Friday, December 31, 2004

House price fall signals end of boom (UK)

House price fall signals end of boom


Times, UK
BRITAIN’S four-year housing boom is over, according to the country’s biggest building society, which confirmed yesterday that efforts to take the heat out of the housing market were working.

In December, house prices fell for the second time in three months, bringing the annual rate of increase down to 12.7 per cent, its lowest level for three years, said Nationwide Building Society.

However, Nationwide is sticking to its prediction of a soft landing for British house prices next year, saying that the market was on track for an orderly slowdown.

Alex Bannister, group economist at Nationwide, said: “The evidence is consistent with house prices treading water in most regions.

“A sharp downturn in prices cannot be completely ruled out, but whilst the economic outlook remains positive it looks unlikely.”

Nationwide is predicting that house prices will nudge up just 2 per cent next year, compared with the annual average increase of £17,000 this year, or £47 a day.

“Broadly favourable economic conditions combined with the ongoing imbalance between the demand for housing and the rate of new build mean that a significant decline in prices will be avoided,” said Mr Bannister.

He went on to conclude that while nothing could be guaranteed, there were signs that the housing market may be beginning to stabilise.

The lender said that the average house price fell 0.2 per cent this month to £152,623 following a 0.9 per cent gain in November.

Nationwide’s survey suggests many homebuyers are feeling the impact after five interest rate rises since November last year. The figures could fuel speculation that rates will start to fall again next year.

A shortage of first-time buyers has also contributed to the fall in average prices. Only 349,000 properties were bought by first-time buyers this year, the lowest figure since the mortgage market was deregulated in the mid 1980s.

Nationwide said that house prices had trebled since 1995 but average pay had gone up by only 50 per cent in the same period, making it increasingly difficult for first-time buyers to enter the market.

“Those that have managed to enter the market have been forced to purchase further down the housing ladder than was the case in 1995,” said Mr Bannister.

Thursday, December 30, 2004

Countrywide cuts Chandler loan officers' pay

Lender slicing commissions
Countrywide cuts Chandler loan officers' pay

Stephanie Paterik
The Arizona Republic
Dec. 29, 2004 12:00 AM
Loan officers at Countrywide Financial Corp. in Chandler say that instead of a Christmas bonus last week they received word their commissions would be slashed come January.

The company's expansion here has been held up as an example of economic vitality, and has been credited by the Greater Phoenix Economic Council with helping boost average salaries in the Valley.

The Calabasas, Calif., corporation's home-loan division, known as Countrywide Home Loans, sent an e-mail to sales representatives throughout the company Dec. 21 preparing them for changes in their compensation. Chandler employees were called into a meeting the next day to learn details.

Top producers will be hit hardest, with commissions dropping from 0.6 percent to 0.4 percent, according to company documents. Countrywide loan officers are guaranteed a minimum of $2,400 a month, but most rely on their commissions to exceed that amount. A top producer who sells 38 home loans totaling $1.4 million in one month would take home $5,600 under the new plan, as opposed to $8,400 under the old system.

The news has socked morale at the Chandler campus, said loan officer Daria Jackson, 24, of Chandler. Some employees have quit and others are circulating résumés, she said.

"They lure you in and cut compensation by half the week of Christmas," Jackson said. "They said, 'We're posting increased revenue quarter over quarter, but we're cutting your compensation.' It doesn't make sense."

Countrywide spokesman Ken Preston refused to comment on the changes because they are "an employee matter."

According to the internal e-mail, Countrywide plans to adjust its costs to remain competitive in an expanding primary home-equity market and to offset declining revenues in the secondary market. The primary market refers to selling loans directly to consumers. The secondary market is when one financial institution sells a loan to another.

The news comes at a time when the company has been growing. Countrywide has added 420 employees in Chandler this year, both in sales and operations, and plans to hire 1,600 more in the next three years as part of a major expansion. The company also is seeking city approval to add 350,000 square feet to its Chandler facility, on Chandler Boulevard between Loop 101 and Dobson Road.

Despite changes, Preston said the new jobs will be high quality, well paying and a benefit to the community.

Jackson said she doubted the company's ability to retain and attract workers without competitive pay.

"There are a lot of upset people," she said. "I don't even know how they're going to keep this center open in Chandler because they're going to lose so many people."

This bet’s on the house!

Expect a broad spectrum of companies being involved in covering realty risks

Financial Times

Homeowners around the world effectively gamble on home prices. Their risks today are often big due to real estate bubbles in such glamour cities as London, Paris, Madrid, Rome, Istanbul, Moscow, Shanghai, Hangzhou, Sydney, Melbourne,

Vancouver, Los Angeles, Las Vegas, Boston, New York, Washington, DC and Miami. Those bubbles may keep expanding, or may burst, leaving many homeowners mired in debt.

The risk to home prices in the aftermath of a bubble is real and substantial. In the last cycle of real estate busts, real (inflation-corrected) home prices fell 46% in London in 1988-95, 41% in Los Angeles in 1989-1997, 43% in Paris in 1991-98, 67% in Moscow in 1993-97, and 38% in Shanghai in 1995-1999. All of these drops were eventually reversed, and all of these markets have boomed recently. But this does not guarantee that future drops will have a similar outcome. On the contrary, the future real value of our homes is fundamentally uncertain.

Most homeowners are not gambling for pleasure. They are just buying real estate because they need it. But, because they do nothing to protect themselves against their real estate price risks, they are unwitting gamblers. In fact, home buyers in most countries do nothing to protect themselves — short of selling their homes — because there is nothing to be done. A market for real estate derivatives that can help balance these risks is only just beginning to appear. Well-developed markets for real estate derivatives would allow homeowners to kick the gambling habit. A liquid, cash-settled futures market that is based on an index of home prices in a city would enable a homeowner living there to sell in a futures market to protect himself. If home prices fall sharply in that city, the drop in the value of the home would be offset by an increase in the value of the futures contract. That is how advanced risk management works, as financial professionals know. But the tools needed to hedge such risks should be made available to everyone.

Attempts to set up derivatives markets for real estate have — so far — all met with only limited success. In May 2003, Goldman, Sachs & Co began offering cash-settled covered warrants on house prices in the United Kingdom, based on the Halifax House Price Index and traded on the London Stock Exchange. In October 2004, Hedgestreet.com began offering “hedgelets” on real estate prices in US cities — contracts that pay out if the rate of increase in home prices based on the OFHEO Home Price Index falls within a pre-specified range.

My former student Allan Weiss and I have been campaigning since 1990 for better risk management institutions for real estate. In 1999, we co-founded a firm, Macro Securities Research, LLC, to promote the development of such institutions, working with the American stock exchange to create securities that would allow people to manage real estate as well as other risks.

These will be long-term securities that pay regular dividends, like stocks, whose value is tied — either positively or negatively — to a real estate price index. Early this month, the Chicago Mercantile Exchange announced that it will also work with us to explore the development of futures markets in US metropolitan-area home prices. We hope to facilitate the creation of such markets in other countries as well.


The future real value of our homes is fundamentally uncertain
Home buyers in most countries do nothing to protect themselves
Leave the game of real estate speculation to professionals

Because even many financially sophisticated homeowners will find direct participation in derivative markets too daunting, the next stage in the development of real estate risk management will be to create suitable retail products. For example, the derivative markets should create an environment that encourages insurers to develop home equity insurance, which insures homeowners not just against a bust but also against drops in the market value of the home. Such insurance should be attractive to homeowners if it is offered as an add-on to their existing insurance policies.

Derivatives markets for real estate should also facilitate the creation of mortgage loans that help homeowners manage risks by, say, reducing the amount owed if a home’s value drops. Such products should appeal to homebuyers when the mortgage is first issued. Insurance companies and mortgage companies ought to be willing to offer such products if they can hedge the home-price risks in liquid derivative markets. Creating these retail products will require time, experimentation, and some real innovation. Over the next decade, we might expect that a broad spectrum of insurance, lending, and securities companies will become involved. As these retail products start to take shape, they will spur increased activity in the derivative markets. As the new risk-management industry develops, its components will gradually boost each other.

These developments offer hope that current and future homeowners will be spared the agony of worrying about the vicissitudes of the real estate market. They will be able to leave the game of real estate speculation to professionals and rest assured about the value that they have accumulated in their homes.

That is good news, because there is a pretty strong chance that we are going to see major price declines in a number of cities around the globe in the next few years, and these price declines will cause real pain to many homeowners. But if the momentum towards better risk management continues, it will be the last real estate cycle in which homeowners are unable to protect themselves.

The author is professor of economics at Yale University.


Homes boom thunders on: State's up, and Nov. numbers set U.S. record


By Jerry Kronenberg, Boston Herald
Reports of the Bay State housing boom's death are apparently an exaggeration.
Figures released yesterday by the Massachusetts Association of Realtors show that condo and house sales rebounded in November after several months of weakness.
``It's a surge - a definite surge,'' association President Judy Moore said, although she cautioned that gains ``could just be a bit of a blip.''
Meanwhile, the National Association of Realtors reported that total U.S. home sales hit a record 6.94 million-unit rate in November. That's up 13.2 percent from a year earlier.
The group also said the median U.S. home sold for $188,200 last month, up 10.4 percent from November 2003.
David Lereah, the NAR's chief economist, said low mortgage rates combined with a generally expanding U.S. economy and job market to ``create optimal conditions for the housing sector.''
In Massachusetts, condos performed particularly well. The MAR reported that 1,597 condos changed hands last month - the highest November volume ever.
In fact, when compared with November 2003 levels, condo sales rose a whopping 53.6 percent - the second-biggest monthly gain on record.
Median condo prices likewise increased 15.9 percent year over year to hit $263,000.
Among single-family homes, sales gained 17.4 percent from November 2003 levels to reach 4,063, the second-best November showing ever.
Median single-family home prices also rose 14.6 percent from year-earlier levels to reach $345,950.
November's gains represent a turnaround for the market, which hit a soft patch over the summer and fall.
Wellesley College expert Karl Case attributed the rebound to low mortgage rates that continued to offset the state's exorbitant home prices and weak jobs growth.
``The fundamentals of the housing market are that you've got two things working against it and one thing working for it,'' he said.
Case and other experts added that condos showed particular strength because high prices have put single-family homes out of many consumers' reach.
Despite last month's rebound, signs of trouble remain.
For instance, November single-family home sales fell 4.1 percent when compared with October levels.
That's the fifth time in a row that sales have fallen month over month - a string of declines the market hasn't seen in more than four years.
Experts say that whenever the housing boom dies, signs of its demise will include sales that rise year over year but slump month over month.

Record run may end, but not gains

Expectations a bit more realistic
Record run may end, but not gains

By Mary Umberger
Chicago Tribune staff reporter
Published December 30, 2004

Wanted: Buyer for North Side condo, owner anxious.

He's so anxious, in fact, that he's knocked $70,000 off the asking price, and if he gets a firm contract before Feb. 4, he'll throw in two tickets to the Super Bowl, which is being played that weekend in Jacksonville, Fla.

In the housing frenzy of recent years, it's seldom been necessary to make such significant price cuts, much less to dangle a Super Bowl carrot at $500 per ticket. But North Side real estate agent Mark Pasquesi, who has the three-bedroom condo now listed at $429,000, says some new strategies are in order.

Not that he thinks real estate's hot streak is over. "We're seeing the same slowdown that's typical for the holidays," says Pasquesi, who expects a New Year's upturn.

He may be right. Industry observers tend to agree that 2005 will be another very good year for real estate, though they say business will be less hectic. That's because it has to be; the pace of four consecutive years of record sales isn't sustainable, they say.

"A lot of buyers have found the home they've been looking for and we can expect a bit of a breather in 2005, which will remain a historically strong year," says David Lereah, chief economist for the National Association of Realtors.

Lereah expects that the 6.94 million existing home sales expected for 2004 will ease to 6.38 million in 2005. He sees newly constructed homes sliding similarly, from 1.18 million in 2004 to 1.13 million in 2005.

But if sales will lighten up, prices won't. Nationally, he predicts price increases of 8 to 9 percent.

Mortgage interest rates, the long-running star of the housing show, are expected to help offset higher prices by increasing slowly and then resting at manageable levels. Various analysts see them finishing 2005 at about 6.5 percent, possibly lower. The typical rate on a 30-year fixed-rate mortgage was around 5.75 percent in late December.

Illinois buyers might find a more palatable price tag, according to John Veneris, president of the Illinois Association of Realtors. "We anticipate that as long as interest rates stay about where they are, we'll see price appreciation in the same areas," he says.

Attractive interest rates are helping to counter price increases for Illinois builders, according to Chris Huecksteadt, director of the Chicago regional office of Metrostudy, a housing research firm.

"Local builders are getting squeezed on all sides: materials costs, development costs and particularly land costs," he said. Local builders may be used to having annual significant sales growth, but overall, their prospects are good, he says.

"We're at 35,000 starts [in the Chicago area in 2004]," he says. "If we could do the same in 2005, that would be a strong year. We might see a slight decline, to 32,000 or 33,000."

Even the market for new condos in downtown Chicago, recently a source of concern because of potential overbuilding, is getting a more positive gloss.

"A couple of years ago, everyone seemed to be doing a new building, and then there was a cool-off as banks started wanting 40 percent of the units to be pre-sold" to justify the financing, says James Kinney, president of Rubloff Residential Real Estate in Chicago.

"Now, once again, there's a lot of upbeat thought. There are a lot of new projects being brought to the table," he says. "With delivery times [on the units for the new buildings] going out to 2008, you have to wonder, again, is that too much inventory? Apparently, a lot of people don't think so."

A recent report from Chicago's Appraisal Research Counselors, which tracks the downtown market, said that high-rise developers were getting those early reservations locked in.

"The outlook for unsold inventory is very favorable," says Gail Lissner, the firm's vice president, who estimates that downtown gained 80,000 residential units in the last 15 years.

For all the bullishness, there are concerns about the market.

The "price bubble" issue, in particular, is getting louder. A federal report in December said home prices nationally increased at an annualized rate of 18.5 percent in the third quarter, the fastest in 25 years.

A December report on home prices in 20 countries by The Economist magazine flatly declared that housing in the U.S. is 30 percent overpriced.

At about the same time, economists at UCLA pronounced that, in California, at least, the bubble is real, with blistering home prices finally beginning to recede. However, the UCLA report expects the bubble to dampen an overall economic recovery there, rather than cause a housing collapse.

Whether a bubble exists is a matter of hot debate in the industry, but few argue that price run-ups are pushing less affluent buyers out of the market.

"In new construction, depending on where you go, you're looking at $180,000 to $200,000 for a real starter home. It wasn't that long ago that it was $150,000," says Huecksteadt, who added that land costs are continually pushing up that price point for first-time buyers.

"If interest rates hold steady, that will keep buyers in the housing market over the next year," Huecksteadt says. "A recipe for disaster would be rapidly rising interest rates and an economy that's losing jobs. Disaster may be too strong a word, but there would be danger."

Some concerns are harder to quantify.

La Grange real estate agent Joan Smothers is seeing a shift in buyers' attitudes. She's surprised by the number of deals falling through, apparently due to shaky consumer confidence.

"Offers are falling apart during the first five days," she says. "They get the homes inspected, and instead of the usual negotiation, with the buyers saying, `Fix this and do that,' now they're saying, `I just don't want to buy it.'

"They just walk away from the deal."

Smothers estimates that 20 percent of recent contracts have dissolved this way. "Now I'm telling sellers they have to be super reasonable. The days of saying, `I don't like that offer, so I'll wait 10 days for another one,' that's not there any more.

"This isn't a bad market. I don't see any hand-wringing," Smothers says. "I'm just telling them that we have to be smarter in 2005. It's going back to normalcy, when you can expect it to take four months for a house to sell."

The market continues to sizzle. A bubble isn’t likely in most places in Florida, but Miami’s condo market bears watching.

RESIDENTIAL: Hot, Hot, Hot
The market continues to sizzle. A bubble isn’t likely in most places in Florida, but Miami’s condo market bears watching.

Florida Trend
Miami-Dade Condo Inventory
Just six years ago, it seemed like every investor was buying technology stocks. Heavy demand drove shares of some dot-com companies into the stratosphere. But as reality set in with the new millennium, the bubble burst and share prices plummeted.

Since then, residential real estate — especially in Florida — has replaced the stock market as the favorite "get-rich-quick" investment strategy for many Americans. As a result, many new condominium developments in markets like Miami, Fort Lauderdale, West Palm Beach and Orlando report long lines of buyers when their sales offices open. The developments announce "sellouts" within a few days — even though it may be two or three years before those "sales" are actually closed.

In fact, a significant portion of those buyers are investors who plan to reserve several condominium units at preconstruction prices, then resell, or "flip," their units to new buyers at a substantial profit as the project nears completion. At some fast-selling projects, speculators account for as much as 80% of sales.

Today’s speculative buyers are betting:

- Florida’s residential market will continue to boom

- Condominium prices will continue to escalate

- Interest rates will remain low

- There will be no bad news to create an exodus out of the market

Unfortunately, these speculative buyers — as well as many developers of multifamily housing projects — are coming to the market at a very late point in the current real estate cycle. Just as the technology boom of the late 1990s came to a crashing halt, the potential exists for a relatively sudden readjustment in the market, otherwise known as a "housing bubble."

The clear danger is that Florida developers may face serious financial difficulties if thousands of condo units hit the market in 2005-06 and produce something like a giant margin call. If there is not enough demand from buyers at that time, investors could be forced to sell at bargain prices, which developers would have to match. The result could be a series of costly foreclosures or financial "workouts" with lenders.

A cyclical industry
Bubbles resulting from unexpected changes in demand or overbuilding by developers have occurred throughout Florida’s history, although they have usually been confined to relatively limited markets. In the mid-1920s, for instance, promoters of vacant land in Coral Gables generated such strong demand that Northern visitors would sign a "binder" to purchase a lot, then "flip" that contract to a new buyer at a higher price a few days later. In 1926, after two years of frenzied real estate activity, a devastating hurricane burst that bubble.

In the early 1970s, condominium developers built thousands of units throughout the state, only to find themselves with vast quantities of unsold inventory when a national recession hit in 1974. A few years later, oil-rich buyers from Venezuela and other Latin American countries began purchasing multiple condominium units on Miami’s Brickell Avenue. A sudden drop in oil prices left many investors unable to close, forcing developers to resell their units at significantly lower prices.

While some developers today actively court this type of speculative demand, others do their best to discourage it. "We do everything we can to keep out the so-called speculators," says Bruce Weiner, president of Turnberry Associates in Aventura. "We put in safeguards so that the original purchaser has to close on the unit. Of course, what they do afterwards is up to them."

Developers say that lenders are also more stringent on their presale requirements than they were even a few years ago. "The banks want to see sales with at least a 20% deposit, and they count multiple units by a buyer as just one sale," says Daniel Kodsi, president and CEO of Royal Palm Communities in Boca Raton. "We like the idea that they’re trying to keep the market as honest as they can."

A statewide perspective
Looking at the state as a whole, there appears to be little danger of a housing bubble in 2005, barring a huge jump in interest rates or a catastrophic terrorist incident. Estimates predict Florida’s population will increase by about 350,000 in 2005 and add 130,000 jobs.Broward Condo InventoryStatewide, the number of housing starts is predicted to be in the 125,000 range. The number could be less if builders in some markets focus on repairing the state’s 50,000-plus hurricane-damaged homes. In addition, higher costs for construction labor, building materials and developable land may cause some developers to reduce their 2005 forecasts.

Continued strong demand and limited supply statistics point to a continued rise in housing prices, although the rate of increase is likely to be lower than in the past two years. According to the Florida Association of Realtors, for the first nine months of 2004 existing-home prices rose 23% statewide to $194,700, despite a third-quarter slowdown as a result of Hurricanes Charley, Frances, Ivan and Jeanne. Just one year earlier, in September 2003, the average resale price was $158,900.

In the Tampa market, median home prices rose 17.8% over the past year to $168,000, surpassing Atlanta’s $156,000.

In another sign of escalating home prices, Broward County recently voted to expand the limits on what qualifies as affordable housing. A family of four earning $48,150, the county decided, now qualifies as low income and eligible for housing assistance. The price of a home that qualifies is now raised to a maximum of $229,000 for new construction and $152,000 for existing.

"As long as Florida’s economic fundamentals sustain themselves, price escalation will be a function of demand," says real estate attorney Ted R. Brown, shareholder at Akerman Senterfitt’s Orlando office. "Restrictions on new development and growth management regulations also act to constrain growth of new housing, making the existing inventory more valuable and pricing it higher."

The rate of price escalation will be a key factor in how the market develops: A volatile situation could occur if the prices of units rise beyond the reach of buyers — particularly in the hottest markets, where speculation is a factor in driving prices upward.

In any Florida market, there is always the possibility that supply could outstrip demand for the short term, says Al Hoffman, CEO of WCI Communities in Bonita Springs, one of the state’s largest developers of high-end single-family and condominium communities. "But the aging of the Baby Boomers and the transfer of wealth between generations is having a real impact on Florida’s second-home and preretirement home markets."

Hoffman says inventories in major metropolitan areas like Tampa Bay and Orlando are in the normal two- to three-year supply range. Since it can take up to five years to win approval for major residential developments, there’s no sign of oversupply.

"I don’t think you’ll see a national or a state housing bubble," Hoffman adds. "National averages show housing has steadily increased in value, and unlike a stock market certificate you just put in the vault, people enjoy their real estate investments. It’s also important to remember that at any given time only 6% to 8% of homes are for sale. It’s very difficult to create a bubble with that low turnover."

Economist Hank Fishkind, president of Fishkind & Associates in Orlando, also believes most housing markets across the state are in reasonable balance, with one exception: South Florida’s new condominium market.

Overbuilding in south Florida?
Historically, south Florida enjoys one of the nation’s most multifaceted condominium markets, with growing primary demand and an expanding international and domestic second home/vacation market. The market has demonstrated its ability to generate new supply and support impressive price appreciation over the past two decades.

However, the magnitude of new development in south Florida today combined with the high level of speculative purchasing poses a serious risk of a bubble in the condominium market. Compounding the problem is that price levels have climbed sharply in the past four years, reducing the number of potential buyers who can afford to buy the speculators’ units.

Converting Apartments
If there’s any doubt about a housing boom in Florida, consider that the state leads the nation in conversions of apartments to condominiums. The housing markets in Miami-Dade and Broward counties combined represented 25% of the $6.3 billion in apartment conversions nationwide through the third quarter of 2004, according to New York-based Real Capital Analytics. Southeast Florida conversions made up 50% of apartment complex sales in the last year.

Recent conversions include the 334-unit Floridian in Miami Beach and the 943-unit Oceancrest Club in Hollywood, but conversions aren’t confined to south Florida. Also on the list of recent conversions are Clearwater’s 366-unit Grand Venezia at Bay Watch, the 292-unit Bayside Village in Tampa, The Waverly on Lake Eola in Orlando, the 298-unit River Reach complex in Jacksonville, the 408-unit Monterrey in south Fort Myers and the 108-unit Park Vista Apartments in Sarasota.

— Amy Welch Brill

One of the analysts most concerned about the pace of new condominium development in south Florida is Michael Y. Cannon, managing director of Integra Realty Resources-South Florida in Miami. "I don’t like to use the word bubble, but real estate clearly runs in cycles," he says. "I believe that 2005 and 2006 will be interesting years in our market."

Cannon is keeping a close eye on his firm’s statistics, which show a steady increase in new condominium inventory in Miami-Dade and Broward counties. At year end 2000, for instance, there were 6,340 completed but unclosed condos in the Miami market. That number rose to 8,557 at year end 2003 and passed the 9,000 level in the first quarter of 2004, the most recent available total.

"That inventory figure is creeping up, and I will be more concerned if it goes over 10,000 unsold units," Cannon says.

In Broward, which has a much smaller market for new condominiums, unclosed inventory has risen from 1,616 units at year end 2000 to 2,522 at the end of March 2004, according to Integra.

In south Florida, the risk of overdevelopment is neighborhood-specific, says Craig Studnicky, executive vice president and principal of International Sales Group in Aventura. Studnicky, who manages sales campaigns for a number of local developers, says there are no signs of problems in the Aventura, Miami Beach or Kendall markets. "Inventories are low, and buyers are holding on to their units," he says.

But it’s a different story in downtown Miami, including Brickell Avenue, where as many as 25,000 units are planned or under construction. That’s where Studnicky believes a price adjustment is coming. "There are thousands of units planned with similar floor plans that will be coming online two to four years from now," he says. "We will be flooded with inventory there."

Kodsi believes the location and design of new projects is crucial to their long-term success. "Currently, the market is very healthy," says Kodsi, whose new condominium developments include Paramount Bay, a 46-story, 360-unit development just north of downtown Miami, and Paramount Beach, a 42-story tower with 236 units in Sunny Isles Beach. "We have sites with unobstructed water views that simply can’t be replicated," he says. "Also, we’re targeting the upscale market with bigger units, while the developments geared to investors and ‘flippers’ tend to have more studios and one-bedrooms."

Weiner says Turnberry Associates continues to experience strong demand for its condominium developments, including the 260-unit Turnberry Ocean Colony, whose first tower is under construction after selling out at an average price of $1.8 million. "Florida, especially the southeast region, will see tremendous growth over the next decade," he adds. "In the long run, there will be an acute shortage of housing throughout the state."

However, developers like Hoffman and Weiner believe that at least some major condominium projects announced for downtown Miami will be delayed or canceled. "Today, the lenders require you to have sales before you can build," says Hoffman. "That means firm contracts, not just a 5% reservation deposit."

Cannon adds poor planning and rising construction costs may also lead some south Florida developers to fold their projects, especially if their designs were unsuitable or their unit prices were too low. "Nobody wants to be forced to build if their costs exceed proper returns," he says.

But Studnicky cautions that a problem in the Brickell market could lead to a "temporary black mark" on south Florida from international buyers who might not recognize the difference between Brickell and Boca.

Looking ahead to the next two years, many buyers may find that making purchase decisions based on 15% to 20% appreciation rates is a dangerous play. As the number of unsold units grows and interest rates move higher, real estate will become less attractive as a pure investment — although it will always be necessary to shelter the state’s ever-growing population.

Monday, December 27, 2004

Real estate bubble could explode in 2005

By Philip S. Moore-Inside Tucson Business



Champagne corks might not be the only thing popping at the start of the New Year, Tucson Metropolitan Chamber of Commerce said.

Along with revelry could come a burst of the real estate bubble enjoyed by the area over the past couple years.

Paula Stuht, director of economic development for the Tucson Metropolitan Chamber of Commerce, said while W the impact on Tucson may not be as severe as other places, such as southern California, it will be felt in flat or declining prices on homes and a drop in new home construction, which could affect businesses as diverse as appliance retailers and construction equipment vendors.

Lower interest rates have fueled a rise in residential sales, but has been matched by an even faster rise in the amount being financed, Suht said

"Home ownership has reached an all-time high (at about 70 percent) but affordability is losing ground, and that isn't a good sign," she said.



Playing into that, mortgage lending has been "fairly lenient" in extending credit for home purchases. "We may see the impact of that in future years," she said.

Although she said it is difficult to link the two, the November increase in personal bankruptsies after months of improvement might be an early warning of trouble ahead. She said over-optimistic appraisals, easy lending policies and rising personal debt levels could spell big trouble for the housing market if buyers discover they can't afford to make the payment and can't find a buyer willing or able to pay the price to assume the mortgage.

The University of Arizona's 2005-2006 Economic Outlook report, presented this month by the Eller College of Management, highlighted the consumer debt crisis, Stuht said.

"They talked about the lack of savings people have and how the personal debt ratio is going up very quickly. Given that situation, it's likely that more people will turn to bankruptcy as a solution," she said.

According to the latest report by the Tucson Divisional Office of the U.S. Bankruptcy Court, a total of 497 new cases were filed last November, more than 10 percent more than the 450 cases filed during the same period a year ago. The overall rise was fueled by a 12.4 percent rise in Chapter 7 personal bankruptcies, which jumped from 363 to 408.

While the November numbers were higher, it still doesn't indicate a trend, since the overall year-to-date numbers for 2004 continue to trail 2003 by 5.58 percent, with a total of 6,002 personal and business bankruptcies during the last 11 months. Chapter 7 personal bankruptcies are down 4.22 percent to 5019, and Chapter 13 personal reorganizations are off 12.36 percent to 943, and Tucson Division numbers continue to be better than the national average, which was down 2.6 percent during fiscal 2004, according to the Dec. 3 report by the Administrative Office of the U.S. Courts.

Between Oct. 1, 2003 and Sept. 30, 2004, non-business bankruptcies, including Chapter 7 and Chapter 11 filings, were down from 1.63 million to 1.58 million, across the nation. Business bankruptcies were also down, from 36,183 in fiscal 2003 to 34,817 in fiscal 2004, with Chapter 12 farm bankruptcies recording a 65.9 percent decline from 698 cases filed in fiscal 2003 to 238 in fiscal 2004.

Despite the improvement, Chapter 11 business reorganizations were up across the U.S. during the 2004 fiscal year, rising 2.2 percent from 10,144 to 10,368.

Quarterly bankruptcy totals have been declining, as compared to the previous year's count, for the last 12 consecutive months. But they remain higher than the comparable periods in fiscal 2002 and 2001, when a total of 1.55 and 1.44 million business and individual bankruptcies were recorded.

Even though there isn't enough evidence in the latest bankruptcy data to point to a trend, Stuht said there are indications that mortgage lenders are growing more cautious. She said real estate agents are noting that "they're not able to make deals they could have made before." Appraisals have become more conservative and approved amounts are less than the full value of the purchase.

"That's just a recent phenomenon," she said. It might be the rise in personal bankruptcies or it might be some other data, "but something has happened and lenders are getting more stringent."

Writer sees real estate investment cycle ending

The Business Journal, Phoenix

Despite the excellent performance for real estate investments over the past five years, it still remains a cyclical investment and the cycle is beginning to turn, a Valley real estate writer said Monday.

Steve Bergsman of Mesa, the author of "Maverick Real Estate Investing: The Art of Buying And Selling Real Estate Like Trump, Zell, Simon and the World's Greatest Landowners," said that as interest rates climb, the number of investors looking to make a commercial real estate deal will decline.

Bergsman said he bases his conclusions on a number of interviews he's conducted with national-level real estate investors.

Investors disappointed in the stock and bond markets have been pouring millions of dollars into real estate investments of one sort or another since the dot.com implosion, according to Bergsman. It has been a good bet, Bergsman said, citing a 9 percent decline in the S&P500 over the past five years, while an investment in real estate investment trusts averaged a gain of 14.5 percent over the same period of time.

And it is not just real estate funds, Bergsman said. Investors have been buying individual properties, everything from small shopping centers to summer homes, where the median price of second homes jumped from $162,000 in 2001 to more than $190,000 in 2004.

This not a market with gloom on the immediate horizon, said Bergsman. "They're expecting a very good year again" in 2005, he said.

However, with so much capital pouring into real estate, the price of individual properties continues to rise, according to Bergsman. While this has been happening over the past few years, investments were still worthwhile because the cost of money was so cheap. With interest rates rising and cost of capital increasing, many deals will no longer make sense, he said.

Other warning signs Bergsman cites include very low cap rates (the rate of return a property will produce on the owner's investment), saying that makes deals great for sellers but expensive for buyers.

Also, one of the reasons real estate has done well has been the flight effect. With the stock and bond markets inconsistent, real estate looked like a great alternative. But, Bergsman says, a lot of that capital inflow is transient money which will move elsewhere as the stock market picks up steam or the next great investment bubble begins. When the transient money leaves, real estate prices will decline dramatically.

Perhaps the most important trend line to watch is how the major real estate investors are moving their money. Bergsman, whose book was published in January and who has had articles published in the Wall Street Journal real estate section and in other magazines, said that those that have made millions in the market invest against the trend lines. They sit out the periods of ecstatic price increases, wait for the bubble to burst, then come into the market to pick up the pieces -- very cheaply. They buy when real estate is cheap, not when it is expensive.

Sunday, December 26, 2004

For America, these may be the good old days

Scott Burns, The Seattle Times

It helps to have historical perspective.

Unfortunately, getting one isn't easy. In the newspaper business, we publish every day. History isn't our long suit. We tend to treat events breathlessly, inflating the importance of the statistic of the moment or the deal of the day. Nowhere is our lack of historical perspective more visible than the unending stories about China. The question is whether China will eat our lunch.

The answer is, yes, it probably will. Not this week. Not next year. But over some period of time longer than we normally consider, like a generation.

When I interviewed John Templeton last month, he had real historical perspective.

I asked the 92-year-old investment master this: "Junius Morgan once advised his son, J. Pierpont Morgan, that one could never go wrong being bullish about America. Given some of the current concerns, especially the idea that the West's historic advantages may be waning, do you agree with Junius today?"

Templeton answered: "Throughout history, all major nations have eventually had a weaker competitive position; and therefore the Morgan family was shortsighted in thinking that nations of Asia cannot become stronger competitors than the USA."

If you want to see the sweep of history, pick up a copy of Samuel Huntington's "The Clash of Civilizations and the Remaking of World Order" (Simon & Schuster, $15). Turn to Page 86.

On that page you will find a table showing "Shares of World Manufacturing Output by Civilization or Country, 1750-1980."

You'll see that the Western nations produced only 18.2 percent of output in 1750. In the same year China turned out 32.8 percent. India/Pakistan turned out 24.5 percent. Between them, the two areas of the East were responsible for 57.3 percent of global manufacturing. Japan was barely on the map, with only 3.8 percent.

By 1830 — the decade widely cited as the beginning of the agricultural revolution in America and the exodus from farm to city — Western manufacturing output, at 31.1 percent, had surpassed China's 29.8 percent. The eclipse of the East had begun.

By 1880, manufacturing in the West accounted for an amazing 68.8 percent of global production. China had collapsed to 12.5 percent. India/Pakistan had imploded to only 2.8 percent. Basically, superior technology and investment in the West had de-industrialized the East.

Believe it or not, Western dominance was not complete. By 1928, Western manufacturing output accounted for 84.2 percent of global production. China was down to 3.4 percent. India/Pakistan was down to 1.9 percent. From producing three times as much as the West in 1750, they were producing only one-sixteenth as much.

The year 1928, however, was when the Western share of manufacturing output peaked. And that was 76 years ago. By 1980, the Western share of manufacturing output had declined to 57.8 percent. China had risen to 5 percent, and India/Pakistan had recovered to 2.3 percent. Both nations, combined, trailed the 9 percent share held by Japan.

And that was 1980, nearly 25 years ago.

Huntington concludes: "It appears probable that for most of history, China had the world's largest economy. The diffusion of technology and the economic development of non-Western societies in the second half of the 20th century are now producing a return to the historical pattern. This will be a slow process, but by the middle of the 21st century, if not before, the distribution of economic product and manufacturing output among the leading civilizations is likely to resemble that of 1800. The 200-year Western 'blip' on the world economy will be over."

Mountain View nixes giant housing project

By Sharon Simonson, MSNBC
SILICON VALLEY/SAN JOSE BUSINESS JOURNAL
Updated: 7:00 p.m. ET Dec. 26, 2004

Greenbriar Homes Communities Inc., a private Fremont-based home builder, has withdrawn its request to convert more than 1 percent of Mountain View's land mass from sparsely occupied industrial space to housing.

The company's decision, announced in a recent letter to the city, was precipitated by a meeting during which city executives told Greenbriar that the community development department and other city staff were increasingly persuaded that the conversion was not a priority, did not make sense for the city's long-term interests and would not receive staff backing.

The deal's collapse means the city of Mountain View -- with 100,000 workers and only 73,000 residents -- will not gain more than 1,300 proposed new homes.

It also means that Equity Office Properties Trust of Chicago, a major Silicon Valley property owner with about 250,000 square feet of industrial buildings in Mountain View, will not sell the buildings or the nearly 25 acres beneath them to Greenbriar.

Greenbriar -- led by its well-known founder, Gilbert M. Meyer -- had executed options and formal agreements to buy the eight EOP properties and another nearly 25 acres nearby in anticipation that the city would approve its application, says Chris Twardus, a Colliers International land broker. It was looking to acquire another 26 acres in the same area. Mr. Twardus did not disclose proposed purchase prices.

So confident had Greenbriar been of its Mountain View plans that it had contemplated buying the land outright, a nearly unheard-of move for housing developers, which prefer to option development property until they have city approvals in hand.

The withdrawal and the staff reaction to the Greenbriar proposal highlight the flood of similar applications that Mountain View has received in recent months. Though the Greenbriar request was exceptionally large, Community Development Director Elaine Costello estimates that as many as four requests a week to re-dedicate industrial land to housing arrive on Mountain View's doorstep . Staff members are so deluged that they are now seeking council direction on how to prioritize those requests.

Without such direction, "We are going to be working on ones that don't have much promise while others that may have more promise wait," Ms. Costello says.

The economic forces underlying the proposed changes are the housing market's continued strength, driven by still-low mortgage interest rates, and the commercial real estate market's prolonged and deep weakness. Tepid commercial demand has left 45 million square feet of offices and research and development buildings vacant valleywide. That's more than 20 percent of the region's entire office and R&D stock.

The value of industrial land now sits at about $20 a square foot, or less than $1 million an acre. Meanwhile, Silicon Valley land zoned for residential use is selling for $65 a square foot, or $2.8 million an acre, rising in the last six months to $90 a square foot in a few cases, or nearly $4 million an acre, Mr. Twardus says.

Despite the homebuyer demand driving those dynamics, and the Bay Area's continuing shortage of moderately priced housing, cities have been reluctant to relinquish their industrial land, fearing it will undermine their long-term tax bases.

That balancing act is further complicated in Mountain View because conversion applications fall disproportionately on the city's planning staff for processing. That staff has been reduced 25 percent in the last four years as the city's annual operating fund revenue declined from $83 million in fiscal 2000 to an estimated $72.5 million this year.

In response, the city is requiring applicants for conversions to pay for all the planning work required. Pennsylvania home developer Toll Brothers Inc., for instance, is seeking permission to build 631 new homes on 25 acres previously used by Hewlett-Packard Co. The cost of processing that application is estimated at $400,000 and will probably rise.

Even with the consultants the money is used to hire, city staff still must oversee the process.

Mountain View affordable housing advocate Roy Hayter says the Toll Brothers petition, which has elicited enormous neighborhood interest and, in some cases, outrage, is soaking up so many city resources that it is eclipsing all other emerging housing opportunities in Mountain View.

"It's the only issue in Mountain View right now, and it could go on for years," he complains. "The neighbors have no incentive for a decision. It's a filibuster approach."

City staff, including City Manager Kevin Duggan, says the relationship between the Toll Brothers application and staff's reaction to Greenbriar is a limited one. He does acknowledge that the Toll Brothers request is more time consuming than anticipated.

However, current city "workload" was a factor that city staff cited in rejecting Greenbriar's request, according to at least one source.

"We are very much in favor of seeing additional housing," Ms. Costello says of the Greenbriar proposal, "but good planning is about finding good sites for uses."

The proposed site, she says, represents some of the city's better industrial property. With 76 acres, it has about a million square feet of industrial development, which in the future could provide expansion space for growing companies. In the past, she says, businesses have sought that type of location.

Still, it's easy to see why Greenbriar would have seen the site as a good conversion candidate. It estimates that industrial buildings are about 50 percent vacant. If accurate, that's roughly twice the vacancy rate of Mountain View's 13.5 million square feet of R&D stock overall, according to BT Commercial Real Estate's most current numbers.

The buildings are generally older and, some could argue, will soon be obsolete. In recent years, they've also produced relatively little revenue for the city. Annual sales tax from businesses in them have fallen from $680,000 in 2000 to $152,000 in 2003. Property taxes have declined less but are estimated at $267,000 this year compared to their peak of $350,000 in fiscal 2002, according to Mountain View Finance Director Robert Locke.

Mr. Locke says the higher density of proposed housing development would almost certainly produce more city revenue than the relatively low-density R&D there now, largely because of Proposition 13, which suppresses taxable value when properties don't change hands.

But, he says, the issue isn't really revenue.

"The issue is on the expenditure side," he says, "and that's much more difficult to predict."

"If there are new roads built, what's the city's ongoing maintenance cost? If there is a park, depending on the arrangement with the developer, we might have to maintain that. And there is police and fire," he says.

Mr. Meyer did not return calls for comment. Mr. Meyer is the founder and former executive chairman of AvalonBay Communities Inc. of Alexandria, Va. Avalon owns 38,000 apartments in various U.S. markets, including many in Silicon Valley.

Scott Jacobs, a principal with Menlo Park-based Landbank Investments, expressed surprise that Mountain View did not evaluate Greenbriar's request more thoroughly.

Landbank has a partially occupied 67,000 square-foot building in the Mountain View area that would have been redeveloped. It is the only building in his company's portfolio of the same vintage -- the rest are in Sunnyvale -- that isn't occupied, he says.

"It seemed like you had a very confident builder in Greenbriar who has built in the city of Mountain View before," he says. "It seemed like a very positive project turning some older office/R&D buildings to good use, and there is a housing shortage. I just think it's rare to find an opportunity where you have a number of empty buildings right next to each other and someone with deep pockets and vision.

"I understand the city of Mountain View's desire to keep its industrial space," he adds. "Everyone wants to believe that there are 15 more Googles ready to burst on the scene, but how long is that going to take?"

Are we inside a bubble, looking out?


Herald Tribune


Just as dot-com stocks dominated cocktail party chatter in 1999, the ever-rising market for real estate is now on everyone's minds.

The Southwest Florida real estate boom is not occurring in isolation. It is part of a state, national and even global move away from paper and toward hard assets, particularly property.

At what point do you say that rising real estate prices constitute a bubble, with the corresponding implication that the bubble might burst?

John P. Calverley, chief economist and strategist for American Express Bank, studied the subject and has just published a book titled "Bubbles and How to Survive Them." Calverley examines the Great Depression, Japan's bubble in the 1980s, and the Internet stock bubble of the past few years. Moving into the present, he discusses what he sees as a global bubble in housing.

Business writer Michael Pollick interviewed Calverley by phone at his London offices, seeking his informed view of where we're at and what to watch out for.



Q How do you know if you're in a real estate bubble?



A When you talk to academics about bubbles, they struggle. There are many factors, and it is difficult to make the list work for all bubbles. The way I try to do it, is I've got a check list in the book.

Seeing lots of condo development is one of the clear signs. Condos always look profitable to the developer, because you are putting a lot of residences on one site. You end up with overbuilding because it turns out that many of the buyers are either purely speculating or buying for investment. There may not be enough final users.



Q So what if there aren't enough final users?



A Well, then, you see the rents crash and a lot of vacancy in the building. Then some people think it is time to sell, and that tends to pull down prices. And it is much more likely to be bought as an investment, for renting out, compared to single-family homes.

Condos also are attractive for speculation, if you can buy off-plan, before the building is completed, and you only have to put down a deposit. As the building goes up, you can double your deposit money without even putting up the whole amount.



Q Understanding that you haven't made a study of Sarasota housing, how do you characterize the housing market in the United States, or Florida in general.



A The latest data show a 13 percent increase in house prices for the country as a whole from a year earlier. Sarasota-Bradenton-Venice shows a 19.7 percent increase over the last year. That is the increase in the average price for the nine months through September. You are by no means the fastest-growing. The fastest was in Las Vegas. Over the last year, they showed a 41.7 percent increase.

In the U.S. as whole, I would say we are in the early to middle stages of a bubble, with many areas on the coast already at an advanced stage. My country, the U.K., and Australia, Spain, Ireland and Holland are the most advanced.

In London you can easily pay a million dollars for a 1,200-square-foot apartment. The pound is very strong at the moment compared with the dollar, so that makes it look worse. I live in a 1,200-square-foot apartment, which I rent. I think the owner would probably think it is worth 650,000 pounds, which is close to $1.1 million.



Q How do you know when the bubble is going to burst? Does it always burst? Isn't it possible that prices will just plateau at a higher level?



A I don't think there is any particular level of prices where you can say, it is going to fall from there. When you've got very high prices, I think they will correct downward at some point, but they could easily go 25 percent higher first. Bubbles can just get inflated far bigger than you ever expect.



Q If someone in Sarasota is sitting there in their home with a 100 percent, 200 percent, 500 percent paper profit, what should they take away from this interview?



A I think the main take- away is that prices could fall significantly at some point.



Q If we are in the bubble, when should we expect it to end?



A My view is that property prices in the U.S. probably are going to continue to rise, for some months, perhaps another year or so, because I am quite positive on the U.S. economy. And I think interest rates, mortgage rates, will only rise gradually.



Q If someone thinks his investment exists within a bubble, how can he protect himself?



A Ultimately, it is very difficult to hold onto the property and protect yourself. It isn't easy to hedge against property prices falling. The only thing you can do is reduce your exposure. You can downscale to a cheaper property, either smaller or in a less- expensive area.



Q Those who insist our rising prices are not dangerous point to the fact that prices are much higher elsewhere in the U.S. How do you respond?



A That is one of the factors that is driving the Florida market, is that people have made a lot of money on their property in the Northeast. It makes it easier for them to remortgage, and buy a second home.

It also makes them more comfortable with a large dollar figure. It's easier psychologically to buy a half-a-million-dollar home in Florida if your home in New York has gone up from $1 million to $2 million.

That brings up another psychological factor I point to in my book that occurs during bubbles, which is called anchoring. Anchoring is where people look at the existing prices, and they treat that as an anchor for where prices should be. It's OK, as long as prices aren't wildly out of line with fundamentals.



Q What are the fundamentals?



A I would look at rental yields. I look at it as the annual rental over the value.

So down there in Florida, say you have a house selling for $300,000, but if you rented it, you'd only get $900 a month. That's $11,000 a year. So you're getting 31/2 to 4 percent yield if it is a $300,000 property. That is very low. I say in the book that a rental yield of six to 10 percent is a more reasonable level.

Another fundamental approach, you can look at it in relationship of prices to people's income. But in a resort area, I think that is less relevant, because many people are buying second homes or vacation homes.

Within a bubble environment, what are the price characteristics of resort property in general?



A I think it tends to go up later, it tends to follow, because it is the money being made elsewhere that gets transferred down. I think it is also liable to be particularly volatile, to overshoot on the upside and to fall more on the downside.



Q What about the scenario that the bubble could burst up North, resounding in Florida?



A The answer is yes. The vulnerability would be if you had a crash in the Northeast, the people there would be less likely to buy a second home or a retirement home in Sarasota. What is driving Sarasota prices is people coming in from outside and buying, and simultaneously, and then people from Sarasota seeking to upgrade, or speculating on higher prices.



Q Those who say prices will never decline here, only plateau or grow less rapidly, point to the fact that Sarasota is not just any resort, that it has grown into a more desirable location in a permanent way.



A Places do get re-rated; places do become fashionable and outperform. I think the issue really is, how far it might fall in a weak market nationwide.

If prices in Florida fall because of a weak property market generally, then maybe Sarasota is going to fall less than other places, if Sarasota has become more fashionable than it used to be.

So that is a positive factor for your local readers. But that doesn't mean it won't fall in a bad market.

A look back at the year -- owners pile up equity, rates still at rock bottom, agent ranks grow, industry battles online listings

House party 2004
A look back at the year -- owners pile up equity, rates still at rock bottom, agent ranks grow, industry battles online listings

- Kelly Zito, San Francisco Chronicle Staff Writer

First of two parts.

If you were fortunate enough to be at the Bay Area homeownership party in 2004, it seemed the drinks never stopped flowing. If you were on the outside looking in, however, it was one of the driest 12 months on record.

During the late spring and early summer, those who plunked "for sale" signs on their front lawns enjoyed a close facsimile of the 2000 frenzy, with all-out bidding wars and many contingency-free offers. But it was a tough year for first-time buyers.

Real estate agents regularly told of couples who wrote up offers on six or eight properties, only to be shut out time and again by the competition -- trade-up buyers armed with the healthy profit from another home sale.

It wasn't supposed to be that way.

Amid concerns about rising interest rates and a flagging economy, economists in 2003 had speculated that the U.S. and Bay Area housing markets would sag in 2004.

Instead, the nine-county region posted its best year ever, sailing past the records of 2003 and the halcyon days of the Internet boom. Strong demand, falling interest rates and signs of a tech turnaround buoyed the housing market amid a short supply of new homes.

"We've never really sensed that there would be a steep drop (in the market) like some forecasts," said John Karevoll, researcher at DataQuick, a real estate information firm in La Jolla (San Deigo County). "But we didn't expect it to be record breaking. Clearly there is more demand for homes than we thought."

An estimated 135,000 Bay Area homes and condos will have changed hands by Dec. 31, the highest number ever, according to DataQuick. The price for a single-family home in the region hit a record $560,000 in November.

If that weren't stunning enough, prices in some locales appeared to be fast closing in on the $1 million mark. In Marin County, the median price for a single-family home in November was a staggering $837,500.

If 2000 was the year paper millionaires ruled the real estate roost, 2004 was the year unforeseen lows in interest rates injected the market with an extra shot of adrenaline. But there were other factors at work: A chronic, tight supply meant there were more buyers than homes for sale.

The past 12 months also saw new developments in the way homes were bought, sold and marketed, as the number of real estate agents in the state and region soared and the Internet continued to exert its influence in an industry that hasn't always embraced technology.

Interest rates

With home prices soaring in 2004, interest rates and new types of loans kept mortgage payments in the realm of reality for many.

Earlier in the year, economists had expected the benchmark 30-year fixed mortgage rate to inch up to around 7 percent by year's end. Not only did a lack of inflation and a sluggish economy keep rates from rising, but they headed lower after peaking at around 6.34 percent in mid-May.

Last week, the average rate for a 30-year fixed loan stood at 5.75 percent.

"A lot of people expected inflation to go up, but it has stayed very tame, " said Doug Duncan, chief economist at the Mortgage Bankers Association, a Washington, D.C. trade group.

Even as rates on fixed-rate loans edged lower in the latter half of the year, more people turned to riskier adjustable-rate mortgages to offset higher home prices.

According to DataQuick, about 82 percent of homes purchased in the Bay Area in the second half of 2004 were financed with an adjustable-rate loan instead of a fixed-rate loan that has set payments for the length of the loan.

While the firm cannot tell what percentage of the adjustable-rate loans are interest-only, lenders such Wells Fargo and Quicken Loans say demand for that type of loan has increased.

Interest-only loans are attractive to financially strapped borrowers because during an initial period, borrowers can elect to pay only interest and no principal. Although the borrower isn't paying down the loan's principal as quickly as he would with a traditional loan, the monthly payments are lower. Once the principal comes due, however, borrowers can be slammed with much higher payments if interest rates rise.

Duncan and others worry that interest-only loans may be helping to artificially inflate prices in expensive markets, where those borrowers otherwise would be unable to afford a home.

But DataQuick's Karevoll contends lenders have calculated the risks, and banks are smarter about lending only to those who can make their mortgage payments.

Building permits

Another factor helping to maintain the Bay Area's lofty prices harks back to one of the first lessons in Economics 101: supply and demand.

Although the number of housing units built statewide in the past 12 months is expected to top 200,000 -- the highest annual total in 15 years --

the Bay Area total is well below recent peaks.

Roughly 24,000 single- and multi-family units will be built in the nine counties in 2004, down about 15 percent from 2003 and 16 percent below 2000, according to the Construction Industry Research Board in Burbank.

Much of the decrease is due to the completion of several large projects in the South Bay in 2003, said Ben Bartolotto, research director the board.

But home builders blame the tight supply on restrictive state environmental codes, cities' reluctance to convert commercially zoned land to residential use and local rules requiring affordable units.

A study published this year by a libertarian think tank in Los Angeles found that so-called inclusionary housing policies have boosted home prices by up to $44,000 and quashed construction of 10,700 units in the Bay Area.

But advocates for low-income residents say such measures are the only way to close the widening affordability gap and achieve social, economic and racial integration.

A separate study by the Bay Area Council found that if trends continue, the region's housing deficit -- now at 36,427 units -- will balloon to about 300,000 by 2030. The figure represents the difference between the number of homes needed to keep pace with job and population growth and the number of units constructed.

"The effect (of the housing deficit) is what we're seeing -- higher housing prices and folks being less able to afford a median-priced home," said Jim Wunderman, president of the Bay Area Council, a business-oriented public policy group. "It also means greater traffic, greater pollution and a worse quality of life."

Online listings

As Bay Area residents, home builders, environmentalists and city leaders engaged in the familiar battle over what and where to build in 2004, the real estate industry had its own internal skirmish.

This one was over the right to display home listing information -- the bread and butter of real estate sales -- on the Web.

Facing competition from discounters and upstarts like Emeryville's ZipRealty, the National Association of Realtors created a policy that would have allowed brokerages to keep the richest listings to themselves.

The policy was widely seen as a way for traditional, large brokerages to use their clout in the marketplace to the disadvantage of smaller firms that often charge lower commissions.

But the group was forced twice to delay the implementation of the policy -- originally scheduled for Jan. 1 -- after the Department of Justice opened an investigation into the plan on grounds it may violate antitrust regulations.

Online real estate firms got another legal boost after a federal judge in Sacramento found it unconstitutional for the state Department of Real Estate to require ForSaleByOwner.com to obtain a broker's license to advertise home listings.

Such companies are helping squeeze commission rates across the board. Although there are no local data available, real estate industry newsletter RealTrends found that nationally, the average commission dropped from 6 percent in the early 1990s to 5.12 percent in 2002.

Influx of agents

Despite the challenges posed by decreasing commission rates and do-it- yourself real estate outfits, thousands of people have turned to a career selling homes.

As of this summer, the number of Bay Area agents had grown by 44 percent in the last five years, from 21,700 to 31,200, according to the California Association of Realtors. (That figure is likely much higher, because the trade group represents only about one-third of the agents in the state).

In the same period, the number of home sales in the nine counties has increased only about 10 percent. That means there are four transactions per year for every agent in the region, compared with nearly 5.5 deals per agent in 1999.

While consumers benefit from the increased competition by negotiating lower commissions, agents -- who are typically independent contractors -- are finding it more difficult to land listings in an industry where the annual income in the first few years can amount to $35,000 or less.

One side effect of the bursting ranks of real estate agents in 2004 was a spike in complaints. The Department of Real Estate, which licenses brokers and salespeople, received more than 10,000 complaints in the fiscal year that ended June 30, up 29 percent from the previous year .

Although the agency's research did not provide specific data on the types of complaints, enforcement chief William Moran blamed the rise on the growing number of license applications. In addition to gripes from consumers, the agency counts as complaints those cases in which a license application is flagged because of a criminal conviction or other problems.

Since July, Moran said, the number of complaints has declined.

Next week: What's in store for the Bay Area real estate market in 2005 --

including the thinking about a potential price bubble, the direction of interest rates and the prospects for bringing housing supply more in line with demand.

Al-ARM-ing


IF YOU HAVE AN ADJUSTABLE-RATE MORTGAGE, NOW'S THE TIME TO REFINANCE TO A FIXED RATE



Knight Ridder/San Jose Mercury

Here's a frightening figure: Of all the mortgage applications Americans filed the first full week in December, just over a third were for loans with adjustable rates.

That's been the pattern this year, according to the Mortgage Bankers Association, whose polls cover about half the mortgages issued in the United States.

The allure of ARMs could turn out badly -- not just for those borrowers, but also for everyone else.

When first issued, ARMs invariably charge lower rates than fixed-rate mortgages such as the standard 30-year loan. ARMs then change rates periodically as prevailing rates go up and down, while fixed mortgage rates stay the same.

The low initial ARM rate allows the borrower to qualify for a bigger loan, helping people buy in today's hot housing market. Hence ARMs' popularity.

Last year, ARMs accounted for just 19 percent of new mortgages -- about half this year's rate. But for high-risk borrowers, ARMs comprise more than half of all loans, according to LoanPerformance, a San Francisco mortgage data provider.

And how will these borrowers cope if the Federal Reserve continues pushing interest rates up -- as it did Dec. 14 -- for the fifth time this year?

Simple: Their monthly payments will go up -- by a lot, in many cases. Those households will, thus, have less to spend on other things, or to save and invest. That's sure to hurt economic growth, affecting us all.

People who can't afford their new, higher payments may lose their homes in foreclosure or be pushed into bankruptcy.

It's impossible to say just how serious this could be because we don't know how high rates will go, and because there are so many different ARM products -- from those that adjust every month to those that don't make the first adjustment for 10 years.

But it's clear that ARMs don't offer very good deals today.

The average one-year ARM, which changes its rate every 12 months, starts at 4.21 percent, according to HSH Associates, the Pompton Plains, N.J., tracking firm. Ordinary 30-year fixed-rate loans average 5.76 percent, with some charging as little as 5.30 percent.

This means the upfront saving you'd enjoy with an ARM is too small to offset the risk of higher rates later. Typically, ARMs can go up as much as 2 percentage points a year, to a maximum of 6 points over the life of the loan. So today's 4.21 percent ARM could go to 6.21 percent in 12 months, or 10.21 percent in as little as three years.

And rates are much more likely to go up than down.

The Federal Reserve has raised the federal funds rate to 2.25 percent, from 1 percent in June. Most experts expect the Fed to keep going until the rate is at 3, 3.5, even 4 percent.

The indexes used to figure ARM adjustments tend to follow the Fed moves. For example, the one-year London InterBank Offered Rate, or LIBOR, has gone from about 2 percent in May to 3 percent today.

An ARM typically adjusts to a rate 2.75 percentage points above the index. So an ARM keyed to the LIBOR rate would go to 5.75 percent were it to adjust today.

If the Fed raises rates another percentage point, the same ARM could go to nearly 7 percent a year from now -- and you'd kick yourself for missing today's low fixed-rate deals.

What if you already have an ARM?

``It's time to get out'' and refinance with a fixed-rate mortgage, says HSH spokesman Keith Gumbinger.

Despite the Fed's moves, rates on fixed loans have not gone up -- yet. In fact, the 30-year fixed rate is about half a percentage point lower than it was when the Fed hikes began. This is because the long-term interest rates that guide fixed mortgages are governed by forces the Fed does not control, such as foreigners' hunger for U.S. Treasury bonds.

In other words, says Gumbinger, this is a sweet spot -- a chance to get out of that risky ARM while the gettin's good.

Choose the right mortgage to avoid winding up 'house poor'

If mortgage payments absorb too much of your income, keeping up will be a struggle.
By Jim DeBoth
Special to the Orlando Sentinel

Owning a house is the American dream. For some people, however, it can become the American nightmare. How? By having the wrong mortgage.

When you shop for a mortgage loan, you know you need to borrow enough money to get the house you want to buy. You also need to have a payment you can meet every month. But if you take out a mortgage that leaves you unable to do anything except make your payments, you are considered "house poor." And it is a nightmare.

Being house poor is especially common among first-time buyers who don't realize how much more there is to owning a house than paying the mortgage.

Many renters have their utilities included in their rent: gas, electric, maybe even cable. Renters do not have to make property tax payments, either. In most cases, if anything goes wrong with the plumbing or wiring, if the roof leaks, or if a door or window needs replacing, it's the landlord's problem. And then there's homeowners insurance, or hazard insurance as it is sometimes called, and that costs a lot more than renters insurance.

Renters pay for all these items, but the costs are usually included in the rent. So, when they look at how much rent they pay each month, they tend to think that they can pay the same amount for a mortgage. They can, but only as long as they figure out how much all those "extras" will cost them every month, and how much they should be able to set aside as a reserve fund for when there's a problem.

When you buy a house, especially a first house, you also are buying a yard to maintain, which means you also might need all the equipment and paraphernalia associated with lawns, gardens, a swimming pool and so on. Many of these can turn into regular expenses. Before you buy any equipment, you should consider creating a budget.

One of the best ways to start working on a budget and get a handle on the size of the loan you should look for is to take a realistic look at your own finances. Lenders will look at your debt-to-income ratio. You can do that yourself to get a picture of where you stand financially.

The first question is how much do you spend on housing every month? If you're a renter, that would be the amount of your rent check. If you already own a home or a condo, it would be your mortgage payment including taxes, interest, insurance and principal, plus any applicable fees, assessments or homeowner association dues.

Most lenders believe you should be spending no more than 28 percent of your income on a mortgage payment. Other lenders are willing to stretch it to 40 percent.

Now add in what you spend every month for your regular debts, the bills you have to pay month-after-month. This includes credit cards, car loans, alimony and child support, and any other debts you will continue to have within the next six months or so. Most lenders say this should be no more than 8 percent of your gross income, but some will go as high as 10 percent. Now consider, how much do you spend on food, clothing, gasoline or other transportation costs? Are you going to be making a major purchase -- furniture, appliances? How often do you eat out? What do you spend on entertainment? How often do you go on vacation? What will that cost? What about medical expenses? How much of a cash reserve do you have in case something goes wrong? Are you planning to have children or do you have them already?

The way to avoid being house poor is by not borrowing more than you can afford to pay back and by finding a house that fits the reality of your budget. Just because a lender says you can use 30 percent or even 40 percent of your income on a mortgage doesn't mean you should. You have the final say on the amount you can comfortably borrow and pay back.

2004 was "a dream market" for real-estate buyers and sellers

By Elizabeth Rhodes

Seattle Times staff reporter

Last December, real-estate experts predicted that mortgage rates would rise, pushing the number of home sales down in 2004. If their prediction had proved true, it would have meant that stories like the one real-estate executive Dan Givens tells would be tales of the past.

Givens' tale concerned the sale of a neglected, nearly century-old North Seattle house. Its foundation sagged; its siding was bad. And that was just the start of its problems. Anyone brave enough to buy this money pit was probably looking at spending "a couple of hundred thousand dollars" to bring it up to shape, said Givens, a Windermere manager.

As the home went on the market, agents speculated that it might fetch about $400,000. Nineteen offers later, the sad old house sold for $509,000.

That sale, which occurred a few months ago, is indicative of this year's super-hot housing market, Givens says. He puts Seattle's sales numbers and sales prices up about 11 percent over last year (final year-end numbers aren't in). Even more telling: "Half the homes sold in less than nine days," Givens said.

2004 has been "the dream market for residential real estate — for buyers, sellers and homeowners who refinanced," said J. Lennox Scott, chairman and CEO of John L. Scott Real Estate.

It's been a dream market for sellers because housing demand far outstripped supply, spawning bidding wars and driving up prices.

It's been a dream market for buyers (and refinancers) because last December's prediction of rising mortgage rates proved wrong.

Rates stayed below 6 percent for a full eight months this year, compared with six months last year, according to mortgage-information provider HSH. As a result, the average rate for a 30-year fixed-rate loan in the past two years is 5.8 percent, mortgage backer Freddie Mac reports.

"We had two indicators of a strong real-estate market in premium position: low interest rates and an improving economy creating job growth," Scott said. "Those are the two top drivers of the residential real-estate market."

What will 2005 bring? With some adjustments, another good year, predicts Matthew Gardner, a principal in the Seattle-based land-use economics firm Gardner Johnson.

Gardner expects the Seattle metro area, which supports 1,337,500 jobs, will add 32,000 more next year. To put that into perspective, every 1.7 new jobs creates the need for another housing unit, says Stuart Tyrie, a Wells Fargo Home Mortgage vice president.

Meanwhile, Gardner predicts that the interest rate for 30-year fixed mortgages will climb above 7 percent.

Jack Haynes, executive vice-resident of Countrywide Home Loans' national builders division, predicts that rates could hit 8 percent.

Given the double-digit rates of a decade ago, 8 percent "isn't unreasonable," Haynes said.

"But when it's coming off rates as low as they've been this year, it's an eye-opener," Haynes said. "There will be some people who will be priced out, and some markets are just going to slow down."

Gardner says Seattle's market may be one of them, at least as far as price increases go. He expects housing appreciation to be in the 4- to 6-percent range next year — roughly half of this year.

"That's a good thing because it keeps the market from getting overheated, which it's done in other areas," Gardner said.

In the past three years, the Seattle metro area's home prices have climbed 19.5 percent, Gardner said. In the same time frame, Las Vegas, Los Angeles and Sacramento, Calif., have seen prices shoot up 78 percent or more.

Rather than considering our appreciation rate to be lagging, Gardner views it as sustainable.

"People often ask me if we have a housing bubble," Gardner said. "I'm quite confident there isn't one here."

There are a couple of significant reasons for that, he says: Unlike Las Vegas, which he considers bubble prone, the Seattle area doesn't have a glut of speculative new homes. Perhaps even more important, Gardner says our positive income growth — he anticipates 4 percent next year — means people can afford to buy.

But given rising interest rates, he says people should buy with caution. Otherwise, "We will start seeing a huge volume of foreclosures in the next few years," he said.

Some will occur because of predatory lenders saddling unsuspecting borrowers with higher-than-necessary debt. Some will occur when buyers who hold adjustable-rate mortgages — so-called ARMs — get squeezed by rising rates.

"It won't take much before it's, 'Do I eat or make the house payment?' " Gardner said.

Because of pent-up demand and concern over rising interest rates, Scott predicts that in 2005, we'll see "déjà vu all over again — a quick-action market, particularly in the first quarter of the year."

"That means buyers need to get pre-approved for a loan," Scott said. "If they have an existing home, they need to get a market evaluation so they know what their equity is because if they find a home, they need to sell a home in short order."

Scott says homes priced below the median for their area will be especially strong sellers. (Median means half sell for more, half for less.)

"Prices below the median are only going to go up in the short term — and in the long term because we have this echo baby boom on the horizon," Scott said. "The oldest echo boomer is now 22 years old. By 2010, we just won't have enough housing."

Steve Smiley, a principal with Hanley Wood Market Intelligence, said he expects increased competition for local housing sooner.

It will come from Californians, who he says have been shell-shocked by rising prices in much of their state. In Orange County, for example, the median price of a new home was $600,000 three years ago. Now it's $1 million.

"Some areas, like Southern California, have so few lots and so many growth restrictions that they're barely building anything," Smiley said. In the Seattle area, new homes have constituted about 17 percent of recent home sales.

"This is a much healthier market because you can probably buy a new house and move into it within a reasonable amount of time," Smiley said.

That combination of availability and lower prices, he predicts, will draw increasing numbers of Californians to compete with hometown folks for this region's homes.