Soaring Home Prices Leave Lots of Folks Out of the Loop

RISMedia
Looks like summer's gonna end on a note of de ja blue for anyone who was looking to buy a house in August, especially first-timers. Each day, the unaffordable grew even more so.

That record $600,000 median price for a single-family home in the San Fernando Valley during July? It's history.

August's market bested it.

At least that's what the evidence assembled by Dan Blake suggests. He's the director of the San Fernando Valley Economic Research Center at California State University, Northridge, and crunched August's price numbers.

He has the median right at $600,000. But that is not equal to what happened in July. That number came from the Southland Regional Association of Realtors, which releases price and sales data from Toluca Lake to Calabasas.

Blake's numbers were compiled by DataQuick Information Systems and his sampling includes all the ZIP codes from the Southland sample plus those in Burbank and Glendale.
In July, Blake's sample was $585,000.

So it stands to reason that the Realtor's number for August would be bigger than July's.

I know this is making owners a bit giddy.

It's really not good news, Blake said.

Consider this. Between August 1995 and last month, the median price of a Valley home soared 257.1 percent, according to DataQuick's calculation.

Blake points out that in 1995, the last boom market bubble was still bursting. It was one year after the Northridge Earthquake and a few years after the closure of the General Motors plant in Van Nuys and the evaporation of thousands of aerospace industry jobs.

"Those were really depressed times. You can't look at that as normal times," Blake said.
OK, let’s jump to 2000. The median price that August was $293,500. And it seemed like a lot back then.

But there was no price bubble blather.

"Those were pretty much sustainable prices by the level of income and in the Valley."
But over the next five years the median price soared 140 percent, something that for the Valley could be news.

"It isn't good for job creation," Blake said. "With the cost of gasoline up, we can't tell (new residents) to go to Lancaster and buy something affordable. It's a discouraging factor."
This past spring, for the first time, high housing prices were cited as a reason people didn't want to move to the Valley, Blake said.

It's also discouraging that with prices at this level, it's harder and harder to provide housing for low- to moderate-income families.

Blake said that the affordable option now is a $350,000 condo. But those aren't easy to find.
The only mitigating factor is that rents have not risen nearly as fast, which explains why more than 50 percent of Valley residents are renters.

For example, figures compiled by UCLA show that for Los Angeles, rents only rose 3.5 percent from the second quarter of 200 to the second quarter of 2005.

And Thursday, executives at a residential real estate conference sponsored by UCLA's Ziman Center for Real Estate agreed that with land and other costs that have risen along with selling prices, it's tough to bring affordable product to market.

The city of Los Angeles is considering adopting an inclusionary zoning ordinance that would require that developers include a certain amount of affordable housing new developments.
Some builders resist this.

Lawrence A. Scott, senior vice president of Avalon Bay Communities, a big apartment company, noted that apartments are the purest form of affordable housing. After all, the said during the conference, that's for first place we all lived after leaving Mom and Dad's house.

And maybe this isn't really a role for government, either.

"Politicians need to resist the urge to develop ordinances to solve the housing crisis. The free market will," he said.

Maybe.

It hasn't done it yet.

Words have been thrown at high housing costs for years.

And there's always been one constant.

"We still need affordable housing," said Joan Ling, executive director of the Santa Monica-based Community Corp. of America. "The last time I looked, there were still poor people. A lot of poor people."

Know we know what happened to the Villa Siena, the senior retirement community planned for the southeast corner of Corbin Avenue and Prairie Street, across from the Northridge Fashion Center.

The plans evaporated, reports Steve Taylor, who was involved in the project.

He was a minority partner with a private investor group from Eugene, Ore.

"After 9/11, they lost the appetite for those kinds of deals and we ended up shutting it down," Taylor said last week. "I haven't talked to those guys in two years."

Taylor, who's based in Del Mar, remained bullish on the Valley, though.

He's building the Vantaggio townhome complex down the street on the northwest corner of Shirley Avenue and Prairie Street.
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New study banishes real estate bubble

Home prices are 'reasonable,' business schools say
Inman News
Most U.S. cities show little evidence of a housing bubble as of the end of 2004, according to a study by two prestigious universities released today.

Recent house-price jumps are largely explained by economic fundamentals such as low interest rates, strong income growth and unusually low housing prices in the mid-1990s, said a study of 46 single-family housing markets from 1980 to 2004 by researchers from Columbia Business School, the Federal Reserve Bank and the Wharton School of the University of Pennsylvania.

The study, "Assessing High Housing Prices: Bubbles, Fundamentals and Misperceptions," found no evidence that buyers are bidding up the price of houses based on unrealistic expectations of future price increases.

According to the study, conventional metrics for assessing the housing market such as price-to-rent ratios or price-to-income ratios ignore the effects of lower real, long-term interest rates, and thus fail to accurately reflect the state of housing costs.

The study sought to dispel what it called common misperceptions, such as:

Misperception #1: The rising price of housing necessarily means that ownership is becoming more expensive.

According to the study, the price of a house is not the same as the annual cost of owning a house. The study calculated the actual cost of owning a house relative to rents and incomes, and found that these ratios were well within historical norms at the end of 2004.

According to the study, during the mid-1990s, housing prices were somewhat undervalued, and at least part of the increase in house prices over the past 10 years reflects a return of these valuation ratios to long-run historical norms.

Misperception #2: High house price growth implies a bubble.

The study said that when the real cost of long-term borrowing is low, as it is today, changes in long-term interest rates have a disproportionately large effect on house prices. Thus, given the decline in real, long-term interest rates since 2000, it is not surprising that house prices have risen as much as they have, according to the study.

However, the other side of the coin is that the housing market may be especially vulnerable to unexpected future rises in real, long-term interest rates or negative shocks to local economies, the study said.

Misperception #3: The cities with the highest price increases (or the highest price-to-rent ratios) are the most overvalued.

In some local housing markets such as San Francisco, Los Angeles, San Diego, New York and Boston, house-price growth has exceeded the national average rate of appreciation for at least 60 years, the study said.

But, according to the study, in cities with higher long-term rates of price appreciation, the annual cost of owning is lower; hence house prices should be higher (relative to rents or incomes). At the same time, house prices in high-priced cities are more sensitive to real, long-term interest rates because interest expense is a higher fraction of annual ownership costs, the study said.

The study concluded that the current U.S. housing values are consistent with strong economic fundamentals. The reduction in ownership costs caused by lower real, long-term interest rates, in particular, has largely offset the rise in housing prices, the study said.

However, the study also cautions that when real, long-term interest rates are already low, further changes in rates can have a disproportionately large impact on the housing market. An unexpected rise in real interest rates or a negative shock to household incomes could cause house prices to decline, according to the study. But this fact does not mean that today houses are systematically mis-priced, according to the study.
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The 'Sweet Spot of Flipping'

Have you ever wondered how good these guys do who buy houses for quick resale?
By: Lew Sichelman: RealtyTimes
Three to six-months is just about the right amount time to hold a property for investors who engage in the legitimate practice of buying undervalued or distressed houses, making a few repairs and putting them back on the market for a quick sale - and, as it turns out, to "reap almost incredible returns," according to a new study. Lew Sichelman has the details.

Well, as it turns out, they do better than most - better, that is, if they sell within three to six months of purchasing a place.

Ninety-to-180 days is the "sweet spot of flipping," according to a new report by First American Residential Solutions, one of the country's largest providers of property data. Hold a house any shorter or longer than that and you won't do nearly as well.

Of course, we're not talking about fraudsters who use false information to buy a house. Rather, we're talking about savvy investors who purchase distressed or undervalued properties, raise their value by making repairs or even remodeling or simply taking advantage of a hot and getting-hotter housing market.

Most folks buy a house to make it their home. And they reside within it for seven years on average. Flippers have a much shorter time-frame, usually less than two years and often much shorter. They may or may not live in it themselves, and they may or may not rent it to others. They may make only cosmetic repairs or they might perform a complete overhaul.

About the only thing they have in common is that they typically want to get in and get out, making a substantial return on their money in the process. And that kind of flipping is very much a legitimate form of investment, even if it is sometimes highly speculative.

Since it difficult to determine exactly what is was the buyer-owner-seller had in mind from a bunch of numbers, Christopher Cagan, director of research and analysis at First American, looked at all resales within the first 24 months after purchase (but not pre-construction flips) in three super-heated housing markets - Orange County, Calif.; Miami-Dade County, Fla., and Clark County (Las Vegas), Nev. And his findings are interesting, if not downright surprising.

Understandably, flippers ride the wave of a rising market and profit from it. But if they sell too quickly or hold too long, the don't do as well as they could if they put their purchases back on the market at just the right time.

Again, Cagan was unable to know how much the investor spent beyond his downpayment. But based upon the price paid and the price received, he was able to calculate the gross profit and adjust for the length of ownership to estimate an annualized appreciation rate.

And the results?

Flippers in all three markets almost always earned 15 percent or more of gross profit in each market. But those who sold between three and six months often sometimes earned 50 to 100 percent as an annualized rate.

Similarly, almost all sellers made more than 15 percent when they held their properties for six months but sold before a year was out. And as did those with quicker trigger fingers, some did better than 15 percent. But the rate of return of those who didn't sell until sometime during their second year of ownership wasn't nearly as strong as the rest.

But Cagan's findings beg another question: Did flippers beat the market or did they merely participate in it like everyone else?

To answer that question, the economist looked at annualized rates of appreciation for different years of sale and different elapsed sales times, and then compared that with the year-over-prior year price appreciation of all single-family residences in each of the three counties, whether they were flips or not.

In perhaps his most surprising discovery, Cagan found that the annual rate of return for 12 to 24-month sales was just a little above or a little below the rate for the overall market.

The rate for a 6 to 12-month hold tended to be a little better than the market as a whole. But appreciation in the three to six-month category, which represents almost an immediate turnaround as far as real estate is concerned, was usually 20 to 40 percent or more ahead of the market.

Cagan calls this time-frame the "sweet spot of flipping," and said that when they market in the three towns was booming, flippers who found the G-spot of real estate "reaped almost incredible returns."

In other words, to paraphrase country singer Kenny Rogers, if you are going to speculate in the housing market, you've gotta know how long to hold 'em and you've gotta know when to fold 'em.
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Bubble Trouble? Not Likely

By: Chris Mayer,Todd Sinai: REALTOR® Magazine Online
Some observers of the housing market point to rapid residential appreciation, the widening gap between property prices and incomes, and the fact that home prices greatly outpace rents in many cities as evidence of a housing bubble; but Columbia Business School's Chris Mayer and Wharton real estate professor Todd Sinai disagree.

They insist that the annual cost of homeownership—after-tax financing costs, plus maintenance and depreciation—has not increased significantly over the last 10 years.

Research by Mayer, Sinai, and Federal Reserve Bank of New York research economist Charles Himmelberg reveals that annual housing costs in Boston, Los Angeles, New York, and San Francisco, for instance, rose no higher than 3 percent over long-run averages between 1980 and 2004.

Mayer and Sinai note that low interest rates are responsible for the large difference between ownership costs and actual home prices, adding that the hottest housing markets are extremely sensitive to interest rates and tend to have the lowest costs of owning.
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Landscapes: What's Outside Can Grow Home Price

By: Jay MacDonald: REALTOR® Magazine Online
Outdoor improvements offer the most effective way for homeowners to drive up the price of their house, as lawn and garden landscaping typically boosts sale prices by 7 to 15 percent. By contrast, homeowners recover just 80 to 90 percent of their investment on interior upgrades.

The National Gardening Association reports that homeowners spent $36.8 billion on lawns and gardens last year, of which $11.4 billion was spent on landscaping.

The dizzying array of landscaping options can bewilder homeowners, so it is important to keep function in mind when designing a landscaping plan. Aging simulations also help alert homeowners to issues that could arise over time, such as a tree growing to obstruct a view or becoming out of proportion with the house. Given that many homeowners might not have an eye for outdoor design, enlisting the aid of professionals might be the way to go.

For smaller-scale projects with minimal engineering requirements, landscape designers--who require no certification and often arrive at the field from a variety of design backgrounds--may be sufficient. Landscape architects are better suited to larger projects, as they all hold four-year degrees in the field and have passed the Landscape Architect Registration Exam as well as completed a substantial apprenticeship.

The difference in qualifications is reflected in their fees, as designers typically earn $50 to $100 per hour; while architects command between $150 and $250 per hour.
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More Homeowners Get Comfy With Second Properties

By: Laura Mandaro: REALTOR® Magazine Online
As the lure of investment sends many back into the real estate market for a second or third home, buyers are encountering stricter loan requirements than apply on their primary home such as down payments of up to 30 percent, compared to the 20 percent that is standard on conventional loans with no mortgage insurance.

Additionally, lenders will demand a lower debt-to-income ratio, meaning that investors' total debt may not exceed 35 to 40 percent of their gross monthly income whereas debt payments on a primary residence may stretch as wide as 50 percent.

Moreover, loans for second homes or investment property frequently are issued at interest rates one to two percentage points higher than those funding first purchases, due largely to the belief that owners will have less incentive to make the payments on a second home than on their primary residence should financial trouble arise.

Many investors are drawn to interest-only products, as they intend to sell the property by the time their payments increase to include principal.
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Real estate more costly than expected in West, South

Fixed-rate mortgages popular with recent buyers
Inman News
About one in five U.S. adults who purchased a home within the last three years as their primary residence say they spent above their suggested price range, while two-thirds stayed within their price range and 12 percent were below their price range, according to a Wall Street Journal Online/Harris Interactive Personal Finance Poll.

When obtaining a mortgage for their new home, recent home buyers who used a mortgage broker, direct lender or another source were nearly three times more likely to obtain a fixed-rate mortgage than an adjustable-rate mortgage, the poll also revealed, and one-third of respondents chose a creative or option mortgage.

The online survey of 2,300 U.S. adults was conducted from Aug. 19-23 for The Wall Street Journal Online's Personal Journal Edition.

About 29 percent of people who bought homes in the West within the last three years went above their suggested price range when purchasing their home, compared to 22 percent in the South, 12 percent in the Midwest and 8 percent in the Northeast. About 83 percent of those in the Northeast and 80 percent in the Midwest stayed within their price range when purchasing their home, compared to 57 percent in the South and 56 percent in the West, the survey found.

Also according to the survey: Mortgage brokers (39 percent) edge out direct lenders (32 percent) as the primary source of mortgage providers for recent home buyers. Less than one in 10 (8 percent) used another source to obtain a mortgage, while 14 percent say they did not need a mortgage to purchase their home. Younger home buyers, 18-34, are most likely to have chosen a broker (55 percent) while home buyers 35-42 are most likely to have obtained their mortgage through a direct lender (42 percent).

"Nontraditional methods of funding a primary residence are becoming more commonplace and acceptable, especially in areas of the country that have seen housing prices skyrocket," said Anne Aldrich, senior vice president of the Financial Services Research Practice at Harris Interactive. "It is important that consumers be aware of all of the options available to them, as well as the possible risks that they may take on with 'creative' mortgage options."

About one-third of recent home buyers who obtained their mortgage through a broker, direct lender or someone else chose one of the following four creative or option mortgages, according to the survey:

    • An interest-only mortgage – where borrowers pay interest but no principal in
      the early years of the loan (17 percent).

    • A piggyback mortgage – where the loan combines a standard first mortgage with
      a home-equity loan or line of credit to avoid private mortgage insurance or
      the higher interest rates on jumbo loans (10 percent).

    • A payment option mortgage – where borrowers have four payment options each
      month and those who elect to make the minimum payment could actually see their
      loan balance rise rather than fall (4 percent).

    • A miss-a-payment mortgage – where borrowers are allowed to skip up to two
      mortgage payments a year and up to 10 payments over the life of the loan
      without ruining their credit rating (2 percent).

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Multihead showers offer latest in luxury bathing

Creating your dream bathroom
By: Paul Bianchina: Inman News
If you're one of those people for whom a shower is a whole lot more than just a quick interlude with some soap and water, then you're the perfect candidate for one of the fabulous, new multihead shower systems that have made their way onto the construction scene in the last few years.

As the name implies, multihead shower systems incorporate any of a variety of combinations of interconnected shower heads, valves, controllers, massage jets and even pumps, all interacting to offer you an incredible shower experience. Designed for both new construction and remodeling, and available as preassembled units or individual components, you're certain to find a combination that's perfect for your dream bathroom.

SHOWER SPRAYS

Multihead showers fall into two broad categories – sprays and spas – and some are available with both. There are some distinct differences, however, and it pays to spend a little time understanding what you're looking for prior to placing your order.

Multihead sprays such as Kohler's Water-Haven or the Body Spray by Aqua Glass are designed to spray water from several showerheads at once. The heads may be on individual arms than can adjust up and down and side to side independently; they may come directly out of the wall of the shower and swivel in different directions; or they may be a combination of both. Some types even incorporate an additional showerhead on a flexible hose, allowing even more bathing freedom. Whatever the setup and combination, the idea is the same – to be able to adjust all of the heads for height and angle so that you are inundated with water streams from several different directions simultaneously, all customized to suit your individual showering pleasure.

SHOWER SPAS

Imagine that you have taken the whirlpool bathtub concept of using a pump to recirculate and push water through jets to create a swirling massage action within the water. Now imagine that the pump is pushing that water through the jets and into the air instead of into the surrounding water in the tub, and you have the concept of the shower spa. Think of it as a combination stall shower and whirlpool bathtub.

Kohler's BodySpa is a perfect example of this concept. Unlike most showers, the BodySpa utilizes a large, deep basin with a closable drain in place of a conventional shower pan, so that water can be held in the basin as it would be in a bathtub. A pump, located just outside the basin, pushes the water through a series of jets that are arranged in a vertical "tower" on the wall of the shower. The result is a pressurized hydro-massage action that can be directed against your body in several different areas at once.

When you're done with the spa action, simply open the drain and the recirculated water drains away. Leave the drain open and switch to the conventional showerhead, and the spa now becomes a standard stall shower. You can utilize a single showerhead or combine the spa with the multispray concept for total indulgence.

Kohler offers the BodySpa as a completely enclosed unit, with basin, pump, heads, jets and control switch. Simply assemble the components within an appropriately sized and framed enclosure, and you're all set. For custom installations, the components are also available separately, allowing you to design the perfect size shower and finish it off inside with tile, marble, Corian, or any other surface material.

If you're in the market for any of these multihead systems, be aware of a couple of things. First of all, there are lots of choices in sizes, finishes and component combinations, so plan on spending a little time with manufacturer catalogs and Internet research before you go shopping, and then try to find a large plumbing fixture showroom that will have one or more of the units on display for you to see.

Second, all of these units have very specific framing, plumbing, and, in the case of the spas, electrical requirements, so you need to make your choices before you begin roughing in pipes and lumber. And finally, remember that all of these units utilize more water than conventional showers, and therefore require additional hot-water capacity.

Remodeling and repair questions? E-mail Paul at paul2887@direcway.com.
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Skylights done right

Part 1: The perfect remodel
By: Arrol Gellner: Inman News
(This is Part 1 of a two-part series.)
Adding a skylight is among the most popular do-it-yourself projects around. Too often, though, people decide where to put in their skylight by gosh and by golly, and then just hope for the best. For shame: like any other remodeling project, a skylight installation demands a little planning to avoid an expensive disappointment.

A few simple rules can help ensure that your skylight not only goes in easily and looks good when it's finished, but also brings in light where and when you want it.

Rule one: don't expect a skylight to do a window's job. A well-placed window is inherently better at daylighting than a skylight, since it automatically admits more low-angle winter sun when it's welcome, and blocks the high-angle summer sun when it's not needed. A typical skylight does just the opposite: Being much closer to horizontal, it tends to block the winter sun, yet lets the hot summer sun pour in just when you don't want it. Therefore, if your goal is efficient daylighting, consider adding a new window or enlarging an existing one before you resort to a skylight. It may cost a bit more, but it'll usually do a better job.

On the other hand, if a lack of wall space, a bad view, or some other constraint rules out a bigger window, a skylight is probably your best option – but you'll still want to consider its location, shape, and size very carefully before you reach for the Sawzall.

Your first step is to decide where not to put the skylight. Rule out any spot that's beneath a roof ridge, valley, hip, or some other roof intersection, as it's generally not possible to cut roof openings there. Also avoid locations that'll interfere with existing pipes, wiring or ducts, as they'll have to be re-routed at extra expense. Lastly, unless your house is in a modernist style, avoid locating the skylight where it'll be visible from the street. Why? Skylights – especially the common "bubble" variety – aren't part of the grammar of traditional architecture, and will stick out like a sore thumb if placed on a conspicuous roof surface.

As for shape, it's common to use narrower skylights that'll fit between the existing roof rafters, but don't hesitate to use a different shape if it suits the room better. However, if your house has prefabricated roof trusses or if you're not sure whether your roof can accommodate the size and shape of skylight you have in mind, talk to an architect or engineer first. It's a lot cheaper than having your roof collapse.

Lastly, don't make the common mistake of making your skylight too small. The cost of adding a skylight is mostly in labor, not in material. And since it takes just about the same effort to install a small skylight as a large one, there's little to be gained by wimping out on the dimensions. For the same reason, one large skylight is usually cheaper to install than a group of smaller ones. Use generous sizes, and make your installation worth all the trouble.

Once you've figured out your skylight's size and location, it's time to fine-tune your design and then test it out – without making a hole in your roof. We'll find out how next time.
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Smart son reaps real estate tax benefits of parents' home

Tricky part is adding name to title
By: Robert J. Bruss: Inman News
DEAR BOB: I live in my parent's house. Instead of paying them rent, they suggest I pay a portion of their mortgage directly to the mortgage company each month. If I pay $500 each month, can I use the $6,000 annual total payments as an income-tax deduction each year even though my name isn't on the mortgage or the title? – Roger K.

DEAR ROGER: Congratulations on choosing very smart parents who are looking out for your best interests.

However, to be entitled to deduct on your income-tax returns any mortgage interest and/or property taxes you pay, you must be legally obligated to make those payments. That means your name must be on the home's title.

Your parents can add you to the title by signing and recording a quit claim deed. It really doesn't matter what percentage interest they gift to you or how you hold title. If you are their only heir, they might want to add you as a joint tenant with right of survivorship to avoid probate when they pass on.

But your name need not be on the mortgage obligation so don't bother contacting the lender. Of course, keep your cancelled checks to be able to prove your actual payments just in case the IRS audits you on this issue. For more details, please consult your tax adviser.

CAN SON EVICT MOTHER FROM HIS PROPERTY?

DEAR BOB: My question concerns a neighbor friend. She is a widow who built a small house on her son's property. Now he wants her gone off his land. He sent her a registered letter (on lined notebook paper) stating he will have the sheriff take her off the property if she isn't gone by the end of the month. She has no deed to her little house but through an agreement with her son has paid his property taxes for the last 12 years. She is 72 and is very upset and frightened. Her son is a very cold person. What should she do? – Nettie G.

DEAR NETTIE: As a neighbor and friend, you should advise her to consult the best real estate attorney in town to preserve her legal rights. I hope she has disinherited that nasty son.

From your description, her legal rights are unclear. There are many legal theories her attorney might use, such as promissory estoppel based on her son's promises to allow her to live on his property and her payment of the property taxes. There might also be a prescriptive easement or even adverse possession since she paid the property taxes.

"FIRST SHOWING RULE" RARELY APPLIES

DEAR BOB: About four months ago, I had a buyer's agent who showed me a house. At the time, I didn't like it. After several months of no phone calls, I dropped that agent. Then, last month another agent showed me the same house and I realized it could be right for me so I made a purchase offer through the second agent. It was accepted by the seller. The sale closed. Now the first agent claims I owe her half of a sales commission because she first showed me the house. Can she sue me? – Mark W.

DEAR MARK: Anyone can sue anyone. But bringing an unsuccessful lawsuit can result in costly malicious prosecution lawsuit damages. I doubt your first agent will sue you.

Very few, if any, local real estate associations still have a "first showing" rule for their members. Years ago, it was popular. But there were so many problems, it has been abandoned by 99 percent of local real estate associations.

Without a legal justification, that first agent has no legal grounds for suing you. If the local association of Realtors still has such an antiquated first showing rule, the first agent's grievance is against the agent who sold the home to you. For full details, please consult a local real estate attorney.

The new Robert Bruss special report, "The 10 Key Questions Condo Sellers Hope Buyers Don't Ask," is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.
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Why Uncle Sam Needs Your Property Taxes

By: RAY A. SMITH: The Wall Street Journal Online
A new analysis shows that cash-strapped state and local governments have increasingly come to depend on property taxes to fill revenue shortfalls as other sources of income soured.

Though not an unexpected trend during economic downturns, the reliance on property taxes has lasted well beyond the end of the recession of 2001. Economists say it is has been of greater depth, and likely will have more lasting consequences, than it did during prior downturns.

In good part, that's because the soaring housing market has lifted the median price of single-family homes by 15%, making property taxes attractive to state and municipal governments facing spending increases. Meanwhile, states have grown more reluctant to lift income or sales taxes in recent years for fear of political retribution, economists say. In some cases, they are even prevented from doing so by laws passed during the 1990s boom.

"The local property tax is one tax the local [authorities] can use to offset declines in state money," says William Fischel, a professor of economics at Dartmouth College. "To some extent, if the state is sending municipalities or even school districts less money because they're in fiscally difficult times, the one tax the local [authorities] have some discretion over raising is the property tax."

Though municipalities can offset rising property values by changing their millage rates, or the rates at which taxes are levied on properties, many strapped municipalities chose not to do so in recent years. "Ultimately, what determines whether property taxes go up is the overall budget for the taxing district," says Matt Gardner, state tax policy director with the Institute on Taxation and Economic Policy in Washington, D.C.

The new analysis, prepared for The Wall Street Journal, shows that property taxes have risen rapidly since 2001 as a share of state and local tax revenue, while income taxes fell and sales taxes rose only slightly. Property taxes represented a 28.2% share of state and local revenue in the first quarter of 2004, up from 25.5% in the first quarter of 2001.

During that span, income taxes fell to 19.4% of state and local revenue collections from 22.4%, while sales taxes as a proportion rose to 32.2% from 31.4%.

The analysis was done by Robert Tannenwald, assistant vice president and economist at the Federal Reserve Bank of Boston, using data from the federal Bureau of Economic Analysis.

Overall, between 2001 and 2003, property taxes, which are used to fund everything from police and fire departments to schools and recreational services, rose an average of more than 10% nationwide, estimates Deloitte & Touche LLP's Property Tax Services Group.

The increased state and local reliance on property taxes over the past few years marked a reversal from the trend of the mid to late 1990s. "Over time, there had been a trend for property taxes to play a smaller role in overall tax collections than income or sales taxes," says Judy Zelio, principal at the National Conference of State Legislatures' fiscal affairs program. But in recessions, property taxes tend to creep back up as a percentage, as happened during the recession of the early 1990s.

The recent rise in property taxes has spurred a political backlash in some areas. In Maine and parts of New Jersey, Ohio and Texas, residents and sometimes city officials have succeeded in getting property-tax reduction initiatives on the Nov. 2 ballot. But economists warn that such limits could potentially squeeze state and local governments even more in a future downturn -- especially if rising interest rates cause the scorching housing market to cool off, forcing housing prices lower.

"If you get ballot measures that put caps on rates and they pass, that could have a significant impact on state and local governments," says Robert Lynch, a research associate with the Economic Policy Institute in Washington and economics professor at Washington College in Chestertown, Md. Governments forced to restrict property taxes could face major revenue problems during a future downturn, and thus may face service cuts, he warns.

Many factors contributed to the increase in property tax revenues that began during the recent recession, economists say. The suddenness of the recession, and the stock-market collapse in 2000, rapidly decimated income and sales tax revenues. Confronted with severe budget problems, states were forced to make drastic budget cuts and, to a lesser extent, increase fees and drain their reserves.

Meanwhile, after years of steady growth as a result of the economic boom of the mid- to late-1990s, state income and sales tax collections were hit hard during the downturn. That also hurt local governments. State tax revenue declined 8% in fiscal year 2002, the first time such revenue had declined in 10 years -- during the recession of the early 1990s, according to the Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York. It fell a further 3.4% in fiscal 2003.

Some of the decline in tax revenue was due directly to the weak economy, specifically job losses and reduced spending. The stock market downturn also hurt. "The drop of 2001 had an especially large impact, because capital gains had become as much as 15% of the overall income tax base over the course of the boom of the 1990s, and then almost dried up," says Harley Duncan, executive director for the Federation of Tax Administrators, a Washington D.C.-based organization that provides services to state tax authorities and administrators.

In that environment, the strong housing market proved to be the real potential gold mine to state and local governments. The median price of an existing single-family home rose 15% between 2001 and 2003 to $170,000. Declining commercial bases, rising health-care and pension costs, and expanding tax breaks for business and elderly and low-income homeowners all played a role in pushing up property tax bills for those without such exemptions.

So did soaring expenses. According to the National League of Cities in Washington, D.C., 62% of cities said they had increased public-safety spending, much of it due to homeland security, in the past year; 38% said they had increased capital spending on infrastructure; and 10% said they had increased spending on education. Four out of five cities and towns reported being less able to meet their financial needs in 2003 than in the previous year and expected to be less able to meet those needs in 2004, citing declines in sales, income and tourist tax revenues and cuts in federal and state aid, among other things.

Economists note that property-tax increases are not irreversible. Mr. Duncan points out that they are set each year by votes of local governing boards, which makes them easier to change than the acts of state or federal legislatures.

At the moment, states seem to be recovering from their fiscal problems. State tax revenue, for example, increased 6.7% during the second quarter, the end of the 2004 fiscal year for 46 states, according to preliminary data by the Rockefeller Institute. But that may not quickly result in increased aid to cities or reduced property taxes. "State tax revenue is definitely growing, but it has a long ways to go to reclaim the levels that it reached before the 2001 recession," says Nicholas W. Jenny, a senior policy analyst in the Institute's fiscal studies program.
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Real-Estate Flip Deals Have a Catch

By: Colleen DeBaise: The Wall Street Journal Online
Amateur "flippers" in the real-estate market have more to worry about than a bubble. Many of them could be facing an income-tax audit - and higher tax bills than expected.

The popularity of so-called flip deals has made section 1031 of the Internal Revenue Code popular with real-estate speculators. In a 1031 exchange - also known as a "like-kind" exchange - a person who sells a business or investment property can defer capital-gains taxes by immediately rolling the gains into a similar piece of property.

The trouble, tax experts say, is that people don't understand the rules. Many trust the advice of real-estate brokers, who often aren't well versed in tax law. Some amateurs are buying and selling properties too quickly, running the risk that the Internal Revenue Service may deem the transactions a person's trade or business, with gains taxed as ordinary income and subject to self-employment taxes.

Flipping's attractions are undeniable: A study released this week by First American Real Estate Solutions, an Anaheim, Calif., data provider, found that the practice can reap big returns. The study looked at sales in three hot markets - Las Vegas, Miami, and Orange County, Calif. - between 1999 and June 2005 and found that the annualized rate of return for three-to-six-month flips was usually 20% to 40% or more above the market appreciation rate.

While flip sales didn't dominate the market in any of the three counties First American studied, they did account for as much as half of all sales within particular ZIP codes. In the Las Vegas area, properties turned over within two years accounted for 52.3% of total sales in ZIP code 89119 and for 45.7% of total sales in ZIP code 89147 during the first half of this year. And in the Miami area's ZIP code 33150, flip sales accounted for 41.7% of total sales last year and 43.6% of total sales in the first half of this year.

Novice real-estate speculators who attempt to flip properties should make sure they understand the rules before they are ensnared in an audit, or forced to pay more than they bargained for come tax season. The best way to avoid a problem is to consult a CPA or tax attorney before beginning the real-estate transaction, as mistakes can be costly.

"The IRS hasn't looked at the like-kind exchange before," says Eric Kea, a tax partner in the real-estate practice at BDO Seidman in New York. "We're assuming they're going to, seeing what the market is."

An IRS spokesman wouldn't speculate on whether the IRS will investigate or conduct more audits of like-kind exchanges. In general, the agency dedicates more resources if there are concerns of noncompliance in a particular area, the spokesman said.

In a like-kind exchange, if you replace a property used for business or investment with a similar property, no gain or loss is recognized at that time. Most people do a "deferred" like-kind exchange, where a seller has 45 days to identify a replacement property and 180 days to close on the new asset.

The big mistake for novices, tax experts say, occurs when the seller takes possession of the cash proceeds of the sale. Under IRS rules, the money must be placed in escrow or held by a qualified intermediary (such as a trust company) until the replacement property is acquired. "If you take possession, you are essentially disallowed the use of 1031," says Lonnie Davis, a certified public accountant and director of CBIZ Accounting, Tax & Advisory Services in Plymouth Meeting, Pa.

To avoid taxes, you have to roll the proceeds into a similar property, which generally would be a business property or raw or developed land. You can't swap an investment property for a personal asset, such as a primary residence or a vacation home, Mr. Davis says.

In a like-kind transaction, real estate must be exchanged for real estate, a rule that sometimes trips up clients who have set up a single entity to hold property and shield them from liability. Often, experts recommend that clients liquidate the entity a day before the real-estate transaction so the swap qualifies for 1031 treatment.

Apart from problems with the like-kind exchanges, there are other common mistakes that amateur investors make. One is not holding the property long enough. You must keep the investment for at least a year before selling to qualify for the preferential 15% capital-gains tax rate. If you sell before a year, the gain is subject to the highest income-tax rate of 35%.

You can avoid the capital-gains tax altogether if you own and use the home as your primary residence for two years. Gains of as much as $250,000 for an individual and $500,000 for a married couple filing jointly are excluded. The two years doesn't necessarily have to be continuous, as long as you have used it as a primary residence for a total of two years within a five-year period, ending on the date you sell the property.

Email your comments to rjeditor@dowjones.com.
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Real estate foreclosures down nationwide

But Hurricane Katrina will cause delinquency uptick soon, MBA says
Inman News
Mortgage foreclosures fell in the second quarter of 2005 compared to the same time period last year, thanks to an improving economy, though late house payments increased slightly compared to 2005’s first quarter, a mortgage survey today revealed.

At the end of the second quarter, the percentage of loans in the foreclosure process was 1 percent, down 18 basis points from the previous year and down 8 basis points from the first quarter of 2005, the Mortgage Bankers Association’s 2005 second-quarter national delinquency survey reported.

Because of Hurricane Katrina, the MBA expects an uptick in delinquency rates over the next few quarters, especially in Louisiana and Mississippi, Doug Duncan, MBA’s chief economist, said in a conference call.

The chief economist expects the first effects of Katrina on delinquencies to be seen in the 30 to 59 days delinquent category reported in the third quarter, with more complete impacts reflected in fourth quarter numbers.

A maximum of 360,000 mortgage loans could be affected by destruction or job loss created by Katrina, Duncan said. The association doesn’t know how many of those loans actually will be affected, and more information isn’t currently available in the wake of the storm, the chief economist said.

There’s a silver lining in Katrina’s storm clouds, however, according to Duncan. While unemployment will rise in the near term because of Katrina-associated job losses, and housing will decline, Duncan expects a housing rebound in 2006. Indeed, the MBA expects economic growth to increase in 2006, fueled by governmental and private outlays to rebuild the shattered Gulf Coast.

Overall, the economist said, the economic outlook is positive.

”Our general outlook is continued economic strength. We expect employment growth within 180,000 to 200,000 per month,” Duncan said.

”Housing will remain strong,” Duncan predicted. ”There will be a temporary slowing from the effects of Katrina, followed by a rebound. We did expect a slowing in 2006, but that may not be as much as expected because of Katrina.”

Late payments on mortgage loans stood at 4.34 percent at the end of the second quarter, down 22 basis points from the second quarter of 2004 but up 3 basis points from the first quarter of this year, the MBA said.

”The U.S. economy grew at almost 33 percent in annualized real terms during the second quarter of 2005, adding 205,000 payroll jobs per month,” Duncan said.

”Combined with the low-interest environment, consumers improved their household payments, and the percentage of homeowners making their mortgage payments on time increased to nearly 96 percent,” Duncan commented.

In general, the survey said, the seasonally adjusted delinquencies for adjustable rate and fixed rate mortgages are down from last year and last quarter. Over the year, the seasonally adjusted rate for prime adjustable-rate mortgage loans is down 7 basis points, from 2.26 percent to 2.19 percent. The percentage among fixed rate mortgage loans decreased 9 basis points, the study said, from 2.11 percent to 2.02 percent.

The MBA has conducted the National Delinquency Survey on a quarterly basis since 1953. The survey covers more than 38 million loans, representing more than 80 percent of all first-lien residential mortgage loans in the United States.
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The Weekend Guide! September 15 - September 18, 2005

The Weekend Guide for September 15 - September 18, 2005.
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