Wednesday, March 30, 2005

The risks from falling home prices

By Chuck Jaffe, MarketWatch

BOSTON (MarketWatch) -- When I interviewed for the job that first brought me to New England in 1994, I met with seven different executives.

Four of them were underwater on their mortgage, meaning that if they had to sell their home in the Boston suburbs, they would have to bring money to the table to pay off their lender because the home had declined in value.

They spent more time talking to me about how nervous the situation was making them, and wondering aloud what might happen next, than they did asking me about my thoughts and feelings for what became my job.

Just over a decade later, in most regions of the country, the idea of people lying awake at night worried about home values seems like ancient history, the stuff of legend.

But that may be about to change.

The winter 2005 Risk Index issued by PMI Mortgage Insurance Co. shows that homeowners in 11 of the top 50 metro market have at least a 25 percent chance of experiencing a housing-price decline over the next two years. My home base in the Boston-Cambridge-Quincy, Mass/N.H. metropolitan area had the worst score, a 53.3 percent probability of weaker home prices in the next two years. Six California markets rank in the top 10 most likely to see a price decline. (For a look at the full report, click here.)

In real estate markets that tend to go through cycles of being super-heated and then cooling off, declines don't necessarily last for just a year or two. In those situations, past history shows that a housing-price decline can last a decade or more.

While consumers in many parts of the country have grown accustomed to feeling like housing prices will grow forever, the PMI Risk Index should make homeowners start to wonder just how much things have changed.

The boom in housing prices in hot markets has been fueled by a number of factors, demand chief among them. But with mortgage interest rates at the lowest levels in decades, consumers took advantage of cheap money to push prices higher.

Now, rates are on the rise, cutting into buying power, which in turn takes some air out of the demand balloon.

The result is a changing environment, one which affects homebuyers and some -- but not all -- homeowners.

"People should not count on their house selling for a certain price in a certain year as they look ahead at their financial future," says Valerie Patterson of "They should not count on some huge sum of money being there, because they could be looking at a long stretch where their house is not appreciating in value, or is growing in value very slowly."

If, indeed, residential real estate is headed for a turn, reactions to the change should vary based on circumstance.

Homebuyers, for example, need to worry about buying at the top of the market cycle, particularly if they do not expect to be in the house for long.

While flipping houses -- buying one, fixing it and then selling -- has made for some fast profits in many markets in recent years, if that trend is going to change, you don't want to be the one to buy in and get stuck.

Typically, financial advisers suggest considering a house a "use asset," meaning you get your value from it by using it every day, with appreciation being a secondary benefit.

For homeowners, a potential decline in home prices raises several issues.

Anyone hoping to maximize their home's value as they downsize or retire may want to speed up the process in an effort to capture top dollar. Without the ability to make a change now, advisers note that homeowners planning on a big windfall from their home may have to postpone plans and build their nest egg in other ways.

"Some people have let the real estate market save for them, figuring their house would make enough money to put them over the top for retirement," says Lisette Smith of Smith Rapacz, a Boston advisory firm. "If selling at a certain price will make or break someone's retirement, then a decline in home prices means they may fall short of their goals and will either have to work longer or save more to make up for it."

Likewise, homeowners planning major renovations may need to reconsider whether they can get the money out of their improvements in the future. They also need to avoid taking on too much home-equity debt, because the higher debt loads increase the potential to be underwater on financing.

"In a down market, people need to be more careful to keep their heads above water," says Patterson. "People have been spending, thinking everything would keep going up -- particularly in the hottest markets -- and now they might want to cut back a little."

Experts also suggest that in an environment that mixes declining home prices with rising interest rates, consumers who borrow against their home equity use the money on things closely related to the home. Upgrading a bathroom or the kitchen, for example, keeps the money in the house; paying for a vacation uses the cash for something with no relation to the home.

Whether a downturn in home prices is short and fast or steep and long -- or happens at all -- is likely to depend on local conditions, but failing to see it coming -- especially for people who are likely to want to cash out from their current property in the next five years -- is shortsighted.

Says Patterson: "You haven't heard of people being underwater on their mortgage for a long time, but you are about to hear about it more and more, because it's going to be a real problem for a lot of homeowners."

Cash in on Your Home?

by Kristin W. Davis Kiplinger, April issue

Many 21st-century homeowners are feeling as if they've won the real estate lottery. Especially on the East and West coasts, they have seen their home values double, or even triple, over the past five years. There's just one problem: It's all on paper. You can't reap the benefit of all that wild appreciation, or protect it from a blowup in your local housing market, unless you somehow cash out.

A small but growing number of homeowners are doing just that. Karen Davidson Seward took advantage of New York City's soaring real estate market to make a move last year to her "dream retreat," a house and barn on nine acres in Lake Placid, N.Y. She paid $250,000 in 1987 to buy a loft in a Tribeca warehouse that had been used to refrigerate cheese. In 2004, after many improvements, it was worth $1.6 million.

The Lake Placid property was a fixer-upper, too, purchased for $65,000. Karen says she has spent another $185,000 to turn the open barn into a winterized living space, complete with plumbing. (Along with her husband, Peter Seward, she did the woodworking herself -- a talent she's proud to say she learned from her father.)

"I had spent nearly 20 years paying off the debts associated with getting the loft -- I didn't save any money," she says. "It became very clear to me after 9/11 that all my eggs were in one basket, and suddenly that investment did not feel secure." Living seven blocks from Ground Zero, Karen had grown weary of the heavy security in her neighborhood. She also felt that there would be no better time than the sizzling market of 2004 to take her profits.

Taxes and real estate commissions took a healthy bite from the proceeds. But for the first time, 50-year-old Karen has a retirement account, invested mostly in stocks and bonds. She's put some of her profits aside to invest in more real estate.

Karen, a graphic designer, primarily works from her Lake Placid home (as does Peter, an illustrator), although she makes occasional trips to New York City to meet with clients. "That's a wonderful balance to being in the wilderness," she says.

For Karen and Peter, who were psychologically ready to pull up stakes, the madcap run-up in housing prices was a golden opportunity to act on an idea that had been simmering for years. And if you live in New York, Southern California or one of the other hyper-inflated housing markets that trigger nightmares of bursting bubbles, bailing out soon could prove to be a shrewd financial move, too.

We know that for every homeowner who fantasizes about semi-retiring on real estate profits and living the simple life in a bucolic locale, few are truly willing to leave behind friends, extended families, schools and communities. But there's no denying that many harbor fears and worry over how can they protect the home equity that makes up a large part of their wealth.

There's no perfect solution. Empty-nesters can cash out and downsize--and tuck their profits someplace safe -- but they may run into tax snags. Risk-takers can refinance to cash out profits and invest them in the stock market or more real estate. But if your house does fall in value, you could end up with more debt than the place is worth--and investment losses to boot. "I'd think twice before I had someone dump their home simply for financial reasons," says Gary Schatsky, an Albany, N.Y., financial planner.
The sky is falling?

Every client who comes into my office asks about buying a condo on spec -- every one," says Benjamin Tobias, a Plantation, Fla., financial planner. "It's reminiscent of the stock-market bubble in 1999, when every client came in wanting tech stocks." The indicators of a market top are easy to find, from "get-rich-quick in real estate" seminars filling church basements and hotel conference rooms to a soon-to-debut reality-TV series called Property Ladder. The show will start out chronicling the efforts of Southern Californians to buy, remodel and flip properties for profit. But for the record, we don't think the national housing market is headed for a crash. A breather, yes, but not a crash.

Rising interest rates will undoubtedly dampen demand. But even if short-term rates rise substantially, mortgage-rate increases (which tend to rise in step with longer-term bonds) will probably be modest. David Berson, chief economist for Fannie Mae, predicts that mortgage rates will rise only one-half to three-fourths of a percentage point this year. And in many markets, recent immigrants, new job seekers and baby-boomers looking to buy homes in warmer climates will continue to drive demand. David Lereah, chief economist for the National Association of Realtors (NAR), predicts a 5.3% increase nationwide in the median price of a house in 2005.

But real estate is local, and in some markets, returns have been breathtaking. Since 1997, the median price of a house has risen 212% in San Diego (from $185,000 to $578,000) and 157% in New York's Nassau and Suffolk counties (from $164,000 to $422,000), according to the NAR. Such markets are the most vulnerable to a slump, especially if mortgage rates go up more sharply than anticipated or unemployment rises.

A nose dive in prices would not be unprecedented. In the late 1980s and early '90s, the median price of a house in Los Angeles dropped 20%, and some homeowners in Southern California and the New York metro area saw 30% slips. It took five to seven years for prices to recover. "My older clients who went through that period have a much different view of real estate than my young clients who bought at the bottom and have experienced phenomenal growth," says Scott Leonard, a financial planner in Redondo Beach, Cal. So if you're afraid your winning lottery ticket may soon expire, you might be looking for a way to cash in.
Sell high, buy low

Cheryl and Mark Shirey were sitting on a $1-million profit in their 1942 Craftsman-style home in Newport Beach, Cal. They purchased it in 1985 for "a couple hundred thousand" and renovated several times. "The stock market crashed so bad, and we went through that," says Cheryl. "We knew it would happen sooner or later with real estate in California." In August, the Shireys sold for $1.2 million and moved to Boise, Idaho, where $500,000 bought a similar Craftsman-style home.

"For the first time in my life, I am not working," says Cheryl, who gave up her sales job with a commercial printing business and now spends more time with the couple's three teenage children, Kayla, Scott and Eric. Mark returns to California every other week to help run a pest-control business he owns there. Together, the family has more time to enjoy Boise's outdoorsy lifestyle, including mountain biking, trout fishing and skiing. "I have no stress anymore," says Cheryl. "I'm not driving on the freeway in bumper-to-bumper traffic."

Jim and Jen Compher made a similar transition. Their Fairfax, Va., townhouse, bought in 2000 for $176,000, had nearly doubled in value when Jen, a special-ed teacher in the Fairfax County school system, decided to stay home with their twins, Owen and Ainsley, born in 2003. To make it work financially, they refinanced with a low-rate 3/1 adjustable-rate mortgage to hold down their monthly out-of-pocket costs. But that was a "ticking time bomb," says Jim. After three years, the rate was sure to go up and no doubt bust their one-income budget.

A move to Florida solved the dilemma. Jim, a Web-site designer, found a new job with Northrop Grumman in Orlando. The Comphers promptly sold their townhouse this past December -- the value had jumped to $377,000 -- and moved to Oviedo, 15 miles outside of Orlando. Their new home is bigger, sits on a kid-friendly cul-de-sac, has a big backyard with a pool -- and cost just $299,000. "It's the Leave It to Beaver experience," Jim says. Their $1,700 mortgage payment is about the same as it was in Virginia, but with a 30-year fixed-rate mortgage, there's no hurry for Jen to return to the workforce. A bonus: Jim traded an hour-plus slog to work in Virginia for a 15-minute commute.

Homeowners in pricey markets are sometimes stunned by what their money will buy elsewhere. Linda Sherrer, a Jacksonville, Fla., real estate agent, recently helped dozens of homeowners relocate from Santa Barbara, Cal. The $650,000-to-$700,000 homes her clients sold "are our $110,000 homes here, with linoleum floors in the kitchen," Sherrer says. "When they saw our $650,000 homes, they couldn't believe the granite and marble."

The only wrinkle: When you're used to expensive real estate, it's easy to pay too much in another market. "Everything looks so cheap that you're not as careful as you ought to be," says Al Stinson, chief financial officer of Fidelity National Financial, in Jacksonville. He says that he probably overpaid when he traded a 3,400-square-foot house in Santa Barbara for a similar-size house in Jacksonville that cost about one-third as much. (But not to worry: He still sold it for a profit when he traded up a year later.)
Cash out and downsize

Who else might want to seize the opportunity to take profits? Anyone with more house than they really need. Warren and Rebecca Boroson bought their Glen Rock, N.J., home 29 years ago for $69,900 and raised their two sons there. But now, says Warren, "our children are grown and out of the house. We had four bedrooms, which is three more to mess up than we needed." Last year the Borosons sold for $579,000 and moved to a high-rise apartment in Hackensack, N.J., with a doorman and a swimming pool.

"We sold mainly to lock in the profit," Warren says. "It was a little faster than we'd planned. But if you're planning to sell in a few years, you might as well do it now while you're sure the market is still good." Warren writes a financial column for the Morris County, N.J., Daily Record that is syndicated nationwide. With an eye on retirement (he's 69), he invested his cashed-out home equity in a laddered portfolio of bonds.

Dave Moran, a financial planner with Evensky and Katz, in Coral Gables, Fla., says some of his clients who are in or near retirement are taking real estate gains off the table. One is a doctor who traded down from a 10,000-square-foot house to one half the size, cashing out $1 million in profit. After he bought a new fishing boat, he invested the rest.

But there is a tax snag in some areas, including Florida and California, that can undermine the benefits of downsizing. State laws sometimes hold down property-tax increases to no more than 2%, say, or the rate of inflation. So if you've owned a property for a long time, your tax bill is likely to be based on an assessment that's far lower than the home's actual value. Once you buy a new property, however, the tax bill on your new home will be based on the current value. Thus, your taxes could go up dramatically even if you buy less house. For example, the Florida doctor's tax bill has tripled, says Moran. And if your profits exceed $500,000 for a married couple or $250,000 for a single taxpayer, you'll have to cough up capital-gains taxes, too.

On the other hand, if you have profits that large, selling now could save you on taxes down the road. When you sell, you can take your tax-free profits -- assuming you've owned the house for at least two years -- and then reset the tax clock. "I know of two families that are selling or seriously considering selling homes that they love to lock in the $500,000 capital-gains exclusion," says Cheryl Costa, a financial planner who lives in Sudbury, Mass. "They are buying homes in a similar price range in the same town to start with a clean slate -- another $500,000 exclusion -- in a new home." There's no limit to the number of times you can claim tax-free profit, as long as you don't sell a home more often than once every two years.

Downsizing can also be a smart move for the house rich and cash poor. In many hot markets, families have stretched to the limit to afford homes bigger than they really need. Those who relied on interest-only or variable-rate loans to qualify for big mortgages may be in for a rude shock when rates rise and payments adjust accordingly. If such a scenario could force you to sell, now is the time to unload, before any potential price drop.
Strip the equity?

Short of selling, can you put any of your home's paper gain to good use? Some risk-takers say you should. "There's no reason to have 50% equity in your house," says Scott Leonard, who is advising many of his clients to strip excess equity and invest it in stocks or more real estate. (He defines "excess" as more than 20% of the home's value.) Those investing in real estate are "buying houses in areas they feel are going to be more stable, as a diversifier away from the Southern California market," where Leonard works. Those buying stocks or tax-efficient mutual funds are seeking at least an 8% return, most of it in appreciation that won't be taxed until the investment is sold. With the after-tax cost of borrowing at about 3.25%, Leonard estimates, "8% tax-deferred for 20 years is phenomenal." He pursues this strategy only with clients in their thirties and forties who have the time to weather any down markets and incomes high enough to easily afford the payments that come with a bigger mortgage.

"It's unbelievable how cheap it is to borrow money on your home," Leonard says. "But people don't take advantage of it as they should." A homeowner with $400,000 of equity in a $750,000 home, for instance, could borrow $250,000 and, invested over 20 years at 8%, turn it into about $1.2 million. The extra mortgage payment, at 5%, would be about $1,300 a month. If you were to simply invest that $1,300 every month, you'd end the 20 years with about $770,000, assuming the same 8% return. (In both cases, any income tax paid along the way is ignored.)

Leonard is in the minority in recommending such an aggressive strategy. And Gary Schatsky wonders how it could make sense for people who are worried about a housing bubble. "Now you have more debt on a property that you're anticipating is going to drop in value," he says. "You don't want to find yourself in the same situation that people did in the late '80s, with more debt on your house than your house is worth." Some people were compelled to file for bankruptcy or, if they sold, had to lick their wounds and come up with the shortfall, Schatsky recalls.

"Expected rates of return greater than the consumer's current borrowing rate come with a high level of volatility and uncertainty," adds Mark Joseph, a financial planner in Reston, Va. If the $250,000 investment in Leonard's example lost 20% over five years and then you were forced to sell your home, you'd have magnified your losses. Not only would you be down $50,000 on your investment but you'd also be out some $78,000 in mortgage payments.

"I'm very cautious" about borrowing against paper gains, says Terry Gustafson, a planner in Carlsbad, Cal. "If someone has significant emergency funds, can tolerate risk and is moving into an investment that is tax-free, that's the only scenario where I'd recommend it."

There's one other hitch. Although you can claim a tax deduction for interest paid on up to $1 million in mortgage debt used to buy or improve a home, only the interest on up to $100,000 in mortgage debt is deductible when the money is used for other purposes. Interest on additional debt could be deductible as investment interest, but only to the extent you report taxable investment income that does not qualify for the special 15% rate for capital gains and dividends. And if you borrow to buy tax-free bonds, interest on the loan is never deductible.
Just let it ride

I am seeing a small percentage of clients taking the money and running," says Gustafson, "but the majority of people are standing pat, sitting on the equity they have accumulated." Whether it's family ties, jobs, schools or community you love, there's usually a reason you live where you do. To take the money and run, you have to have somewhere you want to run to. "It's crowded here," in Southern California, says Leonard, "because it's a great place to live."

So although the shrewdest financial move may be to take some home equity off the table, lifestyle will trump profit-taking for most homeowners. Nonetheless, you can protect your equity in small ways, especially by keeping an eye on minimizing taxable profits when you do sell someday.

Keep the paperwork. When the law changed to allow home sellers to claim up to $500,000 in profits tax-free, financial experts declared an end to the tyranny of keeping receipts for home improvements. (Before that, everyone was told to keep the records to show additions to a home's basis, which reduce the taxable profit on a sale.) Pack rats who ignored the "toss 'em" advice and saved receipts anyway were smart. "I have had clients bumping up against the $500,000 limitation," says Gustafson. If you do keep your receipts (at least from this point forward), you'll save yourself capital-gains taxes if your profits someday exceed the threshold. Additions, landscaping and upgrading the kitchen and bathrooms all count as basis-boosting improvements (but ordinary maintenance, such as fixing a broken window, doesn't count).

Prepare for the worst. Don't quite have enough cash in your emergency fund to weather six months of unemployment? Now is the time to make your home equity accessible should you need to tap it later. Set up a home-equity line of credit while home values are high, rates are low, and banks are lending freely. Should a crisis strike, it could keep you from being forced to sell in a down market.

In the end, don't sweat it. Keep in mind why you bought your house in the first place: It was probably for the property's location, size, style and amenities, not its prospects for appreciation. No matter what happens to its value, you still live in the home you bought because it was just right for your family. So although a paper gain may not be as much fun as winning cash, a paper loss isn't all that painful. In a lot of markets, says Schatsky, "if prices drop 20% or 30%, you've lost maybe a year and half's worth of appreciation." Presuming you've owned the house longer than that, you're still ahead.

How to sell a house? Try some entertainment

By Kimberly Blanton, Globe Staff

CAMBRIDGE -- With the high-end housing market cooling, a realtor in this city knew exactly who should be the headliner at her open house a few blocks from Harvard University: a historian.

More than 100 of the city's well-heeled turned out on a recent weeknight to hear Charles Sullivan of the Cambridge Historical Commission speak about the 162-year-old mansion for sale on Brattle Street. Harvard faculty, retired lawyers, elderly neighbors, and interior designers sipped wine, nibbled on steak and salmon, gossiped about who was there, why the house had no working kitchen, and whether the prior owner really kept pet monkeys.

Sullivan ''was more of a draw than the tenderloin," said Lindsay Allison, the Hammond Real Estate agent, who is co-listing the $10 million property with Sotheby's International Realty Affiliates Inc.

There was a time brokers could simply put a for-sale sign in front of a house in a good neighborhood and wait for an offer. Today, some agents don't just show the house, they put on a show.

The events, called extreme open houses, can revolve around an appearance by a best-selling author, a garage sale, or a fashion show. At a Manhattan penthouse being sold by Donald Trump, a so-called ''psychic psychiatrist" performed what she called ''energy healings." The Donald also made an appearance at the invitation-only affair.

The strategy is starting to take hold in Boston, following a trend that began in Manhattan and Las Vegas. The party-like atmosphere adds flair to a stale property, buzz to a pricey place, and puts a tough sell in a new light.

''It puts energy and attention on to a place," said Wendy Sarasohn, a Corcoran Group broker who favors the approach, and who organized the Trump event.

By Sarasohn's standards, the Cambridge event was not extreme enough. To sell a townhouse in Greenwich Village with a theater attached, the Corcoran Group agent brought in comedians to perform. To sell a place in the meat-packing district with a reflecting pool, she had a channeler seat the guests around the pool and try to contact dead relatives.

She spends as much as $10,000 on her events, a good investment in her image as a broker doing all she can to help clients sell. Of the three dozen extreme open houses she's organized over the past 15 years, she said, about 70 percent of the properties sold as a result.

The typical broker commission is 5 percent of the sale price, which is divided up among the brokers involved and the agencies they work for. On a $2 million property, for example, the total commission would be $100,000, more than enough to pay for even the most lavish open house.

Sarasohn says she started by hiring tarot-card readers to come to market Andy Warhol's place on the Upper East Side in the early 1990s.

Las Vegas event planner Grace Price was at it early, too. She works with agents to attract society by offering for sale at events modern paintings and sculpture by her husband, Nicholas Price. Early this year, she said, she showcased his work in a $7.5 million home for sale in singer Celine Dion's neighborhood on Lake Las Vegas. More than 100 glitterati attended.

Unlike traditional open houses in which potential buyers quickly size up a property, extreme open houses are designed for lingering. They leave guests with a good feeling, which brokers hope will create a buzz in the right circles. ''Clients get bored with just listing the property, getting an open house," Price said. ''I bring people together I know want to network with each other. It's like organizing a good dinner party."

The concept is spreading to the nation's suburbs, where brokers do everything from staging garage sales and charity events to inviting decorators to offer suggestions. In Natick recently, Coldwell Banker agent Maribeth Boisvert hired caterers to whip up appetizers at a home being marketed for $1.02 million to show it is well-laid out for entertaining. ''You've got to make it fun," she said.

Visitors crowded around the granite-topped kitchen island and ate the squash-pecan pastry boats and teriyaki beef sticks, as Amanda Graves, owner of Amanda Cooks!, pulled them from the oven. Next to her, Gary Kalajian of Gary's Gourmet Chocolates dipped fruit slices into a chocolate melter swirling on the counter.

''I would've probably come anyway," but gourmet food ''is definitely another motivator," said Evan Moskovit, reaching for chicken satay.

Extreme open houses are ''going to become more and more common," said Rick Goodwin, publisher of Unique Homes magazine, which coined the term.

The median price for million dollar-plus properties in Boston and its suburbs was $1.445 million in February, virtually unchanged from February 2004, and a 11 percent increase over 2003, when it was $1.25 million, according to MLS Property Information Network. These high-end houses sold in 95 days on average last month, down from 135 days in February 2004.

Karl Case, a Wellesley College economics professor, said brokers may be spending on extreme open houses because Greater Boston homes are no longer selling themselves. ''People are nervous," he said. ''There's all this talk about the housing bubble. Having said that, people have been talking about this bubble for three years."

In Cambridge, as many as 150 people roamed the 15-room house on Brattle Street built in 1843 by Joseph Worcester, who compiled a dictionary. Many were neighbors with multimillion-dollar properties themselves who wanted to see a property that had not been on the market for a half century. The owner was the late William J.J. Gordon, who innovated uniformly shaped potato chips stacked in a cylindrical can, later named Pringles. The property once housed his six children, two monkeys, many dogs and, it's rumored, a llama. Gordon died in 2003, and a trust lawyer is selling the property.

Since relatively few people are in the market for a $10 million house, Hammond Real Estate spent about $5,000 on the party to attract as many people as possible ''to get the word out," Allison said. Said S. Donald Gonson, a retired Hale and Dorr law partner who lives nearby, ''I certainly can't afford it, but I know people who could afford it." Four people who either attended the open house or were invited to it have since asked for private showings, though no offers have been made.

Nathan H.D. Gordon, feels protective of his childhood home and was somewhat uncomfortable with opening it to the public, but concedes the event may have been a necessary, perhaps even clever, way to market it.

It was ''more selective," he said, and did ''not let the riffraff see the house."

Metro mortgage defaults on rise

Experts blame bad lending and borrowing decisions, lagging income growth and flat home prices.
By Christine Tatum
Denver Post Staff Writer

Soaring foreclosure filings in Arapahoe County for the first three months of this year helped drive metro Denver's foreclosure rate 34 percent higher than the same period of last year and 30 percent higher than the fourth quarter of 2004.

The seven-county region's ballooning rates stem from bad borrowing and lending decisions, lagging income growth and flat home prices, experts say.

It's hard to continue blaming foreclosures only on the economy. Colorado added 27,900 jobs last year, and the state's unemployment rate dropped in January to 4.9 percent, the lowest level since September 2001.

"Lenders started giving money to people, and it's gotten out of hand," said Jeannie Reeser, public trustee of Adams County. "I am talking to people who have jobs, but their income doesn't come anywhere close to matching their financing."

Arapahoe County Public Trustee Mary Wenke expresses similar frustrations. First-quarter foreclosure filings in that county came in at 1,629, topping the other counties substantially. The rate represents 1.3 percent of 125,325 single-family, owner-occupied houses in the county, according to 2003 census records.

Arapahoe County's most recent quarterly filing rate is more than double the 757 foreclosures posted in the fourth quarter of last year. The county had the dubious distinction of posting the greatest rise in foreclosures last year - a 39 percent spike over 2003.

Wenke said most of the foreclosures her office is handling are tied to loans less than a year and a half old. Eighty percent of the county's foreclosures occurred in Aurora.

"I am not in a position to say it's faulty lending, but we have too many foreclosures that are on brand-new loans not to conclude that something is wrong," she said.

Pete Lansing, president of Denver mortgage company Universal Lending Corp., agrees that some lenders are too lax. But Lansing said many people could afford their home loans if they were smarter about managing other expenses.

"Everybody has to have what they want right now, no waiting, no saving up," he said. "Credit is so loose today that I can buy the groceries I need on a credit card, eat the food tonight, discard the food by tomorrow at noon and finance my debt on a 30-year, amortized loan. How stupid is that? But people do it all the time - and then they wonder why they're in foreclosure."

Mortgage Applications Increased Last Week

NEW YORK (Reuters) - Applications for U.S. home mortgages increased last week as higher home purchasing activity offset a decrease in refinancing at a time when mortgage rates are rising, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity increased 2.4 percent to 674.3 in the week ended March 25, partly offsetting the 9.5 percent decline the week before.

The overall increase was fueled by the MBA's purchase index, a gauge of loan requests for home purchases, which rose 5.5 percent to 470.9, after it lost 3.5 percent the previous week.

The increase was offset by the MBA's seasonally adjusted index of refinancing applications, which dropped 2.0 percent to 1857.2, after falling 16.5 percent the prior week.

But applications for adjustable-rate mortgages (ARMs) -- which have relatively low initial rates that ``adjust'' in line with market trends after a fixed period -- rose as a percentage of all mortgage applications, climbing to 36.6 percent from 33.5 percent the prior week.

``Rates on 30-year fixed-rate mortgages have increased 34 basis points in the last month. Following this increase in rates, the market attained a record high ARM (adjustable-rate mortgage) share this week, both in terms of number of loans and dollar volumes,'' Michael Cevarr, MBA's director of industry surveys, said in a press release.

Fixed 30-year mortgage rates averaged 6.08 percent last week, excluding fees, up 13 basis points from 5.95 percent the previous week.

One-year ARM rates averaged 4.39 percent last week, excluding fees, up 27 basis points from 4.12 percent one week earlier.

Refinancings also decreased as a percentage of all mortgage applications, falling to 37.8 percent, from 39.5 percent the week before.

The MBA's purchase index, a gauge of loan requests for home purchases, rose 5.5 percent to 470.9, after it lost 3.5 percent the previous week.

The MBA's survey covers approximately 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990.

Respondents include mortgage bankers, commercial banks and thrifts.

Tuesday, March 29, 2005

Bad loans more than double at GMAC

By James Mackintosh in London

Enter Description for image here!Bad loans at the retail mortgage operations of General Motors, the world's biggest carmaker, more than doubled last year as it increased lending to poorer customers and was forced by post-Enron accounting to keep more debt on the balance sheet.

Non-performing loans in the mortgage business of General Motors Acceptance Corp, the finance arm that is the most profitable part of the carmaker, increased from $1.3bn to $3.4bn in 2004, excluding purchases of distressed debt. As a result, the proportion of the loan portfolio that is more than 60 days overdue rose to 8.8 per cent from 5.2 per cent the previous year, according to regulatory filings submitted this month. The company has not previously disclosed non-performing loans.

Beazer to Log Goodwill Impairment Charge

Beazer Says 2Q Results to Include Charges From Impairing Goodwill, Class-Action Settlement
ATLANTA (AP) -- Beazer Homes USA Inc. on Tuesday said it plans to record charges from impairing goodwill and a legal settlement in its results for the current quarter.

The homebuilder, however, maintained its forecast for 2005 earnings -- including the settlement but before any impairment costs -- of $6.67 to $7 per share. Analysts polled by Thomson Financial currently see yearly income of $7.09 per share.

About $131 million in goodwill was recorded in April 2002 following its acquisition of Crossmann Communities, Beazer said. Its board decided nearly all of the goodwill allocated to underperforming operations in several locations will likely be written off as part of its strategy to reduce investments in weak markets.

"While the company remains committed to the Indiana, Ohio, Kentucky and Charlotte, N.C., markets, they presently suffer from relatively weak local economics and severe price competition, particularly at entry level price points," the company said in a statement.

The amount of the impairment charge will be finalized and logged as a non-cash item in results for the second quarter, which ends March 31, Beazer said.

Separately, Beazer settled a class-action suit related to water-damage claims against Trinity Homes LLC, which it acquired in the Crossmann deal. Beazer will record a second-quarter charge of about $40 million, which is its best estimate of the total liability from the suit, the company said.

Last year, Beazer earned $5.69 per share on sales of $3.91 billion.

Beazer shares fell $2.15, or 4.1 percent, to $50.05 at the close of trading on the New York Stock Exchange, and sank an additional 65 cents to $49.40 during extended activity.


by Dr. Kurt Richebächer

From the macro perspective, U.S. business profits received their main boost from two flows in recent years. One was the phenomenal decline of personal saving, and the other was the soaring budget deficit accruing from tax cuts and higher spending.

Saving is the unspent part of personal income. To this extent, wage earners reduce total business receipts in relation to total expenses incurred. The net result is a corresponding fall in profits. Conversely, when households run down their saving, business revenues rise in relation to expenses incurred. The net result is higher profits.

In this way, the phenomenal collapse of personal saving in the past few years has been Corporate America's main profit bonanza. This was far more important than the direct and indirect revenue flows from the soaring budget deficit.

But the trouble is that the soaring U.S. trade deficit in recent years has been diverting a rapidly growing share of such spending and its inherent profit creation to foreign producers. In essence, the trade deficit directly transfers spending and profits from domestic to foreign producers, leaving American producers with the wage expenses, which their employees spend on foreign goods. As we have stressed many times, the trade deficit is the greatest profit killer in the U.S. economy.

We come to the most important macroeconomic profit source in a healthy economy. Apparently unknown to most American economists, this is net capital investment. John M. Keynes expressed it with great simplicity and precision: There are two streams of money flowing to the entrepreneurs, namely, the part of their incomes that the public spends on consumption and the expenditures of businesses on net capital investment.

Economists, in general, are completely unaware of the crucial importance of business investment for business revenues and profits. This has a particular and peculiar reason. From the perspective of the business sector as a whole, investment spending creates business revenue without generating business expense.

What seems mysterious has, in reality, a simple explanation. Investing firms capitalize their investment expenditures. No expense is incurred until the first depreciation charge is recorded. For the producers of the capital goods, on the other hand, it involves a sale, producing immediate revenue.

Due to this particular treatment in accounting, net fixed investment is typically the business sector's most important profit source. But in the United States, this profit source has dramatically collapsed in the past few years, as rising depreciations have overtaken gross new investment.

In 2003, net fixed investment amounted to $154.5 billion, after $404.8 billion in 2000. This implies, first of all, a rapidly shrinking capital stock; and second, a disastrous drag on business profits, because depreciations are expensive.

Answering the question of aggregate profit prospects for the U.S. economy in 2005 requires a macro perspective focusing on changes in four aggregates: personal saving, budget deficit, trade deficit and net business investment.

Our crucial assumption is that negative profit influences will grossly outweigh positive influences, suggesting in their wake lower business investment. If the consumer starts to save out of current income, the U.S. economy will slump.

We have characterized the U.S. economy as a bubble economy in the sense that asset appreciation has become its main engine of growth. Courtesy of the prolonged sharp rise in house prices, the American consumer has been willing and able to maintain his spending despite a protracted recession in employment and wage incomes.

But we see a variety of influences tempering the bubble climate. For the time being, the whole set of asset bubbles finds strong support from still exceptionally low short-term rates, still extremely loose money and credit, and high-riding expectations about strong U.S. economic growth and low inflation rates in 2005. Much economic data warn of impending strong disappointment on both counts that will prick the bubbles. Not to ignore, moreover, the Fed's commitment to further rate hikes.

Yet the refusal of long-term rates to rise in response to the Fed's serial exertions to raise short-term rates further is perplexing. Mr. Greenspan himself spoke of a "conundrum." A reported inflation rate above 3% would, by past experience, imply a federal funds rate of at least 5%. But a rate of 3.5% would already be enough to wreck the bond bubble, and in its wake, the stock and housing bubbles.

For sure, the financial community is fully aware of this immense policy risk, strictly limiting the Fed's scope for further rate hikes. The amazing stability of long-term rates suggests the financial community has not only refused to unwind, but has even continued to add to existing carry-trade positions. They are still far too profitable to be abandoned before the Fed makes them unsustainable.

As no one is taking the Fed seriously, it may have to do more than it wants. The frightening point to see is that, given the U.S. economy's heavy dependence on consumer spending for the housing bubble, a mere leveling of house prices would be enough to slash consumer spending and economic growth. We expect worse than price stagnation.

It ought to be realized that a rise in long-term rates by only 1-2 percentage points would rapidly play havoc with all existing asset bubbles - bonds, stocks, housing - and in consequence, with economic growth. Within a matter of months, there would be deep recession.

A crucial question is the inherent impact on personal saving. Voluntarily or involuntarily, private households will sharply restrain their borrowing and return to old-fashioned saving out of their current income. That this will badly depress consumer spending needs no explanation. Unfortunately, when consumption declines, fragile business and housing investment will fall as well.

Most people inside and outside of America have yet to realize two things: First, that among industrial countries, the U.S. economy has by far the worst structural fundamentals; and second, that it is far more vulnerable today than in the first two years of the decade.

Of course, American policymakers and economists have been trumpeting the opposite for years. Having realized their complete disregard of macroeconomics, we are sure that they earnestly believe this fairy tale. With this in mind, we recently, with great interest, read a report from Morgan Stanley about a meeting with customers in late January.

About global economic prospects for 2005, it said: "There was little doubt as to who would take the baton in a post-U.S.-centric world - it would be another encore for America. There was deep conviction that no one comes close to having such an ideal system - especially in terms of technology, the work force and America's unique risk-taking culture. Market depth and flexibility - in both the financial and the nonfinancial realms - was depicted as the icing on the cake for yet another run of U.S.-centric global growth."

Later, it stated, "Europe, which has none of these qualities, is the last place where productivity could take off."

For us, this is typical Wall Street trash, bare of any serious macroeconomic thought. It used to be an elementary truism among economists that a healthy economy is rich in savings, rich in productive investment and rich in profits. The U.S. economy is extremely poor in all three. But it is extremely rich in financial speculation and corporate malfeasance.

To be sure, the enormous structural deficiencies are increasingly impairing U.S. economic growth. For the past three years, unprecedented monetary and fiscal profligacy has been able to overpower their depressant influence through the bubble-driven consumer borrowing-and-spending spree. Yet the "structural drags" are finally gaining the upper hand over the weakening bubble impetus. The U.S. economy's famous resilience had more to do with clever statistics and unprecedented monetary looseness than with true economic strength.


Kurt Richebächer
for The Daily Reckoning

Monday, March 28, 2005

Greenspan's Second Bubble


I knew Alan Greenspan had his first bubble in late 1999 when cab drivers were too busy talking to their brokers on cell phones to talk with customers. The “cab driver test” flashed its second bubble warning light to me just recently when I arrived in Key West for the annual winter vacation with my family. Without any prompting, our cab driver told us of a Key West real estate market on fire. Condos that were selling a year ago for $600,000 could not be touched for $1 million today, while the units under construction were sold four times over before anyone even thought of occupying them. The old hotels were being torn down to be replaced by condos that were selling like hotcakes before construction had begun. Meanwhile, room rates and rental rates in Key West have hardly budged. The implied return on investment in real estate is tied to an expectation of ever-rising prices, not to income from property.

Although Greenspan and his Federal Open Market Committee colleagues may not have the opportunity to come to Key West and talk to the cab drivers about real estate, they could have heard similar stories over the past several years in the red-hot real estate market around Jackson Hole, Wyoming, where they gather annually for central bankers’ summer camp.

Lest I be accused of being unscientific, there is more objective evidence of a housing bubble in the United States than that linked to the opinions of cab drivers. Between 2000 and 2004, house prices, nationwide, rose by more than 40 percent—the fastest rate of increase on record since World War II. Moreover, the pace is accelerating. During 2004, the value of real estate on household balance sheets rose by 12.5 percent. That is far short of the 30 to 40 percent increase in prices evident in some markets over the past twelve to eighteen months, but it denotes a substantial and widespread acceleration in the price of owner-occupied real estate. Meanwhile, the ratio of average yearly rents to house prices has been dropping steadily, from about 5 percent nationwide in the 1990s, to 3.5 percent in 2004, reminiscent of the way earnings plunged relative to soaring equity prices before the tech bubble burst in March 2000. Rental yields in the hotter markets are even lower.

What Caused the Housing Bubble?

Bubbles in any market feature expectations for price increases that catch fire, so that more and more people begin to chase the market based only on the expectation of ever-rising prices. This bubble has some clear and proximate causes, none of which by itself would have been sufficient to cause a bubble, but which together create a compelling set of preconditions for a housing bubble.

The key underlying elements contributing to the new-millennium housing bubble are the Fed’s responses to a series of unique events over the past seven years: the Long-Term Capital Management crisis in the fall of 1998, the collapse of the NASDAQ Stock Market in March 2000, the September 11 attacks, and the corporate scandals beginning with the 2001 Enron debacle. In the background, the emergence of China as a new mass supplier of inexpensive traded goods has also forced the Federal Reserve to respond to a 2003 deflation scare.

All of these events combined to create a conviction among market participants that the Fed would not allow a serious drop in broad asset prices. The “systemic risk” warning flag would be unfurled should markets be threatened, resulting in an extended period of very low interest rates. The aim was to avoid an asset market meltdown while, simultaneously, addressing a deflationary problem of global excess capacity in the traded-goods sector.

The housing bubble, together with a pervasive underpricing of risk, is a byproduct of a set of compelling and arguably necessary monetary policy responses to a powerful series of market-unfriendly events, each of which potentially constituted a systemic threat to the global financial system. It may be true that the Fed has played the systemic-risk card so frequently since the fall 1998 Long-Term Capital Management rescue that a macroeconomic moral-hazard syndrome has emerged. Specifically, it would be understandable if an asset market participant observing the operation of the Federal Reserve over the past seven or eight years concluded that risk should be sought aggressively as a means to enhance returns because any financial accidents lead to a declaration of systemic risk and accommodation by the Federal Reserve that amounts to free insurance for aggressive risk taking.

The Fed followed its accommodative response to the Long-Term Capital Management crisis in the fall of 1998 with a brief period of tightening in 1999. After the collapse of the NASDAQ in March 2000, the Fed began rapid easing that accelerated in the aftermath of the September 11 tragedy. That was followed by the 2003 deflation scare, which was due partly to the massive excess capacity in the traded-goods sector driven largely by China’s emergence as a major producer in the area. This resulted in the Fed’s decision to consider buying long-term bonds to avoid deflation and then later to predetermine that its tightening pace should be slow.

The Fed’s need to target its ultra-accommodative monetary stance--the real Fed funds rate was negative during the two and a half years prior to its cautious initiation of tightening in June 2004--to combat a disinflationary trend in the traded-goods markets ballooned the U.S. real estate market. Tax law changes that allowed households repeated exemptions of up to $500,000 on housing capital gains coupled with an innovative mortgage market that simplified withdrawal of accumulated gains, even from unsold housing, added to the fire under the housing market. As a result, housing replaced tech stocks as the “hot” way to accumulate wealth for most American households.

The current U.S. housing bubble is the result of two aspects of Fed policy. First, as I have already noted, the Fed needed to keep rates very low (negative in real terms) for an extended period that included an underlying disinflationary impulse from the global excess capacity problem. Second, possible systemic risk in the face of exogenous shocks from Long-Term Capital Management to the NASDAQ collapse, September 11, and corporate scandals rightly or wrongly has made the housing bubble intensify further on the notion that the Fed would also act to avoid a housing meltdown that threatened to erase trillions of dollars of household wealth.

The Fed, however, is not supposed to target asset markets for the very reason that too much risk taking would be the result of doing so. Yet who doubts that a sharp drop in the market for housing or in the stock market would cause Fed tightening to stop or even to be reversed? The Greenspan Fed has been willing to spike the punch bowl when the party threatened to end for asset markets. Is it willing to remove it when the party gets too rowdy?

The Fed began to tighten in June 2004 with a commitment to raise rates at a “measured pace” until policy no longer remained accommodative. So far, the measured pace of Fed tightening has left financial conditions remarkably easy as the dollar has dropped and long-term rates have risen a little while, of course, a housing boom has boosted household net worth by $6 trillion since 2000. That said, the Fed faces a difficult task as it tightens in this cycle. Excess capacity in the traded-goods sector continues to exist, somewhat exacerbated by China’s refusal to allow its currency to appreciate, while simultaneously the liquidity flowing into China is being recycled back into U.S. financial markets through heavy purchases of U.S. government securities.

In retrospect, there are plenty of reasons to account for the emergence of a housing bubble, and no single one, save perhaps for the Long-Term Capital Management rescue, can be described as an inappropriate or inflationary action by the Federal Reserve. Like so many difficult issues, the housing bubble has emerged from an unusual combination of events. The Fed’s response to each is defensible. However, taken collectively, those responses have encouraged what is arguably a worldwide housing bubble.

The wealth created in the housing sector may be distorting investment decisions and boosting aggregate demand so that even goods prices are starting to rise at a faster pace. The most recent report on the core personal consumption expenditures (PCE) deflator, the Fed’s favorite index of inflation, showed a modest rise to a 1.6 percent year-over-year increase. But the annualized inflation rate over the last three months has been 2.1 percent, and it is fairly easy to see the year-over-year rate rising above 2 percent, the top end of the Fed’s permissible range, by the end of this year.

What Should Be Done?

The reason to end the housing bubble proactively is straightforward. If it is a real bubble, it will grow bigger and burst of its own accord with even more disruption to financial markets than would be caused by a preemptive strike from the Federal Reserve. It is a simple matter of pay me now or pay me later, but it is less expensive to pay the price now.

The Fed should proceed in two steps to remove accommodation while minimizing risks to asset markets. First, it must remove the pre-commitment lag, which has been included in the statement following its periodic rate-setting meetings. The phrase “accommodation can be removed at a measured pace” has been interpreted by markets as a signal that Fed rate increases will proceed at 25 basis points per meeting until an unknown, neutral level of the Fed funds rate is achieved. This pre-commitment by the Fed suggests a fear of lower asset values. If the Fed is prepared to temper its tightening pace for the sake of asset markets then, so some believe, it will slow or reverse its tightening process if asset markets fall. As a result of the Fed’s implicit guarantee, the return on risky assets has been driven far below normal. The same has happened to the return on low-risk assets, as indicated by the sub-2-percent real yields on ten-year Treasury notes that have yielded long-run average real returns well above 3 percent.

The Fed should eliminate the “measured pace” language from its statement and simply indicate that monetary policy is currently accommodative and that accommodation will be removed at a pace dictated by the future path of growth and inflation. Second, if growth remains at or above a 3.5-percent trend rate and inflation creeps closer to or above 2 percent, the Fed should raise the federal funds rate by 50 basis points, perhaps at its mid-year meeting in June. That would put the federal funds rate at 3.5 percent (assuming another 25-basis-point increase in May) and leave the real rate at roughly 1.5 percent, which would still be accommodative. More important, the Fed would unambiguously have shown markets that the pre-commitment era is over.

The decision to end its pre-commitment strategy to a measured 25-basis-point per meeting pace of tightening brings the Fed up against a basic issue. The Greenspan Fed has always been prepared to consider asset markets in distress with attendant possible systemic risk as a relevant consideration in accelerating the pace of easing. A housing bubble puts the shoe on the other foot. If there is an asset market bubble, is the Fed prepared to alter its pace of tightening in order to address the possible systemic risk associated with the growth and eventual bursting of a bubble in housing prices?

Only by addressing this question and suggesting that the systemic risk consideration works both ways in the asset markets can the Fed remove a long-building moral hazard problem from asset markets in which the price of risk is simply too low. Greenspan’s decision is whether to bite the bullet now or leave the hard work to his successor.


Fri, Mar. 25, 2005


IN PENNSYLVANIA in the past three years, an alarming number of homeowners - about 55,000 - have had their American Dream sold at Sheriff's sale.

In fact, Pennsylvania ranks fourth in the nation in the rates of foreclosures for "subprime" mortgages, according to a recent study prepared by The Reinvestment Fund for state Banking Secretary William Schenk. (For loans at prime, it ranks ninth in the United States.)

As this editorial page has pointed out frequently - and despairingly - Philadelphia is particularly vulnerable, with the second-highest rate of foreclosures in the counties studied.

Home foreclosure rates are reminiscent of the Great Depression, but not all the reasons are the same. These days, Pennsylvanians who lose their homes are victims, not only of hard luck like losing their jobs, but also of "abusive" practices by some mortgage lenders.

"Subprime" loans are those made at higher rates to borrowers with weak credit histories. These mortgages have made owning a home possible for many who could not afford it otherwise.

But they also can be a trap, especially when the loans are made to people who realistically won't be able to make the payments.

Also contributing to the problem are lenders who hide the true costs of the loans or don't fully explain the terms of the loans. Many people get caught in the downward spiral by taking on second mortgages for home repairs that could have been financed in other ways.

The result is seen in these chilling numbers: 11.9 percent of subprime borrowers lose their homes to foreclosure, 1,400 times the rate of foreclosures of "prime" mortgage holders. As usual, these abuses impact low-income, minority and elderly homeowners the most.

This was a problem hiding in plain sight for too long, with more handwringing than hands-on action. Now, though, Pennsylvania appears geared up to attack it from a range of different angles.

State government is limited in what it can do to change the traditional reasons for foreclosures like unemployment, divorce, or unwise personal decisions. It can and should do more to protect consumers.

On the legislative side, the General Assembly will be asked to pass a number of laws to protect consumers, including a requirement that all individuals who provide mortgages be licensed, like individual real estate agents. (Now, only the companies need be licensed and unethical individuals avoid detection by moving from one to another.)

Also on the docket: proposals to requiring pre-closing credit counseling for subprime borrowers and establishment of an emergency fund for victims of abusive lending.

On the administrative front, the Banking Department will be restructured to take on the job of policing tougher regulations. The staff will be increased from the 108 who worked there when Schenk took office to 175 by next year. Eleven of those employees will form an investigative unit to go after dishonest and unethical businesses.

As important, the Banking Department is increasing financial education in schools so Pennsylvanians will be better able to protect themselves from being conned.

It's a scandal that the immoral exploitation of consumers was allowed to grow into the current foreclosure crisis - but it's heartening that Pennsylvania's leadership finally is starting to wake up to its obligations.

Japan's real estate still under bubble shadow

TOKYO, March 28 (Xinhuanet) -- Whereas land prices in large citiesacross Japan are picking up, the overall market is still on the decline, a lingering repercussion of the 1990s property foam, recent government statistics showed.

The statistics released last week by the Land, Infrastructure and Transport Ministry showed that the nation's average land prices dropped 5.0 percent in the year to Jan. 1, 2005 for the 14th consecutive year.

The residential land prices dropped 4.5 percent in the year, while that of land for commercial use fell 5.6 percent.

Compared with 1991 when the bubble economy started breaking, the residential land prices have dropped by 46 percent to the pre-bubble year of 1985, and the commercial land saw its prices shrinking by 70 percent to the lowest since 1974.

Back in late 1980s, Japan's economy was on a rapid rebound track after the global oil crisis. The easy monetary policy adopted by the central bank to stimulate the economy attributed toa tremendous flow into property and stock markets of the surplus money which could not find other satisfying investment projects. As a result, the real estate prices skyrocketed.

Failing to realize the perilous consequences of the property foam and make appropriate assessment about the market landscape, Japanese lenders were scrambling to give loans to developers and construction firms, which aggravated the vicious circle of hiking house prices and ballooning credits.

In 1988, the commercial land prices index of the commercial land in Tokyo nearly tripled compared with three years ago. In thedowntown Central Ward, the land prices quadrupled.

By 1990, the land prices in Tokyo was on par with those of the entire United States, creating an unprecedented property myth.

In 1991 alone, the 12 leading banks poured 50 trillion yen (470billion US dollars) in loans into the property sector, a sum accounting for one-fourth of the total loans they gave in that year.

Yet, the bubble blew in the very same year, when the stock and property markets suffered a nosediving. The repercussion has been gnawing at Japan's economy since then.

Not only the developers and construction companies, but also almost all major Japanese major enterprises were involved in the real estate spree, and some had gone bust.

The firms in the property and construction sector accounted forthe bulk of the bankrupt companies.

In 2000, some 6,000 such companies went broken, or 33.6 percentof the bankrupt businesses.

A total of 28 listed went bankrupt in 2002 with property firms taking up more than one-third, both setting a record after the World War II.

The financial industry, which was stunned heavily in the rampage, became the chief criminal in Japan's decade-old economic depression.

Their generous loans later came out to be the poison for the debt-laden property firms. And the lands in pledge finally translated into growing bad loans and declining capital adequacy ratio as the values kept plummeting.

The piling non-performing loans weakened the banking system. Three of the top-ten banks closed for bad capital turnover, let alone numerous middle- and small-sized financial institutes.

To bail out the struggling banking industry, the central government has pumped about 23 trillion yen since 1997.

Notwithstanding, the average capital adequacy ratio of major banks once dropped to about 8 percent, barely above the bottom line of the Bank for International Settlement. Credit ratings of Japanese banks were repeatedly lowered, leading to hardship in financing in the world financial market.

Tightened credit policies made by cautious surviving banks suffocated enterprises which depended largely on loans. In turn, the grim lending policies further produced bad loans as the money-strapped borrowers were not able to improve their operational performances.

By the end of March 2003, the total amount of non-performing loans of Japanese banks still stayed at up to 44.5 trillion yen (418 billion US dollars).

Economists said the long-standing depression following the collapse of the economic bubble was mainly due to incessant bad loans largely as a result of the ever-declining prices of real estate in pawn.

They blamed the financial policies of the government for the badly unhealthy real estate sector.

The yen appreciated tremendously in the wake of the signing of the Plaza Accord in October 1985.

In order to ease the appreciation pressure and galvanize the domestic consumption, Japan had been conducting an ultra-easy money policy. The practice encouraged a huge flow of surplus moneyinto stock and real estate markets.

The rate leverage imposed by the financial watchdog that finally detected the bubble proved too late to work. Then Finance Minister Kiichi Miyazawa admitted later that the faulted monetary policy played a leading role in the forming of bubble economy. Unchecked lending by the profit-seeking banks and speculative activities of enterprises and privates also were at fault, they said. Enditem

Should You Wait Out Mortgage Rates?

Click On Detroit
Mortgage rates have been rising steadily, and rates on 30-year home loans are back above 6 percent, on average, for the first time in eight months.

Is it a good idea to wait in hopes that rates go back down? Maybe not. Senior vice president Jack Radin with online lender Mortgage-IT said it can be a mistake to buy when rates are low, because low rates can draw more people into the market and result in higher prices. He said you might, in fact, do better buying when rates are up. That tends to depress home values, so you can get a home at a more affordable price and plan to refinance later, if rates do eventually retreat. Home prices have continued to escalate, but economists predict we'll see some cooling off if mortgage rates keep going higher this year. And they said rates are unlikely to fall anytime soon, with the Fed pushing up interest rates and mentioning the "I" word -- inflation.

Real Rates and Gold

Forex Rate
This week witnessed some big news on the real interest rate front. Notable developments...

... hit the wires in both key components of real interest rates, nominal 1-year US Treasury Bill yields and the annual growth rate in US inflation as measured by the Consumer Price Index.

On Tuesday the US Fed raised overnight lending rates between banks by 25bp to 2.75%. It was the seventh consecutive 25bp rate hike in as many FOMC meetings. Bonds were sold on the higher-rates announcement, driving yields higher. The benchmark 1y T-Bill yields instrumental in real-rate calculations headed up near 3.5% on the Fed’s action.

The FOMC even made the following statement about inflation, which is pretty extraordinary since it usually does everything possible to convince the markets that inflation is trivial. “Though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident.”

The “pricing power” reference refers to the fact that US corporations are growing tired of eating higher raw materials costs. They are ready and able to simply raise their final-goods prices to American consumers and pass on these higher general costs. If the rising costs are not passed through, corporate profits and US stock prices will suffer.

But as soon as corporations exercise their pricing power to pass along their own higher costs, American consumers are going to start feeling the pinch of inflation. Each dollar earned will buy less and less in terms of real goods and services. This will hit folks who live from paycheck to paycheck especially hard. The latest CPI numbers released the morning after the Fed’s rate hike are already bearing this out.

The February CPI report claimed US consumer prices rose a staggering 0.4% last month. Annualized, this means that general prices in the US are growing at a hefty 4.8% a year, even by the lowballed official government measure. In absolute terms, the latest CPI data weighed in at a 3.0% higher level than that of a year ago.

Recall that real rates are simply the nominal interest rates savers can earn in the marketplace less the rate of inflation. To compare apples to apples, the real rates must be calculated using both components over the same underlying time frame. If a one-year rate of inflation is used, then a one-year “risk-free” US Treasury Bill yield must be incorporated as well to keep the calculation congruent and accurate.

With 1y T-Bills now yielding around 3.5%, and CPI inflation running 3.0% over the past year, real interest rates are now actually modestly positive for the first time since 2002! Since negative real interest rates are one of the most bullish monetary environments possible for gold, this week I would like to continue my real rates and gold series of essays and address gold in light of these latest real-rate developments.

With real rates by the most conservative measure now modestly positive, is our young gold bull in jeopardy? Will today’s newly positive real rates entice investors out of gold and back into bonds since they can now once again modestly increase the purchasing power of their capital through investing in short-term Treasuries?

The short answers are no and no, so please relax if you are a gold investor. I will attempt to flesh out the long answers and the logic behind them in the rest of this essay.

To start, it is easiest to wrap our minds around this crucial gold and real rates relationship by first considering the long-term strategic perspective. Since I wrote my first real rates and gold essay in July 2001, so much has happened. The latest update of that original chart published nearly four years ago tells the whole story of the past 35 years.

Gold is the ultimate money, but it is also the ultimate alternative investment. Investors tend to flock to gold not when stocks and bonds are doing well, but when they are struggling. Stock investors who recognize the dire writing on the wall relative to the current very high equity valuations and the long-term Curse of the Trading Range have been slowly moving capital into gold to escape the secular bear carnage.

For bond investors, hard times are not defined by valuation reversions but by real rates of return. All bond investors are by definition savers, they have scrimped at some point in their lives to consume less than they earned so they have accumulated surplus capital, or wealth. By investing in bonds they make their surplus capital available to debtors, who consume more than they earn.

Free-market transactions are supposed to be mutually beneficial for both the buyer and seller, or borrower and saver. In normal free markets where the Fed hasn’t manipulated interest rates to artificial lows, the borrower pays a fair rate to consume more than he earns and the saver earns a fair rate to consume less than he earns. Everyone is happy and the bond markets thrive.

But if inflation exceeds the nominal yields that can be earned in US Treasuries, then savers actually lose purchasing power by making their surplus capital available for debtors to borrow. For example, in early 2003 CPI inflation was running 3% while 1y T-Bills were only yielding just above 1%. If savers lent their capital at this 1% nominal rate while general prices were rising at 3%, the net result was they lost 2% of their purchasing power over a year.

Now obviously deploying precious capital in a relatively risky investment with a guaranteed loss of purchasing power is pretty foolish. The savvy savers in the bond markets certainly understand this so they are likely to gradually defect from bonds when real rates grind too low or negative. If lending capital via bonds is likely to result in a real loss, why not just exit from the bond markets and find somewhere else to protect your purchasing power from inflation? Enter gold.

As the chart above shows, gold thrives when real rates are negative, when inflation is so high or nominal interest rates are so low that bond investors simply cannot earn a real purchasing-power return with their hard-earned surplus capital. Rather than let inflation erode their hard work of a lifetime, they gradually move capital into gold which will always rise at least enough to keep them ahead of inflation.

Remember that inflation is always ultimately a monetary phenomenon. When a central bank creates too much fiat money relatively more money chases after relatively fewer goods and services driving up general prices. This very inflating money supply that makes bond investing pointless also bids up the gold price. Thus buying gold in inflationary times is as great of guarantee as you can possibly get that your purchasing power will be maintained and protected in real terms regardless of fiat expansion.

History has unambiguously taught that regardless if fiat-currency inflation is running 3% or 300% gold prices will stay on the crest of this inflationary wave over the long term. An ounce of gold today will buy roughly the same amount of real goods and services as it did in 1970 or even way back in 1910 before the Federal Reserve fraud was foisted upon the American people.

The longer that real rates remain low or negative, the longer and more powerful gold bulls become. It is no coincidence in this chart that today’s gold bull is already the greatest by far that we have witnessed since the 1970s. The last few years mark the first time since the late 1970s that real rates went negative, and gold has rallied higher right on cue as I suspected it would four years ago when real rates first threatened to go negative and gold languished in the $260s!

Back to our original question spawned from this week’s news, will the reappearance of modestly positive real rates threaten the viability of this gold bull? Highly unlikely. All kinds of interesting strategic comparisons leap out of this chart above that suggest positive real rates are not a potential threat to gold until they hit +3% or +4%, light years away from here in economic terms.

First, note that the 1970s gold superbull ended in a parabolic spike. This was a one-time event driven primarily by the final reneging of the US dollar gold standard in 1971. Today’s bull market is vastly more modest and orderly by comparison. Gold is rising at a nice steady pace today, not shooting parabolic, and the public is far from involved. Without a parabolic rise and a popular speculative mania, today’s gold bull is not going to crash like the 1970s one did.

And if we want to attribute causality in the early 1980s crash of gold to real rates, note that they skyrocketed from -6% to +6% on then Fed Chairman Volker’s brutal inflation shock therapy. +6% real rates today would certainly make the bond markets look sexy again and seduce capital back out from gold, but the cost to the US economy of having such high real-rate levels would be staggering.

If annualized inflation is now running near 5%, in order to get to 6% real we would need to see the Fed jack up interest rates to nearly 11%! This would probably push 30y mortgages up to 14%+! With the US today the worst debtor nation in history and individual Americans also fielding stunning debt levels, much at adjustable rates, 11% nominal rates would feel like the end of the world.

As fragile as our US debt pyramid is today, it honestly would not surprise me if 11% fed funds rates would lead to the end of the Fed if not a popular revolt against Washington. I suspect bureaucrats who love their taxation power on the American people would rather eat broken glass than risk their entire corrupt system by forcing real rates up to +6%. A repeat of the early 1980s gold crash on stellar real interest rates seems about as likely as an asteroid slamming into the Earth.

Actually, in the 1980s and 1990s, real rates seemed to need to hover between +3% to +4% to make bonds more alluring than gold to savers. When real rates headed below that gold usually rose, but when real rates once again stabilized in the 3% to 4% range gold tended to fall. While I doubt I will see 6%+ real rates again in my lifetime since they are so disruptive, I am sure we will see 3% to 4% real sometime in the coming decade or two.

To better understand how real rates could get to this 3% to 4% level that could start seducing capital back out of gold, a short-term real-rates chart since 2000 helps clarify the picture. As in our strategic chart above, the black line represents the nominal 1y T-Bill yield while the white line represents the year-over-year change in the Consumer Price Index.

Our current gold bull really didn’t begin in earnest until real rates fell below 1% in early 2001. It is interesting to note that in 2002 when real rates once again flirted with +1%, gold’s bull market didn’t show the slightest signs of abating. This observation leads to two key factors that will be necessary for real rates to go above +3% and potentially entice capital out of gold, fantastic economic pain and realigned saver expectations.

In order for real rates to get to 3% to 4%, the black 1y T-Bill line above somehow has to get 3% or 4% above the white annual CPI inflation rate line. In this latest chart update, I found it intriguing that the CPI inflation rate is in a technical uptrend with multiple support and resistance intercepts. If this uptrend holds, as it certainly ought to the way the Fed is growing money supplies, then conservative inflation rates are likely to rise by maybe 0.5% per year.

In reality I suspect that this 0.5% annual technical upslope is too flat, and therefore conservative, for a variety of reasons. The February CPI report just released showed annualized inflation running nearly 5%, far above the 3% growth in the CPI over the past year. Over the past year true inflation, pure money supply growth, was running 5.0% in the broad US M3 money supply, two-thirds higher than the past year’s CPI numbers.

For students of the markets studying inflation, we have to remember that the CPI is not an unbiased dataset like the price history of some stock. The CPI is computed internally by the US government and uses hedonic adjustments and all kinds of mathematical wizardry to intentionally lowball the results for political reasons.

Many welfare programs today like social security are indexed directly to the CPI which means that the higher the CPI the more of our taxes the government has to pay out to the welfare recipients. These welfare payments are non-discretionary, they must be paid, and the larger they grow the less discretionary money Washington has to spend on “fun stuff” it likes such as imperialism abroad and suffocating regulation at home. And we all know that bureaucrats and politicians just live to waste our money so they are not happy at all if the CPI grows too fast driving welfare payments to cut into formerly discretionary funds!

So the CPI is heavily massaged by the bureaucrats that create it to make it as benign as possible for their political masters. Nevertheless, even with all the hedonic-type gimmicks thrown at it, it is still rising. In order for real rates to once again challenge the 3% to 4% level that may start enticing capital out of gold, nominal 1y T-Bill yields have to rise enough to get 3% or 4% ahead of CPI growth.

If the CPI proves to be running at 5% growth a year from now as the February CPI report suggested the annualized inflation growth rate now is, 1y T-Bills would have to yield 8% or 9% to catapult rates up to 3% to 4% real. 8% to 9% nominal risk-free rates, however, would not be easy to get to and would cause staggering pain for both overvalued US stocks and overextended American debtors.

The fed funds rate was hiked to 2.75% this week, and it would have to triple again from here to be high enough to push 1y rates up to 8% to 9%. A 7.5% to 8.5% fed funds rate would gut the stock markets like a fish and probably lead to bear-market downlegs that would utterly dwarf those of 2001 and 2002. Economists generally consider a fed funds rate of 4.25% or so to be neutral, so a 7.5%+ fed funds rate would be highly constrictive and cause debt and asset prices to contract dramatically across the entire US economy.

American debtors would be crushed like bugs, especially all the fools today who were naïve enough to take out adjustable-rate mortgages and other loans near half-century nominal interest-rate lows. Debtors who willingly took this adjustable-rate risk make professional options speculators look like risk-adverse cowards by comparison.

At 8% to 9% 1y T-Bill yields I suspect 30y mortgages farther out on the yield curve would cost 11% to 12%. If Americans tend to be overextended today with 5% mortgages, they would be toast with 10%+ mortgages. Such stellar rates would almost certainly crash debt-financed speculative real-estate markets around the country, with 90% price plunges in speculative houses probable.

Now this certainly isn’t rocket science and the Fed knows it too. If getting to +3% to +4% real means jacking up mortgage rates to 10%+ and crashing the housing bubbles springing up across our great nation, I bet the Fed will do anything in its power to avoid raising rates that high, including letting the dollar bear market continue unabated which is hugely beneficial for gold.

With American consumerism now driving two-thirds of the US economy, and debt driving the majority of this consumerism, any major rise in interest rates risks triggering a full-on depression, the first in three generations. Depressions are exceedingly dangerous events for existing governments as they trigger all kinds of social unrest which can lead to major government changes. The politicians and bureaucrats at the helm today will probably do everything they can to avoid threatening their cushy status quo.

And practical pain aside, there is a crucial expectations component as well that not even the mighty Fed can ever hope to manage. In the markets, expectations can be far more important than reality. Even the Fed’s statement on inflation I quoted above in the introduction explicitly mentioned inflation expectations.

If real rates could somehow get to +3% to +4% without causing enough chaos in the debt-ridden US to spark the next Great Depression, these rates would have to stay high enough for long enough to convince bond investors that they are likely to persist indefinitely. If real rates merely shot up and were expected to promptly crash back down to 1% or less, then there would be no reason for bond investors to move capital back out of gold and into bonds.

So not only do real rates need to head to 3% to 4% to seriously threaten this powerful gold bull, but they would have to stay there long enough to convince flight capital that the ruthless Greenspan assault on savers was finally over for good. I don’t know how long real rates would have to remain healthy to reset expectations, but I suspect we are talking in terms of years here after +3% to +4% real is first witnessed.

To summarize, low and negative real rates drive great gold bulls since bond investors can’t earn any real returns on their capital. In order to entice inflation flight capital back out of gold, real rates have to rise back up to 3% to 4% and stay there long enough to convince savers to expect these favorable conditions to persist. But if the Fed pushes nominal rates high enough to hit 3% to 4% above inflation, then it risks collapsing the entire US real estate market and hobbling two-thirds of the US economy.

Today’s newly positive real interest rates, now running near 0.5%, are nowhere close to high enough to reverse the trend of capital migrating from bonds to gold. Not only are today’s anemic real rates only 1/8th to 1/6th high enough to be healthy again, but they haven’t persisted anywhere close to long enough to set expectations that a pro-saver real-rate environment is once again returning.

The Fed will have to raise rates far more than it already has to even approach healthy real-rate levels that could seduce inflation flight capital back out of gold. Since this will probably take years, we will continue to actively trade this secular gold bull via carefully researched gold-stock trades in our acclaimed monthly newsletter. Please join us today to stay abreast of our latest actual gold and silver stock trades and trading strategies.

Today’s new modestly positive real rates are certainly interesting, but odds are they are nowhere close to being worthy of fear for today’s gold investors. Healthy real rates seem to remain far off in the future and gold should continue to thrive even in today’s low real-rate environment.

Sunday, March 27, 2005

Housing boom may go bust, economists warn

Eager investors are buying up real estate; parallels to dot-com frenzy raise red flag

New York Times

Real estate-crazed Americans have started behaving in ways that eerily recall the stock market obsession of the late 1990s.

In a version of day trading, some houses in Naples, Fla., have been bought twice in a single day. Buying stocks on margin has morphed into buying homes with no money down. The over-the-top parties of Internet startups have been replaced by flashy gatherings where developers pitch condos to eager buyers.

Five years ago, the cable channel CNBC sometimes seemed like a backdrop to daily American life. Its cheery analysis of the stock market played in offices, in barbershops, even in some bars. Today, Dude Room, Toolbelt Diva and other home-improvement shows are the addictive fare that CNBC's exuberant stock shows once were.

``It just seems like everyone is doing it,'' Laurie Romano, a 26-year-old self-described real estate investor, said with a giggle as she explained why she was attending an open house this month for the Nexus, a 56-unit building going up in Brooklyn's chic Dumbo neighborhood. She and her fiance, a dentist, had already put down a deposit on a Manhattan condo earlier in the week and had come to look at another at the Nexus.

Nobody can know whether the housing boom of the last decade will end as the dot-com frenzy did. But the parallels are raising alarms among many economists, even those who acknowledge that there are important differences between homes and stocks that significantly reduce chances of another meltdown. For one thing, houses are not just paper wealth: You can live in them.

Perhaps the most troubling similarity, some analysts say, is the claim that the rules have somehow changed. In an echo of the ``new economy'' investors' blase attitude toward unprofitable companies, the growing ranks of real estate investors are buying houses they never expect to be able to rent at a profit. Instead, they think the prices of houses will just keep rising.

Indeed, the government reported Thursday that nationwide sales of new homes jumped sharply in February in the biggest monthly increase in four years. A strong national economy and an improving job market contributed to the gain, as did speculative fever. But many were also trying to beat rising mortgage rates, which could eventually cool the market.

Robert J. Shiller -- a professor of economics at Yale whose prescient book on stocks, Irrational Exuberance, appeared just a few months before technology stocks began their slide -- has returned as a doomsayer on the housing market.

``We're going through something very similar in real estate that we did with stocks,'' he said. ``It's driven by the same forces: that investments can't go bad, that it has the potential to make you rich, that you'll regret it if you don't do it, that it looks expensive but is really not.''

A new edition of Shiller's book will be published next month. The cover promises an ``analysis of the worldwide real estate bubble and its aftermath.''

Bullish on real estate

Premonitions of a bubble on the verge of popping do not ruffle those who are bullish on real estate. In Miami, Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors, predicted that a limited supply of land coupled with demand from baby boomers and foreigners would prolong the boom indefinitely.

``South Florida,'' he said, ``is working off of a totally new economic model than any of us have ever experienced in the past.''

The can't-miss aura has helped nudge many families to invest more of their personal wealth in real estate by buying more expensive homes and taking on riskier mortgages -- much as ordinary workers used their 401(k) plans to bet on company stocks.

There are certainly serious reasons to believe that house prices will not suffer the fate of technology stocks. Not only are houses more tangible, but people do not sell their homes as quickly as stocks, making a panic much less likely. And because of tax advantages, few owners are likely to sell and rent something else simply because local house prices start to decline.

And as high as they might seem now on the coasts, home prices have not even doubled over the last decade; during the 1990s, the Standard & Poor's 500-stock index more than quadrupled. In Ohio, for example, the price rise has been much more modest than in other regions.

In Summit County, a lot of homes are on the market, but home sales volume has remained healthy and overall values have been solid.

For January and February, sales were up slightly -- to 646 from 633 in the same period in 2004. Inventory levels fell to 3,013 at the end of February from 3,177 in 2004. The median sales price was $183,225 in February versus $176,000 for February 2004, which are modest gains compared to those seen on the coasts.

Some optimism exists

``I just don't think we have what it takes to prick the bubble,'' said Diane C. Swonk, chief economist at Mesirow Financial in Chicago. ``I don't think prices are going to fall, and I don't think they're even going to be flat.''

Such optimism about real estate has created a stampede of new investors in some regions. The night before the Nexus party, Patrick Cullert, 31, and Jennifer Mathews, 29, who are engaged, camped out to ensure they would be near the head of the line for one of 16 condos to be sold at the party.

Many former stock market enthusiasts are turning to housing. Douglas Paul, a 46-year-old former analyst, left AT&T in 2002 to buy and sell stocks on his own. But he soon decided that real estate could be another way to make quick profits. Paul owns two condominiums around Fort Lauderdale and one in Miami Beach that he bought during the last year, in addition to the one where he lives. He plans to sell one of the Fort Lauderdale condos in June for what he believes will be double his investment.

``It really is a very hot real estate market and I don't know how long it's going to continue,'' he said. ``But in the short term, why not profit from it?''

House as an investment

Paul's path is an increasingly common one. The National Association of Realtors estimates that nearly one-quarter of home purchases last year were made by people who thought of the house as an investment rather than a place to live. Seminars promising to teach amateurs the tricks of real estate speculation have proliferated.

Even at Harvard Business School, where students have traditionally gravitated to careers in investment banking and corporate marketing, real estate is suddenly hot. About 25 graduates have taken real estate jobs in each of the last two years, up from only six in 2001.

It is not quite the gold rush of 2000, when almost 200 Harvard MBA graduates flocked to technology companies. But even if they are not working in real estate, some of those graduates are now investing in it.

Andrew Farquharson, a member of the class of 1999, said he recently teamed up with a high school friend to buy a home in the Central Valley of California ``out of pure speculation.'' He knows three other classmates who have made similar investments.

``I look at this as a short-term investment,'' said Farquharson, 36, who works for a venture capital firm, ``and plan to unload it as soon as things look dangerous.''

Another lingering echo of the stock market boom is the role of the Federal Reserve. In the 1990s, the Fed kept interest rates relatively low because it saw little risk of rising inflation despite a booming economy, helping feed a fever for stocks.

Alan Greenspan, the Fed chairman, famously asked aloud in 1996 whether ``irrational exuberance'' was driving the stock market, but then backed off from second-guessing investors.

After the market plunged and the economy weakened, the Fed pushed interest rates down to near 50-year lows, helping to fuel the housing boom. This month, Greenspan made some comments about housing that offered a pale echo of his 1996 musings.

``Analysts have conjectured that the extended period of low interest rates is spawning a bubble in housing prices in the United States that will, at some point, implode,'' Greenspan said in a speech in New York, adding that real estate speculation had shown a ``marked increase.'' Nevertheless, he said he did not expect a ``destabilizing'' drop in prices, in part because home prices across the country have never fallen significantly.

But by one measure, houses in at least a few metropolitan areas are as expensive as telecommunications stocks were in 1999, relative to their underlying value.

Pricey San Jose homes

The average house in San Jose costs 35 times what it would cost to rent for a year, according to, a research company. In New York and West Palm Beach, this ratio -- a rough equivalent of the price-earnings ratio for stocks -- is almost 25.

In March 2000, the price-earnings ratio of the Standard & Poor's 500 -- the combined price of the stocks, divided by their profits per share -- peaked around 32, as it did for telecommunications stocks. The S&P's PE ratio has since fallen to around 20; it is down even more for the telecommunications industry.

Still, no matter how expensive real estate might be, it continues to provide many owners a return worth boasting about.

At dinner parties in Manhattan, Holly Peterson, who is writing a novel about the idiosyncrasies of New York's rich, said she frequently hears complaints about high home prices, followed by claims of quick profits. ``They always hit you with their last jab: `Of course my money's doubled three times over since I got married,' '' she said.

Five years ago, she said, friends at parties were crowing about ``making millions of dollars on paper with $25,000 and $50,000 investments.'' But ``most of those people,'' she added, ``got wiped out.''