Greenspan predicts slower real estate price growth

Fed Reserve chair acknowledges localized housing bubbles
Inman News
Alan Greenspan, chairman of the Federal Reserve, invoked the B-word Friday, acknowledging that the housing market contains "a lot of local bubbles" with "unsustainable" price gains, media reports said.

"Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern," Greenspan told the Economic Club of New York at the Hilton New York hotel, according to reports.

However, the Federal Reserve chair also said significant price declines are unlikely, reports said.
Greenspan pointed to a big increase in speculation in homes, particularly in second homes, and acknowledged concerns over "froth" in the market, according to reports, reports said. As a result of this, there are "a lot of local bubbles" around the country, Greenspan said, according to reports.

Even if housing prices do fall, the drop won't hit most homeowners hard because of the huge amount of equity already in their homes, Greenspan reportedly told more than 1,000 onlookers at a meeting of the New York Economic Club.

"There are a number of things which I think suggest, at minimum, that there's a little froth in this market," Greenspan reportedly said, to laughs in the audience.

Many have expressed concern over the current red-hot housing market.

For example, while saying that the housing market remains "unusually strong," David Lereah, chief economist for the National Association of Realtors, said he expects that some hyper-extended local real estate markets will sour within the next couple of years, while the overall housing market should remain robust for at least the next couple of years.

Lereah made the remarks at a presentation in mid-May at the National Association of Realtors' midyear meetings, saying loose lending and speculative buying are the greatest risks "our industry faces right now."

Analysts have found some reason to be concerned – increasing debt, fast-rising home prices in some markets, a larger share of adjustable-rate mortgages, and a higher share of home-price-to-income and home-price-to-rent ratios in some markets. Financial scandals that have plagued mortgage giants Fannie Mae and Freddie Mac could lead to some industry-shaking reforms, as the trade deficit is swelling, oil prices are increasing, and the value of the dollar is dropping.
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'Envy' fuels real estate bubble talk

Housing still a better investment than stocks
By: Lou Barnes: Inman News
Long Treasurys bottomed at 4.05 percent last week as the GM-Ford-junk-derivative-hedge mini-panic faded; they are now 4.13 percent, mortgages mostly holding 5.626 percent.

The economic data were benign: core producer prices rose .3 percent in April, but core CPI was unchanged. The nominals, up .6 percent and .5 percent were dismissed as residuals from now-fading energy costs; oil stayed under $50/bbl all week. Industrial production was on the weak side, minus .2 percent, and capacity in use fell .2 percent to 79.2 percent.

However, housing starts and new permits in April roared back from a weak March, up 11 percent and 5.3 percent, which leads to the following Housing Bubble rant.

The financial press is now on official Bubble Watch; CNBC might as well have a bubble ticker scrolling along with stock prices, and the Wall Street Journal last week ran four prominent Bubble-related stories. One had some merit, arguing The Bubble as an artifact of too easy mortgages.

The first aspect of too easy is too low, as in rates. In the last four years, fixed-mortgage rates have been on a centerline of 5.75 percent, down from 7.75 percent through the 1990s. Thirty percent of a $100,000 annual income committed to a mortgage payment ($2,500/mo., less $350 for TI = 2,150 for PI) at 7.75 percent used to borrow $300,000. Today, at 5.75 percent, it's $368,000. That 20-ish percent increase does not explain the 49 percent increase in U.S. home prices since 1999.

However, convert to interest-only, increase the TI to $400 for a more expensive house, and the $2,100 remaining for interest at 5.75 percent will borrow $438,000. That 30 percent interest-only increase, even with post-90s income growth, does not explain the 102 percent five-year run in California, or 112 percent in D.C., 99 percent in Rhode Island, and 75 percent in Florida.

How about no-proof-of-income lending as supercharger? If that were so, we would have seen a surging entrance of buyers previously shut out of the market. Not so; rates of home ownership are steady.

I have no doubt that low rates and easier underwriting (enlightened, says here) are the cause of some of the price run-up; nor doubt that interest-only loans are now facilitating higher prices. However, to be a bubble, home prices must be unsustainable; for foolish mortgage terms to be the culprit, mass default would have to be in prospect.

There is no evidence whatever that home prices are unsustainable, nor any evidence of widespread default. The bubble is in commentary coming from the financial markets, and the gas inside is envy.

After foolish lending and borrowing, the market types' critique of housing: too many investment and second-home purchases. Must be dangerous speculation. Prices are unsupported by buyer income or market rents. Tisk, tisk. The Fed should put a stop to this. Call in the regulators.

That line of argument sets a record for hypocrisy. You stock-market guys, the ones who gave us the biggest bubble in financial history, are suddenly the Bubble Cops? High prices versus lower incomes and rents? That's what you call a "healthy price-earnings ratio." Riding prices up is a crime? In your market, you call the same thing a skill, "momentum investing," and "market timing." Millions of American families are taking advantage of an epic demographic mis-match of land versus 3 million new Americans every year; you call them irresponsible Bubbleheads, while the exact same behavior among yourselves is called "value investing."

Financial-market people have a fit when clients announce they are withdrawing capital to put it in real estate: "Uh-oh. Bubble!" Say the same thing to them about their products and they will hang up on you. Stocks have staggered in their tracks since 1999; it is the soul of prudence to re-allocate some assets to a better market.

The truth hated most by stock-jockeys: invest in a home, and even if you're wrong about prices, you get to live in it. Try that with an Enron stock certificate.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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Investors Going into Debt to Buy Real Estate

The amount of home equity extracted by U.S. property owners surged to $705 billion in 2004 from $266 billion in 1999, with most of the money put toward buying new residences, repaying credit-card debt, and funding home-improvement projects, Economy.com reports.

And more homeowners are using the cash to purchase investment properties--2.2 million in 2004 compared to 1 million in 1994, says SRI Consulting Business Intelligence.

Experts say investors are betting that residential prices to continue their uphill climb and that demand from baby boomers and immigrants will bolster the market, but some buyers are running into difficulty unloading their properties and have posted losses in some cases.

"You should think pretty hard about whether you want to increase your exposure to real estate at a time when it is trading at historically high valuations," says Jan Hatzius, a Goldman Sachs economist.
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"Streamlined" No-Fee Mortgages are Coming to the Prime Home Purchase Market

by: Kenneth R. Harney: RealtyTimes
Home equity credit line lenders have been doing it for two years, and now the concept is migrating to the primary home purchase market: Super-streamlined loans that require applicants to pay none of the usual lender fees -- appraisals, credit reports, document preparation, tax service, underwriting or processing. Yet the mortgages carry interest rates identical to those the lender quotes on loans in the regular market that come with full fees.

Several large mortgage companies are preparing programs that radically streamline and simplify the entire mortgage process, but Bank of America appears to be the first out of the box with an actual prototype. The bank is launching what it calls its "Mortgage Rewards" loan this month. Aimed primarily at its 33 million existing customers, the program dispenses with most of the traditional lender charges paid for by home purchasers at closing. There is no application, appraisal, credit, flood zone determination, tax service or origination fee charged separately to the borrower.

The only charge the bank says it cannot waive, because of state laws and regulations, is title insurance. However, national title insurance companies participating in the program say they will be able to sharply cut their charges as a result of the bank's centralized, high-tech administration of Rewards.

Ernest Smith, head of Fidelity National Financial's title and mortgage services unit, estimated that title insurance savings to Rewards borrowers -- and competing programs expected from other large lenders -- could eventually exceed 40 percent.

Bank of America confirmed that its Rewards loans will carry the same interest rates as its regular market, non-streamlined offerings. For instance, said Eric Telljohann, program director, if the going rate for a 30-year loan at the bank is six percent plus all the standard closing and origination fees, the rate for a Rewards applicant would also be six percent -- but without the fees added on.

Bank of America estimates that on a 15-year fixed rate loan at 5.625 percent, the fee savings to the home buyer would range from about $2,000 on a $100,000 mortgage to $3,000 on a $300,000 loan, and $5,600 on a $700,000 loan. Some of the savings will be possible because the bank will be purchasing discount-priced "bundles" of services from wholesale providers such as First American Corp. and Fidelity National. Other savings will be available from sharply reduced marketing costs because the program will be targeted "in house," to existing customers with banking, checking, and mortgage accounts.

"We know these people already," said Telljohann. Only customers with satisfactory payment and credit histories are expected to be eligible. Nor will the bank use third-party originators -- mortgage brokers -- to produce the loan flow. It will all be done in house, mainly via the bank's network of 6,000-plus retail branches.

As add-on features, the Rewards program will also offer $200 credits to home buyers as a way to offset the title fees at settlement, plus an optional one-year, free "borrower protection" plan which will pay the mortgage principal and interest for up to six months in the event of job loss, or pay off the mortgage balance in case of accidental death. Though competitors in the banking field generally declined comment about their own plans for streamlined, no-fee home mortgage programs, one offered a compliment.

"I applaud Bank of America for making this effort" to simplify the home loan process, said Garth Graham of ABN-Amro Mortgage Corp., a unit of giant international ABN-Amro Bank, which already offers a "one-fee" loan that guarantees applicants a fixed amount of bundled closing and origination charges at settlement.

For more information on the Rewards program, call 1-800-900-9000.

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Financing real estate investments

By: Pat Curry: Bankrate.com
Although the stock market has rebounded recently, many investors still are looking for solid alternatives, and few things are more solid than real estate.

That's why some are looking to buy single-family homes, duplexes or condos, either to rent out or to renovate and resell.

"The stock market bubble a few years back led to a lot of insecurity in stock investing," says Mark Hancock, executive vice president and chief credit officer at Piedmont Bank in Atlanta. "When it's insecure, people fly to quality, and real estate has been quality in this decade."

But before you head out with a real estate agent to pick out your nest egg, there are a few things you should know about the financing. Buying real estate for investment is different from getting a mortgage for your own home.

"They need to understand that the interest rates they see all over the place don't apply to them," says David Finkel, co-author of "Making Big Money Investing in Real Estate." "People ask, 'Why wouldn't I get 6.5 percent?' It's because people who have nonowner occupied properties have a higher default rate."

It's true, Hancock says. If times get tight and a person has to choose between paying his own mortgage and making the monthly payment on his investment property, he's going to keep the roof over his own head every time. Hence, lenders consider investment property a riskier loan and will charge a higher interest rate or points than in a traditional mortgage.

Depending on how much you put down and your personal credit rating, expect to pay from 1.5 percent to 2.5 percent more than the going rate for owner-occupied mortgages, says Barbara Sama, regional branch operations manager for New York-based American Mortgage Network.

You should also be prepared to make a much larger down payment than was required for your own home. As a rule, banks will be looking for at least 20 percent.

That's why Finkel considers banks his third choice for financing.

Seller-financing tops the list
"My first source of financing always will be the seller. That will always be cheaper," he says. "The seller won't charge me points, PMI or loan origination fees. They'll be thrilled if I give them 6 or 7 percent on a first mortgage. That's lower than I get from the bank. They'll let me make interest-only payments, and I can always prepay the principal."

Finkel often offers sellers a balloon note to get their full payment within 60 months. At that point, he can refinance through traditional channels.

His second choice for financing is private lenders, people with cash who are losing money in the stock market or making 1 percent to 2 percent in certificates of deposit. An investment that returns 7 percent to 8 percent with a house as collateral is an attractive alternative.

Regardless of who's providing the financing, you'll need to put together a loan package that outlines the viability of the investment. An appraisal of the property will need to include not only information on comparable sales in the neighborhood but a rent survey of the area.

Finkel includes a photograph of the property, a rent survey for a quarter-mile radius, projected income and expenses, and a projected vacancy factor (how long the property could remain unrented) based on the area's vacancy rate. All the estimates are conservative, he says, because that's how bankers make their projections.

"That done, I'm going to show the banker it will pay for itself, plus something else," he says.

That's especially important if you're going to the traditional lending market because the requirements have tightened for banks that sell their mortgages, says Robert Galbraith, an attorney in Rochester, N.Y., with more than 15 years of experience in handling residential and commercial mortgages.

The more experience you have in managing rental property, the stronger your application for a traditional loan will be, Galbraith says. Your level of experience may determine how much of the rental income they include as your income for the loan.

They also want to see sufficient reserves to cover the payments if it's not rented for an extended period, Sama says. Or they may require rental-loss insurance.

"You need the skill and experience to manage (rental property) and the financial wherewithal to pay for them," Galbraith says. "People come in, buy a duplex, run it into the ground and wind up losing it in foreclosure."

Renovation projects
While the application process for rental property is fairly similar to that of an owner-occupied mortgage, the financing for renovating and reselling houses is completely different, Hancock says. Loans for rental property will be long-term notes, usually for 30 years. Rehab projects are short-term loans, generally no longer than a year, to cover the necessary time to complete the renovations and sell the property.

"It's a whole different ballgame," he says.

The down payments will vary by the deal and will depend, in large part, on how much work needs to be done on the house.

"If you're taking off a roof, I promise you your banker will look for a bigger down payment," Hancock says. "A lot of time on rehabs, when you start construction, the value of property goes down. If you demolish the house, you have a vacant lot. We have to cover the bank's position if you don't build."

The loans on rehabs will vary based on the prime rate, with fees in the 1 percent to 1.5 percent range "depending on the financial strength of the buyer," he notes.

The buyer's experience in residential renovations also figures prominently in the deal, he says. He looks carefully at the borrower's list of suppliers and subcontractors and flatly refuses to lend money to weekend remodelers.

"They have to have experience in this particular area," he says. "The collateral I have will be good collateral. It sounds silly, but I've had pilots with major airlines walk in and I've shown them the door. Just because they're rich doesn't mean they're a home builder."

Sama recommends that buyers consider two other options. You may qualify for a Fannie Mae long-term rehab program called the HomeStyle Loan. It allows buyers to roll rehab costs into their mortgage, putting the money into an escrow account that a contractor can draw from to perform the work.

"I love this program," she says. "The rates are a touch higher (than a regular mortgage), but not much."

The second option is for a buyer to use the equity in his own home for a credit line. That gives him maximum flexibility to use the funds as he sees fit.

"It's a great way to do it," she says. "Of course, you have to be able to withstand the extra debt. This is for the borrower with pretty good credit and income."
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Home furnishings of the rich and sometimes famous

Part 3: The American Dream is on steroids
By: Janis Mara: Inman News
Editor's note: Like everything in American culture, houses have blown up to Hummer-sized proportions. Eight-figure prices and 10,000-square-foot homes are becoming the norm in the luxury housing market, which is booming. In this three-part series, we explore the changing nature of the American Dream, what people are looking for in the ideal home and our obsession with all things big. (See Part 1: Lust for status drives luxury real estate market and Part 2: Family values rank high in dream houses.)

What do boxing rings, Australian jara and navy blue gas ranges have in common? They're all highly sought-after, super-trendy components of today's luxury homes.

Though colored appliances give rise to visions of the hideous avocado and harvest gold refrigerators of the 1970s, they're back, and even now decorating – or perhaps desecrating – the homes of the very rich, according to Laurie Moore-Moore, president of the Institute for Luxury Home Marketing.

America's luxury housing is on steroids, with 10,000-square-foot homes and eight-figure prices becoming commonplace. In the luxury market, it's not about keeping up with the Joneses, building a two-story ranch and putting up a white picket fence. The stakes are higher and the fences are made of Australian jara. It's more about keeping up with the high-tech moguls next door: the Bill Gateses and the Larry Ellisons.

Along these lines, clients' demands for furnishings and amenities are ramping up as well.

Dual "his and hers" sinks in the master bath, once a staple of luxury living, have morphed into his-and-her bathrooms. Walk-in closets are now also his and hers, with climate-controlled fur storage for the lady and quality paneling for the gent, Moore-Moore said.

In many cases, yesterday's luxuries are becoming today's standards, according to Daniel Levy, president of CityRealty.com.

"Brazilian cherry wood flooring is almost a standard now," said Levy, who operates in the fang-and-claw world of Manhattan real estate. "Over the past five to eight years, the concept of luxury, at least in Manhattan, has been taken to new heights. High-end kitchens with Viking appliances are now very standard."

The one-time Holy Grail of kitchen decoration, the granite countertop, is practically mundane now, Levy said. "One new development has custom sinks made from one 700-pound marble piece," Levy said. (One can only hope the building had a sturdy elevator.)

Along with the unwashed masses, rich folks are retreating to their homes in the wake of the Sept. 11, 2001, terrorist attacks, experts say.

Pools, tennis courts, screening rooms, wine cellars, boxing rings, large exercise facilities and "things as bizarre as bowling alleys" make it possible to recreate at home, according to William Hablinski, founding partner of Hablinski + Manion Architecture, a luxury housing firm focusing mostly on the Pacific Northwest.

It goes without saying that today's luxury home has broadband access, and also qualifies as a "smart" house.

"Ten years ago, houses were wired. Now there are intelligent houses that turn on the bath, the heater, the security, the music, the lights. A lot of people go to their computer and look at the cameras in their homes, scan their homes to see if anything is awry. You can do that remotely by computer and cameras," said John Brian Losh, founder and publisher of LuxuryRealEstate.com.

Bathrooms are always hot, and clients are increasingly focused on high-tech, stress-relieving showers, said Richard Taylor of Richard Taylor Architects in Dublin, Ohio.

"The shower will be glass-enclosed, eight feet by eight feet, all tile and marble," Taylor said. Multiple-head steam or rain showers that give body massages and built-in steamers are popular, the architect said.

Exotic hardwoods can now be farmed, so now "we don't have to wreck the rain forest to trim our studies," Taylor said. For that reason, it's now possible to use exotic woods that were previously unavailable, such as Australian jara, and they're in great demand, the architect said.

Traditional architecture, as opposed to modern design, is popular these days, Hablinski said.

"Certain traditional period work, which has not been popular in this country since the 1920s and 1930s, is having a reemergence," Hablinski said. "People are going back to more traditional design work that emanates from traditional European themes, English, French, Italian."

In a cultural shift, Americans are becoming increasingly sensitive to design, according to Levy and Hablinski. This is showing up in their requests for specific types of houses.

"People are becoming sophisticated enough to ask for a Roman palazzo, a Gothic palazzo or a Tuscan farmhouse," Hablinski said, citing three forms of Italianate architecture that are currently popular. English Georgian and Regency style homes are also popular, he said.

Levy said style is gaining importance. "Before, you chose the architect as to who would maximize the square footage. Now if you can get a real name designer in there, someone with style, that's important. It's not just somewhere I'm going to live. I'll have my own style and make sure the apartment reflects it."

Sometimes, clients who spend gargantuan amounts of money on lavish features end up not even using them, according to Taylor.

"A lot of people have to have the home gym, the home theater. They try to create the movie experience at home, Dolby surround sound, they spend $100,000 on a sound system. The one thing they don't get is the experience of going out to the movies. How often can you ask your friends over to watch movies in the basement?" Taylor asked.

"We see people who spend great sums of money on a theater and it falls into disuse," the architect said.

"We started seeing this 10 or 15 years ago with master bathrooms, spas like the Paris Hotel bathroom. We get young couples – the first thing they think of is the huge big bathtub. They get a shy smile, 'We're going to have a lot of fun.' But it's a hassle to fill the tub, it's hard to clean. We go back a year later and they are using it to water the ferns," Taylor said.
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NEW HOMEOWNER'S GUIDE TO EARTHQUAKE SAFETY

Brought to you by the California Association of REALTORS®
The California Seismic Safety Commission has recently released a newly revised 52-page Homeowner's Guide to Earthquake Safety. This 2005 Edition replaces the existing 2002 Edition starting July 1, 2005. C.A.R. will release an updated Combined Hazards Book containing the new earthquake safety booklet by May 27, 2005.

The Homeowner's Guide to Earthquake Safety is a required disclosure for most sellers of residential one-to-four units built before 1960 of light frame construction. The 2005 Edition has a more consumer-friendly format than its predecessor, and has more maps, pictures, and helpful information, such as a greater emphasis on solving structural problems caused by earthquake weaknesses.

For more information, C.A.R. members may contact C.A.R.'s Member Legal Hotline at 213.739.8282, or for office managers, broker/owners, and designated REALTORS®, call 213.739.8350. Access to Member Legal Hotline is also available through C.A.R. Online at http://www.car.org/index.php?id=NTk2.
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Credit unions get flexible real estate loan programs

Inman News
Mortgage buyer Freddie Mac and the Credit Union Mortgage Alliance Network (CUMAnet) have formed a partnership to provide new home-ownership opportunities to credit union members.

Under the recently announced agreement, CUMAnet will begin marketing Freddie Mac's suite of affordable lending products, including Home Possible, a flexible credit and low-down-payment mortgage option designed to help lenders enable more first-time home ownership among credit union members.

The agreement calls for Freddie Mac and CUMAnet to work together and develop and distribute information that would help more potential borrowers understand the mortgage process. Among the initiatives the organizations will promote is material from Freddie Mac's "Homeownership: Let the Truth Move You" campaign.

"Homeownership: Let the Truth Move You" campaign is a national effort launched in 2004 by Freddie Mac that works to provide accurate information about the home-buying process. Research shows that many potential home buyers don't consider home ownership because of the "myths" about the process. For example, a number of potential home buyers believe that at least a 20 percent down payment is required to purchase a home. With Freddie Mac's suite of Home Possible mortgages, qualified borrowers may get into a home with zero down and with just $500 from their own savings for closing costs. The balance of the closing costs can be paid through a qualified grant or gift.

CUMAnet is a credit union-owned real estate service organization, providing residential mortgage and home equity loan products and related services to credit unions nationwide.
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Family values rank high in dream houses

Part 2: The American Dream is on steroids
By: Janis Mara: Inman News
Editor's note: Like everything in American culture, houses have blown up to Hummer-sized proportions. Eight-figure prices and 10,000-square-foot homes are becoming the norm in the luxury housing market, which is booming. In this three-part series, we explore the changing nature of the American Dream, what people are looking for in the ideal home and our obsession with all things big. (See Part 1: Lust for status drives luxury real estate market.)

Ask a dozen people about their dream houses, and you'll get a dozen answers – with one thing in common: most folks' dream houses have space for family activities. Most also have a taste for luxury.

"My dream house would be in the country, with log construction," said Kate Schroeder, who lives in Oakland, Calif. "I'm an artist, so I would want a studio. There has to be space for my children and grandchildren to visit."

Schroeder's dream house wasn't entirely low-key. She said she would like granite countertops, marmoleum flooring, a meditation garden and a brook. The artist also would like a kiln and woodworking shop in her dream home. Still, her demands were relatively modest compared to the luxury homes of today.

America's luxury housing is on steroids, with 10,000-square-foot homes and eight-figure prices becoming commonplace. In the luxury market, it's not about keeping up with the Joneses, building a two-story ranch and putting up a white picket fence. The stakes are higher and the fences are made of Australian jara. Now it's more about keeping up with the high-tech moguls next door: the Bill Gateses and the Larry Ellisons.

Rick Elliott, a vice president at BNY Mortgage, shared Schroeder's high priority on family. Elliott said he didn't have to use his imagination to come up with a dream house. He's living in it.

"I already have my dream house," the New Yorker said. "It's a five-bedroom Colonial with a pool, great neighbors, great schools. Our kids have wonderful friends. There's a wraparound porch, a back deck and a nice garden."

According to industry experts, many peoples' dream houses involve both materialistic and family values.

"There are so many things pulling families apart. This (the home) is a way to bring families together," said Kathryn Robyn, co-author of "The Emotional House," a how-to book about the emotional side of housing. "We don't have time any more. We want to be with our family as much as we can. We can watch a movie together at home, so we get a home theater."

Echoing the family theme, Perrin Kliot of Orinda, Calif., said he would like a view of the hills, a pool – and a flat yard for his 2-year-old son to play in.

Kliot did allow himself vaulted ceilings and "lots of room" in the house, though suggestions of a media center met with disapproval. "I have a 2-year-old. We don't need a media room," he said, perhaps meaning that his son provided enough entertainment on his own.

"When people spend money on their dream house, it's not just consumption. It's recreation," said Susan Wachter, real estate professor at the Wharton School of the University of Pennsylvania. "Housing consumption is consuming home activities."

Housing is not just physical space, she said, but access to activities in a convenient setting where families can participate in those activities together.

James Croft, who lives in Great Falls, Va., and has a second home in Midway, Utah, had a similar vision.

"I can tell you right away about my dream house in Utah," said Croft, who founded the Mortgage Asset Research Institute. "It has nine bedrooms, six baths and a bunk room that sleeps a dozen grandchildren." Snowskiing, waterskiing, golf, hiking and tennis are available in the immediate area, he said.

"We call it the kid trap," Croft said. It has every feature Croft and his wife could come up with "to trap our kids into coming to visit," he said. "We built it from the ground up about two years ago."

Croft's approach is not unusual, a luxury real estate agent said.

"People with second homes often make the second home very pleasing to fit their children's and grandchildren's interests," said Barbara Candee, vice president and Sotheby's International Realty Director at Daniel Gale Real Estate's Locust Valley, N.Y., office.

"Some of the luxury homes today more than previously are building indoor pools, personal gymnasiums. Things you can do with your family, as well as extended families, grandparents," Candee said.

Not everyone is intent on spending time with children or grandchildren, however.

"My dream house would be a dome house in the Sierras," said Robert Yates of Berkeley, Calif. "Lots of rooms so friends could come to visit, a deck, a pool and a clothing-optional environment."

Deniene Erickson-Yuen was a bit more willing to live large.

"My dream house would be on the beach in Maui, so I could take in those amazing sunsets and capture the breeze," she said.

Her dream house would have an outdoor kitchen and "one of those dark tiled pools that looks like it disappears into the horizon."

Making up for her less assuming compatriots, Amika Antoniades-Rao was more imaginative – or perhaps more honest.

Her dream house has an Olympic-sized swimming pool with Greek columns and statues, a circular foyer with a huge Swarovski crystal chandelier, a kitchen with two islands and two dishwashers, a huge bedroom with a fireplace, a movie room and a plasma TV in every room.

Features like these are not unusual in the luxury house of today, experts say.

Though she was willing to admit to some fairly lavish fantasies, Antoniades-Rao didn't forget her family.

She said she'd like a home gym with a couple of treadmills, "so my hubby and I could work out together," and one more gym – this one for her two pugs, complete with doggie treadmills so they, too, could stay in shape.
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Principle residence sale rules to live by

Title issue could jeopardize tax exemption
By: Robert J. Bruss: Inman News
Here are some additional issues that frequently arise regarding principal residence sales:

1 – Principal residence sale in the year of a spouse's death. IRC 121(b)(2) says the $500,000 principal residence sale exclusion is available for the sale of the marital home if the sale closes in the tax year of a spouse's death. Although the IRS considered extending this time limit beyond the year of a spouse's death, it found there is no authority to do so without the approval of Congress. The tax reason is that a surviving spouse can only file a joint tax return with the deceased spouse for the tax year of that spouse's death, but not in future tax years after that.

However, this is not such a "big deal," as many surviving spouses believe. If the surviving spouse inherits the deceased spouse's half of the home, the surviving spouse receives a new basis on that inherited 50 percent "stepped-up" to market value as of the date of the spouse's death. If the principal residence is in a community property state, the surviving spouse usually receives a new stepped-up basis on 100 percent of the home's entire market value on the date of death.

This stepped-up basis for the deceased spouse's interest in the home usually is far more important than the $500,000 principal residence sale tax exemption, which is available only in the year of death when a joint income tax return can still be filed.

The only time the surviving spouse is usually hurt financially occurs if title to the residence was held in the name of the surviving spouse alone so there was nothing to inherit from the deceased spouse. Then the surviving spouse does not receive a new stepped-up basis because he or she already held full title.

2 – Holding title in a living trust doesn't change eligibility for the $250,000/$500,000 exemption. When title to a principal residence is held in a trust for the benefit of the trustor, such as a living trust that avoids probate costs and delays, the method of holding title is disregarded for purposes of IRC 121 tax exemptions. "The sale by the trust will be treated for federal income tax purposes as if made by the grantor," IRS regulations explain.

3 – Sale of a partial interest in a principal residence won't increase the exemption. At the time a qualified principal residence owner sells a partial interest in the home, such as a sale to a son or daughter, that sale can qualify for the $250,000 or $500,000 exemption.

But this is not a tax loophole to allow the seller one exemption for a partial sale now and another exemption in the future when selling another partial interest. The IRS regulations clearly state that the maximum $250,000/$500,000 exemptions cannot be exceeded when selling partial interests in the seller's principal residence.

4 – Exempt principal residence sales need not be reported to the IRS. The IRS regulations state: "Reporting of an excluded gain is unnecessary and would be unduly burdensome for taxpayers."

However, if your principal residence sale is partially taxable, such as when your capital gain exceeds the $250,000 or $500,000 exemption, your home sale should be reported on Schedule D of your federal income tax returns, clearly showing the exclusion amount.

SUMMARY: The $250,000 and $500,000 principal residence sale capital gain exclusions are major tax benefits for home sellers who understand how to maximize their exemptions. More details can be found in the IRS Regulations at IR-2002-142, available on the IRS Web site at www.irs.gov/newsroom with a link to the IR regulations as published in the Federal Register.
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The Weekend Guide! May 19 - May 22, 2005

The Weekend Guide for May 19 - May 22, 2005.
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Bootcamp for Do It Yourself Renovators

by Al Heavens
What people new to homeownership don't know tends to be a lot. Boot camps offered to first-time buyers in the form of classes are already seen in many cities. But what about first-time renovators? Or how about those interested in restoring an older home? Perhaps there should be a boot camp for them as well.

I'm a big believer in trying to find out as much as you can about a project before you jump in feet first, and that's why a recent e-mail from the Allen Mortgage and Real Estate Group in St. Paul, Minn., caught my eye. Recognizing how overwhelming the home-buying process can be for first-timers, Allen is sponsoring a series of "first-time home buyers boot camps" around Minnesota between the end of April and mid-December of 2005.

The process can seem simple, but "it's what first time home buyers don't know that can really hurt them," said Cindy Allen, who is a principal in the company. "There are many expensive pitfalls that may not become evident until a new homebuyer is in the middle of an unforeseen problem. Then they must learn the hard way. We don't want buying your first home to become a nightmare."

This is not a real boot camp, where prospective buyers live in tents and ford swollen streams wearing 50-pound backpacks. These "camps," held in classroom settings, present the home-buying process from start to finish, from understanding credit scores to figuring out what is the "right" mortgage.

It is a concept I think I could take to the renovation world -- a boot camp for people planning to buy older homes and fixer-uppers.

I've been thinking about this for a couple of years, ever since I spent an evening at a Home Depot project night designed for women. A number of participants who recognized me from my newspaper column photo asked me if I would ever teach a nuts-and-bolts home renovation course.

I considered it for a while, and then decided that it would be better if I found some way of presenting the good, the bad and the ugly of renovation, emphasizing the cost-effective ways of doing it.

Although I've told a lot of people lately that if I had the chance to renovate two houses again, I might have stayed in bed, that isn't completely true. I would have done things differently, for sure. For example, I would have developed a way of measuring the effectiveness of doing a project myself versus hiring someone to do
it, based on an algebraic formula along the lines of what the math genius on CBS-TV's Numbers uses to solve crimes for his brother in the FBI.

In the vast majority of cases, the numbers for most major renovation projects that homeowners take on themselves don't add up. Even some regular maintenance projects that a homeowner typically tackles might be more cost-effective if it were done by a paid professional instead.

Let's look at the annual swabbing of the deck -- a task I took on myself for the 13 years I owned a house that had one. The bi-level deck, with stairs, measured 300 square feet. Because the deck was on the north side of the house, the absence of direct sunlight for a good part of the year meant that it was very green and dirty.

A deck maintenance job typically requires washing the deck and then applying two coats of water-repellent sealer, usually in mid-spring when the temperatures are still cool and there is more cloud cover. What this means, of course, is that you have to wait for the ideal time for the job, hoping that your available time and the ideal time mesh.

Just think about actual working time. It typically took me 16 hours to maintain the deck from start to finish. Now say my regular job paid me $40 an hour, or $640 for 16 hours. Would it be more cost-effective to hire a professional, who usually takes less time than even the most-experienced do-it-yourselfer to do this job, than to do it yourself, especially if the guy or woman charges $400 from start to finish?

I'm not knocking do-it-yourself. For the last 15 years, I've been one of the chief advocates of it. What I am saying, however, is pick your battles. Cleaning a deck is a messy job, usually done after a hard week of your doing the one that brings in the bacon. It would have been smarter for me to cut off a couple of slices for the professional deck cleaner, and be able to do something else, something fun.

Now that I think about it, maybe that's what homeowner's boot camp should offer: A chance to clean an outdoor deck. Too bad I didn't think about when I owned such a deck. I could have had people paying me for the privilege.

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Lust for status drives luxury real estate market

Part 1: The American Dream is on steroids
By: Janis Mara: Inman News
Editor's note: Like everything in American culture, houses have blown up to Hummer-sized proportions. Eight-figure prices and 10,000-square-foot homes are becoming the norm in the luxury housing market, which is booming. In this three-part series, we explore the changing nature of the American Dream, what people are looking for in the ideal home and our obsession with all things big.

Amika Antoniades-Rao's dream house has an Olympic-sized swimming pool with Greek columns and statues, a circular foyer with a huge Swarovski crystal chandelier, a kitchen with two islands and two dishwashers, a movie room and a home gym.

The California resident's fantasy home may sound extravagant, but it's actually conservative compared to many existing luxury homes.

America's luxury housing is on steroids, with 10,000-square-foot homes and eight-figure prices becoming commonplace. In the luxury market, it's not about keeping up with the Joneses, building a two-story ranch and putting up a white picket fence. The stakes are higher and the fences are made of Australian jara. Now it's more about keeping up with the high-tech moguls next door: the Bill Gateses and the Larry Ellisons.

"We've experienced the overly large home phenomenon for some time," said William Hablinski, founding partner of Hablinski + Manion Architecture, a luxury housing design firm focusing mostly on the Pacific Northwest. Hablinski said 15,000- to 24,000-square-foot houses are the norm for his firm.

"I've had 60,000- to 70,000-foot houses. It's really almost obscene," the architect said.

Such projects easily can cost $35 million for the home construction alone. With the price of the land, the house could be valued at $50 to $70 million, he said.

"They're building palaces," said Yolande Citro, an agent with Triangle Properties who sells luxury homes in Miami Beach, of her clients. "Star Island and India Creek Island (in the Miami Beach area) have lots of land. They are building gigantic homes, huge master bedrooms with 'his and her' bathrooms, pools, six-car garages with private apartments on top, maid's quarters and cottages for guests."

The former Atherton, Calif., home of Larry Ellison, founder of Oracle, has seven bedrooms and 7.5 baths on 2.8 acres, with a Japanese teahouse, Japanese gardens, waterfalls, a koi pond, an in-ground spa, a pool and a tennis court. It's currently for sale at $29.5 million.

Such extravagant homes are spreading. The luxury home market is booming, with Coldwell Banker's sales volume of homes valued at $1 million or more surging to an all-time high of $35.5 billion in 2004. The company's previous record volume for luxury home sales was $23.3 billion in 2003.

In California, one of the top-selling states for luxury homes, sales of homes valued at more than $1 million jumped 73 percent, from 19,080 properties in 2003 to 33,107 in 2004, according to DataQuick Information Systems.

"We're booked up through January 2006, we're turning work away and there doesn't seem to be any letup in demand," said Hablinski.

Hablinski says similar trends are happening in Florida, Long Island, Connecticut, the San Francisco area, the greater Chicago area, Atlanta, Dallas and other metropolitan hubs.

Luxury home values jumped 48 percent in the last year in the San Francisco Bay Area, according to Katherine August-deWilde. August-deWilde is chief operating officer for First Republic Bank, which tracks luxury home prices through its Prestige Home Index. Prices for such homes are on the upswing in Los Angeles, San Diego, according to the index, and also in New York, August-deWilde said.

One commentator sees the trend toward larger, costlier homes as an upscale bunker mentality engendered by the September 2001 terrorist attacks.

"When uncertainty is strong, as it is now in the national psyche since 9/11, the tendency to hunker down is ongoing," said Kathryn Robyn, co-author of The Emotional House. "People are threatened. Where do you go when you're afraid? You go home. It's your sanctuary.

"We've seen this at other times in history," Robyn said. "Whenever there's an uncertain time, we hunker down and become fascinated by luxury." During the Cold War in the 50s when the nation was at odds with Russia, people were fascinated with luxurious homes, she said.

August-deWilde agreed that the terrorist attacks have been a big influence.

"A lot of this comes in the wake of 9/11 and the war in Iraq," August-deWilde said. "There's a bit of a homing instinct. People are spending more time in their homes." Also, lower interest rates have made the opportunity of spending money on housing low, and finally, because the stock market became more volatile in recent years, she said.

Kevin Gotham, a sociologist and associate professor at Tulane University, had a different interpretation.

"People seek out large properties because it makes them seem successful. These kinds of objects and commodities are signifiers of prestige," Gotham said.

The psychology behind the 10,000-square-foot, multimillion-dollar home is similar to that behind the Hummer, according to Gotham. They're both symbols of upward mobility.

"People believe if they have one of these, they will project status," the sociologist said. "There's nothing modest about the Hummer or those big homes. They don't express modesty or humility at all."

A person's home is a reflection of his personality, according to John Brian Losh, founder and publisher of LuxuryRealty.com. Losh agreed that "people equate big houses with big success.

"People view their homes as reflections of themselves," Losh said. "Every luxury house takes on the personality of the owner."

Hablinski agreed, saying, "It can be symbolic of personal success if you have a big house."

Daniel Levy, president of CityRealty.com, put it more succinctly.

"It used to be keeping up with the Joneses. Now it's keeping up with the Ellisons," he said.
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New book helps avoid home renovation mistakes

If it doesn't boost property value, don't do it
By: Robert J. Bruss: Inman News
If you are considering remodeling your home, but you are a little intimidated by the process, reading "What No One Ever Tells You About Renovating Your Home" by Alan J. Heavens will explain the "dos" and "don'ts" for a successful project.

This is not a "how to" book explaining specific tasks, such as installing dry wall. There are lots of other books explaining home remodeling components. Instead, this book takes an overall view of home renovation, explaining when it is wise and when it shouldn't be undertaken.

In a likeable, self-deprecating way, home remodeling expert Heavens shares many of his personal home renovation experiences, mostly to illustrate what not to do. For example, he explains his misplaced obsession with finishing his basement remodel before he completed his more visible and partially completed upstairs fix-up projects.

The book is filled with lots of real-world examples from homeowners who undertook home renovation work, mostly successful, but a few with unplanned results. The story I liked best is about Alex and Beth Cerrato from San Diego who added a 1,500-square-foot addition while continuing to live in their home with their 18-month-old son. That must have been fun. They explain how they hired a recommended remodeling contractor who actually completed the project on budget and delivered top quality work.

This guidebook to successful home renovation explains when it's best to hire contractors and when to do the work yourself. Heavens is clearly a do-it-yourself guy, perhaps because then he often writes about his personal remodeling experiences in his newspaper articles for the Philadelphia Inquirer.

But the author recommends doing lots of research before deciding to do it yourself or hire an experienced contractor. He reports the renovation business is highly fragmented, with about 880,000 businesses involved in remodeling, of which 550,000 are one-person operations.

According to the National Association of Home Builders, Heavens reports, by 2019 the remodeling business will outpace residential construction in annual volume. No wonder the home improvement stores are expanding so fast.

"Never spend money if it won't boost your property values" is the book's theme. That topic is explained in one of the 50 short mini-chapters, which break up the book into easy-to-understand components. At the end of each chapter there are dozens of short, one-sentence summary "things to remember" tips.

Heavens suggests not undertaking renovation projects shortly before selling your home. Instead, he recommends minor fix-up to prepare a home for sale to earn top dollar.

One of the most valuable of the book's many segments explains how to hire a quality contractor. Heavens advises against using the phone book yellow pages method because that's expensive advertising, which the contractor's customers pay for one way or another.

The method for hiring quality contractors the author suggests is to ask neighbors, friends and relatives for recommendations of reliable contractors. Another source, he says, is ask local building inspectors which contractors do the best work and have the fewest problems.

The book is like having a personal conversation with an impartial home renovation expert who shares his many personal experiences in an organized way. Based on his 15 years of writing his syndicated home improvement columns, interviewing hundreds of homeowners and contractors, Heavens shares his insights of what to do to have a successful home remodel.

To illustrate, I especially liked his explanations of home renovation topics from the contractor's viewpoint, such as making estimates. The author reports this is one task most contractors hate because they know many estimates will never result in firm contracts since many homeowners are just shopping and they know estimates are free.

After reading this excellent book, I have a greater understanding of the home remodeling business and what to do and what not to do for a satisfying project.

Especially revealing is the process of getting building permits and what can happen if the contractor works without a permit. For example, Heavens shares the story of a homeowner who had to tear down a $10,000 non-permitted deck that was built too close to the property line and the building inspector wouldn't grant a variance to legalize it.

Chapter topics include "Right from the Start"; "Roll Up Your Sleeves"; "Stop, Look, and Listen"; and "The Good, the Bad, and the Ugly." The Appendix includes an excellent Internet Resource Guide.

There should be a federal law requiring all homeowners to read this outstanding home renovation book before they are allowed to either undertake do-it-yourself home remodeling or hire a remodeling contractor.

Reading this book written by a home renovator who shares his many practical experiences, and who has the ability to write in a very understandable manner, will avoid costly mistakes and make the renovation process go smoothly. On my scale of one to 10, this outstanding new book rates an off-the-chart 12.

"What No One Ever Tells You About Renovating Your Home," by Alan J. Heavens (Dearborn-Kaplan Publishing, Chicago), 2005, $18.95, 208 pages; Available in stock or by special order at local bookstores, public libraries, and www.amazon.com.
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