Evidence of real estate bubble?

[michael perelman <michael@xxxxxxxxxxxxxxxxx>]

         March 1, 2005


   Speculators Seeing Gold in a Boom in the Prices for Homes

*By MOTOKO RICH *

SUNNY ISLES, Fla., Feb. 25 - Within six months last year, Carlos and 
Betti Lidsky bought and sold two condominiums. Then they bought and sold 
two houses. They say they will clear a half-million dollars in profit, 
and none of the homes have even been built.

Now Mr. Lidsky, a lawyer, and his wife, a charity fund-raiser, have put 
down a deposit on a fifth property, a $1.3 million condo in a high-rise 
under construction, and are planning to sell before the deal closes, 
without even taking out a mortgage.

"It is much better than the stock market," Mr. Lidsky said. "This is an 
extraordinary, phenomenally good result."

In several metropolitan areas, from Miami to Riverside, Calif., where 
the real estate market is white hot, rapidly rising prices are luring a 
growing number of ordinary people into buying and selling residences 
they do not intend to occupy, despite warnings from some economists that 
prices cannot continue to rise as steeply as they have in the last few 
years.

According to LoanPerformance Inc., a San Francisco mortgage data firm, 
about 8.5 percent of mortgages nationwide in the first 11 months of last 
year were taken out by people who did not plan to live in the houses 
themselves, up from 5.8 percent in 2000. In some markets, that 
proportion is much higher: in Phoenix, more than 12 percent of mortgages 
were taken out by investors; in Miami, the figure is 11 percent.

The National Association of Realtors, a trade organization that 
represents real estate brokers, said in a study being released on 
Tuesday that the percentage of homes bought for investment might be as 
high as one-quarter of the 7.7 million sold last year.

"Americans are treating real estate as a viable alternative to stocks 
and bonds," said David Lereah, chief economist at the Realtors 
association. And some are buying at least two properties at a time.

Like the day traders of the 1990's dot-com boom, people are investing in 
a market that seems to just go up. Promoters use Web sites to attract 
investors, promising quick profits. One site, 
getpreconstructionprofits.com <http://getpreconstructionprofits.com>, is 
run by a pair of investors who offer online training for $197. On their 
home page, they say people can earn over $100,000 in six months 
investing in unbuilt real estate.

Some economists say the influx of investors into the real estate market 
could have negative consequences.

"Investors are now seemingly buying based on the expectation that house 
prices are going to grow as rapidly as they have in the recent past, 
long into the future," said Mark Zandi, the chief economist at 
Economy.com <http://Economy.com>, a private research group. "How quickly 
and high fixed mortgage rates rise will determine whether the 
speculative fever in the market just goes flat or whether it caves."

For now, low interest rates are helping to fuel the frenzy. Sometimes, 
homeowners borrow equity from their primary residence to finance down 
payments. These buyers, some of whom lost money when the stock market 
crashed five years ago, believe real estate is a safer bet.

Rita Lawrence, a construction business owner in Phoenix, has bought 
three houses in the last two years. Ms. Lawrence and her husband rent 
out two of them, and they hope to sell the third - which they are buying 
for $195,000 - for $249,000, after a quick renovation.

Taxes can take a sizable part of the profits in these deals. Investors 
who sell within a year of purchase face federal short-term capital gains 
taxes of up to 35 percent, and 15 percent if they wait a year.

Still, investors have been seduced by the steady upward march of house 
prices over the past few years. Since 2000, the national median price of 
a house has increased by 33 percent. And in the fourth quarter of last 
year, out of 129 metropolitan areas covered by the Realtors, 62 markets 
showed double-digit price rises over the same period a year earlier.

Demand for investment properties has risen in markets with the most 
spectacular price increases, according to brokers. As buyers were priced 
out of Los Angeles, they moved into San Bernardino and adjacent 
Riverside County, where prices rose by 35 percent last year. Nancy 
Overgaag, a mortgage broker at Financial 2000 in Redlands, Calif., said 
about one-third of her customers were looking to invest in real estate.

Even in Manhattan, where average sales prices topped $1 million last 
year, investors are piling into the market, brokers say.

Some investment buyers are willing to rent out their properties at a 
monthly loss, anticipating future sales price rises. Dru Finley and her 
husband, Hsiao-Li Pan, who live in Brewster, N.Y., bought a one-bedroom 
condominium in Battery Park City in Lower Manhattan last summer for 
$499,000. They rent it out for $2,225 a month, about $1,000 less than 
their mortgage and maintenance costs. The couple hope to make up the 
shortfall when they sell the condo in a few years. "It seems that real 
estate always goes up," in the long term, Ms. Finley said.

Many homeowners are tapping the paper wealth in their own homes to buy 
more real estate. Mark Purnell, who manages internal technology for a 
software company in Southern California, said the four-bedroom house he 
bought eight years ago in Rancho Santa Margarita, south of Los Angeles, 
had quadrupled in value to $800,000. Last year he took out a $150,000 
home equity loan and, with his brother, bought three houses in Phoenix.

Mr. Purnell, 36, who is renting out those houses, said he would buy more 
in Phoenix but could not find anything. So he is turning his attention 
to Palm Springs, Calif. His Phoenix real estate agent, Kim Martin of 
Re/Max Achievers, said that investors had helped deplete inventories of 
available properties from about 25,000 this time last year to about 
8,000 now.

In a backlash against speculative investing in some popular markets like 
Phoenix and Las Vegas, some homebuilders now prohibit renting or selling 
houses for at least a year after closing. As a result, investors have 
started to back off in Las Vegas, where the pace of the price rises 
started to ease towards the end of last year.

But in Miami, the speculative craze is promoted in part by developers 
and brokers who help buyers to resell quickly.

Brokers in Miami work overtime to get their clients into V.I.P. sales 
events before developers start pitching buildings to the public.

The Lidskys were heading out of town early last year when they got a 
call from Michelle L. Judd, a sales associate at Ocean IV, a high-rise 
being built in Sunny Isles by a consortium led by the Related Group of 
Florida, the same company that built the condo where they have lived 
since 2003. Ms. Judd was offering to sell them a second unit, but only 
if they would put down a deposit that day.

Shortly before their flight, Mr. Lidsky drove to the sales office and 
without viewing any floor plans, ended up writing deposit checks 
totaling $159,380 for a $479,900 two-bedroom condo, and an adjoining 
four-bedroom unit for $1,113,900. The money came from a bank line of 
credit not secured by their current home. Within three months, Ms. Judd 
called again: she had buyers for the two-bedroom willing to pay $625,000 
and $1.425 million for the four-bedroom.

Such get-rich-quick stories have increased demand for preconstruction 
condo units in and around Miami. While many buyers do intend to move in 
to their homes, as many as half the original buyers of some condos 
resell them before they are built. Of the 280 units at Ocean IV, Ms. 
Judd said, nearly 130 had resold.

Thomas Daly, a principal investor with the Related Group in 18 condo 
projects, said the company did not "encourage investors" but that once a 
project was initially sold out, the developer would help buyers resell 
their properties quickly "to accommodate our purchasers."

Developers of some projects do not allow buyers to resell before 
closing, because they fear this could artificially inflate prices.

One of those projects, Arté City, a 202-unit condo complex being built 
in Miami Beach, is still attracting investors, although they are those 
who are willing to wait longer to sell. Jaime Nack, a 29-year-old event 
producer in Santa Monica, Calif., bought a one-bedroom unit at Arté City 
for $270,000, financing the down payment with a second mortgage on her 
one-bedroom condo in Santa Monica.

Ms. Nack plans to rent out the unit for a couple of years before 
selling. Because of its proximity to the beach, "I think it will be safe 
even if the market drops a bit," she said.

Some real estate watchers in Miami wonder whether that drop will come 
soon. With more than 60,000 units in some phase of development in the 
Miami area, "the supply may be greater than the ultimate demand," said 
Michael Y. Cannon, managing director of Integra Realty Resources-South 
Florida, a market analyst. A similar situation in 1986 sent the market 
spiraling, and it took seven years to recover.

For now, investors like the Lidskys are still buying. They intend to buy 
at least one more unit - their sixth in less than a year - in another 
condo. But the couple, who acknowledged being "killed" in the stock 
market five years ago, sounded a note of caution.

"Maybe we won't lose money, but I just think it is not going to keep 
up," Ms. Lidsky said . "At some point there are just going to be too 
many apartments in this area."

--

Michael Perelman
Economics Department
California State University
michael at ecst.csuchico.edu
Chico, CA 95929
530-898-5321
fax 530-898-5901