Curb Appeal: Best face forward

Spiffing up a listing’s exterior can mean the difference between a drive-by and a signed deal.
By: CHUCK PAUSTIAN: REALTOR® Magazine Online
Warm. Welcoming. Arresting. Appealing. Although landscape and real estate professionals differ about how to define curb appeal, they agree that a home’s first impression can make a huge difference in how well it fares on the market.

“People who prepare their homes—inside and out—before they put them on the market are the ones who have quicker sales and who receive top dollar,” says Mary Harker, ABR®, CRS®, a broker-associate with Keller Williams Realty in Dallas.

There are several improvements, from minor repairs to major yard overhauls, you can suggest to sellers that will add pizzazz to listings. The course of action will depend on the owner’s budget and how much time you have to sell the house. Some experts say, for example, that owners should spend between 10 percent and 20 percent of a home’s value on landscaping. But that’s for owners who are staying put; it wouldn’t be advisable to spend that much unless the sale was a year or more away. For a more typical sales cycle—30 to 60 days—practitioners say spending between 1 percent and 2 percent of a home’s value is a reasonable investment in curb appeal.

“Some homes need more attention than others,” says Jim Albrecht, ABR®, a broker with First Weber Group, REALTORS®, in Waukesha, Wis. Tammy Fadler, CRS®, GRI, broker-owner of Signature Properties in Festus, Mo., agrees: “I look at what the owners can spend and then recommend improvements accordingly.”

Sometimes consumers balk at the idea of spending money to improve a house they’re about to leave, Albrecht says. So you may need to underscore the benefits of the investment. “People cost themselves a lot of money in terms of the offers they receive by not paying attention to the appearance of their house,” he says. “Even if the project amounts to basic maintenance that homeowners can take care of themselves, they’d get back at least what they put into it.” Industry experts say new landscaping can add two to three times its cost to the home’s sales price.

The basics

At a minimum, everything a potential buyer might notice about a home’s exterior and lot should be in working order and well maintained. For the most part, homeowners can take care of this work themselves with a little money and a lot of elbow grease.

Items such as burned-out lightbulbs, broken doorbells and fountains, cracked panes of glass, and damaged trim should be repaired or replaced. Windows and siding should be clean, and any metal objects, such as doorknobs, mailboxes, and kick plates, should be polished.

“If the house shines like a pretty penny, it’ll sell quicker,” says Ed Huck, ABR®, CRS®, an associate broker with Realty One Real Living in Westlake, Ohio. “When I started out, curb appeal wasn’t such a big deal. But now it’s become huge.”

Keep sidewalks and driveways clean and passable. Lawns should be cut, edged, and green. A bag of fertilizer from the local hardware store or garden center and some regular watering will perk up grass in a week or two. In addition, all bushes and trees should be trimmed, and flower beds should be weeded and covered with fresh mulch.

“If the yard is overgrown and weedy, it’s a turnoff,” says Steve Griggs, president of Land Design Studio Inc. in Blauvelt, N.Y. If bushes are beyond trimming, the homeowner should remove them unless they’re covering up an unattractive feature. “It’s better to have minimal landscaping than bad landscaping,” says W Scott McAdam, president of McAdam Landscaping Inc. in Forest Park, Ill.

After homeowners get the outside in tip-top shape, they must maintain the property, because potential buyers could drive by at any time. Remind sellers to turn on any exterior lighting so that a home’s features can be seen at night. The home has to say buy me” at all times, says Harker.

Must do vs. should do

Once the owners have covered the basics, the line between “must do” and “should do” projects becomes blurred, with budget and timing of the sale often determining which tasks to tackle.

Encourage owners to pursue some projects even though they carry potentially high price tags and might require hiring professional contractors. “The roof is a biggie,” says Albrecht. “If the shingles are starting to cup and curl, owners should consider replacing them.” Painting a home’s exterior, replacing damaged gutters and shutters, repairing broken concrete in walks and driveways, and adding exterior lighting should also be high on the list.

Fadler adds that if painting isn’t an option, the seller can hire someone to power wash the exterior “so that it looks nice and fresh.”

Other projects fall into the optional category. Landscaping is a good example of the type of improvement homeowners can pursue, but only if they have the money and time. A yard makeover can have a dramatic effect on a home’s curb appeal, but the cost can easily run into several thousand dollars or more, and the improvements might take weeks to install and several months to mature.

To add splash when owners have limited money and time, real estate and landscape experts recommend adding larger, more mature plants. They cost a little more individually but will add immediate color, texture, and interest, and the homeowner won’t need to buy as many. If flower beds are scarce or nonexistent, fill flowerpots to add splashes of color.

“Yellow and red flowers are buyer colors. They really seem to stop people in their tracks,” says Harker. “If there’s room, add a bench to the front porch. If not, try putting it in the yard.”

Another cost-saving suggestion is to focus on plants and not worry about projects such as putting in a brick pathway. “Plantings tend not to be the expensive part of the job. It’s usually the hardscape that adds a lot of expense,” says Howard Cohen, vice president of Surrounds Landscape Architecture and Construction in Sterling, Va.

Planning ahead

Sellers often have more than 60 days to prepare their home for sale. A recent survey by Hebert Research for HouseValues Inc., based in Kirkland, Wash., found that the average home sale takes 9.3 months from the time the owner thinks of selling to the closing date. That perspective gives sellers more options.

“I’m working with two clients now who’ll be putting their homes on the market next spring,” says John Widener, president of Shaded Leaf Landscaping in Columbia, Md. “We’re planning now for plants that will be blooming when they put up the For Sale sign.”

Fadler says about 2 percent of the people contacting her want to sell in a year or more. The added lead time allows sellers to spread out expenses and consider more elaborate plans, she says.

“If you’re looking to sell in six months or more, you might not have as much cost on the landscape installation,” says Tammy Key, president of Garden Spaces Inc., a San Francisco landscape design company, noting that the additional time gives homeowners the option of using seeds and smaller plants that require more time to grow and are less expensive than mature plants.

Whether the listing period is a week or six months, real estate pros say sellers will maximize their home’s marketability by investing in a few well-chosen exterior touches.
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Taking the Plunge! Ten Reasons Why Sellers Should Market a Home Now

Why should I list my house now?
By: Jim Remley: Pro Performer Seminars
In today's hot real estate market sellers can have many legitimate fears about selling their home, not the least of which is finding another one to buy!

The ultra competitive environment of escalation clauses, multiple offers, and endless showings is daunting for the listing agent, let alone a seller considering listing their home. In making the largest financial decision of their lives many sellers are hesitant to jump in to the deep end of the pool.

Ten Reason to Market Your Home Now!

    1. Pricing Power - In most markets sellers are able to sell for top dollar as
       low interest rates and high demand has fueled a rush of buyers into the
       market place.

    2. High Demand - Low inventory in most markets means that the number of buyers
       competing for each home is higher than it has ever been. This also means that
       the time it takes to secure an acceptable offer has dropped considerably.

    3. Low Interest Rates - Interest Rates have remained at 30 year lows despite the
       fact the Federal Reserve has hiked rates for the past several quarters.
       Today's low rates mean more buyers can afford to purchase more amenities and
       pay higher prices than in the past.

    4. Fewer Contingencies - Because many buyers have been able to sell their homes
       quickly many are able to write offers that are not contingent on the sale of
       their home.

    5. Flexible Financing - Many buyers today are able to enjoy hundreds of
       different possible loan programs from ARMS, to reverse amortization
       mortgages, and even no-documentation loans. This flexibility means more
       buyers can afford to buy homes than ever before.

    6. Timing Control - Sellers who need more time to move, find a replacement
       property, or move into a rental can be more selective in choosing which offer
       best suits their needs. They can also specify their timing needs in advance.

    7. Tax Savings - Sellers who have owned their home for two of the past five
       years, and lived in their home for two of the past five years may be able to
       take up to $250,000 as a single person or up to $500,000 as a married couple
       in tax free gains out of the sale! See www.irs.gov for details.

    8. Nationwide Market Expansion - The national housing market is now at record
       levels. This may mean more out of state buyers than ever before as potential
       buyers for a sellers home.

    9. Home Ownership Rates - The number of American families who own a home is at
       all time high - 70%! This is good news for sellers - as more, and more
       families recognize the value and wealth building potential of owning real
       estate.

    10.Discounted Rental Rates - Although home prices have climbed steadily over
       the last several months, rental rates in most areas of the country have not
       kept pace. This can be good news for sellers who would like to take their
       time finding their next home.

The future is unpredictable. The housing market like all financial markets is a volatile mix of perceived values, real values, and future values. None of us really knows what tomorrow may bring although there is one thing we can all be sure of which is that - today, right now in almost every market in America it is absolutely one of the best times to sell a home in human history!

So dive into the deep end of the market!
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Florida: Foreign Buyers Flock to Sunshine State

REALTOR® Magazine Online
Foreign buyers are adding fuel to the U.S. housing boom, especially in Florida where they account for a solid 15 percent of all home sales and make up a growing share of real estate practitioners’ business volume.

That’s according to the just-published results of a survey by the NATIONAL ASSOCIATION OF REALTORS®, which focuses on sales to foreign buyers in the Sunshine State but also provides general insights on the homebuying preferences of this significant buyer segment.

Of the nearly 1,000 REALTORS® who responded to the May 2005 survey, 87 percent said they completed at least one home sale transaction with a foreign buyer in the previous 12 months. Of those, 66 percent had one to four of such deals; 13 percent had between five and 10; and 10 percent completed 10 or more.

When asked whether home sales to international buyers made up a larger percentage of their business, nearly half of respondents—49 percent—said yes. Another 45 percent said their dealings with foreign buyers have remaining about the same, and just 6 percent reported a decline.

While Florida’s international homebuyers came from more than 100 countries in all areas of the world, the majority—58 percent—of all home purchases by foreign buyers in Florida were made by Europeans. And more than half of the buyers from Europe are based in the United Kingdom.

Spanish-speaking buyers from South and Central America and the Caribbean Islands comprised 29 percent, while buyers from Brazil accounted for 3 percent. There also were buyers from Asia, Africa, Australia, and New Zealand, but results for those areas did not yield a large enough sample size to analyze.

For both Latin American and European buyers, the main reason for purchasing a home in Florida was to have rental property for investment. More than a third of Europeans and 23 percent of Latin Americans planned to use the home as a vacation venue. And nearly a third of Latin American homebuyers planned to use the property as a second home for their part-time work in the U.S.

NAR worked in conjunction with the Florida Association of REALTORS® to conduct the survey. Their goal was to fill a gap in formal research on international homebuyers and to better understand why those buyers purchased homes in the United States, what types of properties they bought, and for what purpose.

The full report can be viewed online in PDF format.

To learn more on international real estate, visit REALTOR.org’s International section. You also can visit REALTOR® Magazine Online’s new resource on Servicing Your Multicultural Clients, which includes articles and tips on successfully working with clients from different cultural and ethnic backgrounds.
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More Investors Become Landlords

REALTOR® Magazine Online
Scores of real estate investors are assuming the role of landlord, looking to turn a profit by renting out their properties.

Landlords must handle several responsibilities, aside from collecting monthly rents. They must locate tenants, which can be difficult in markets where investors are aggressively competing for renters. Such competition, coupled with an increase in home sales, also can force landlords to discount rents.

Landlords additionally must draw up leases, keep track of income and expenditures for tax purposes, obtain adequate insurance coverage, and make repairs as necessary. They would be wise to assemble a network of professionals who can help—such as attorneys, accountants, plumbers, and locksmiths.

A property manager is a must for those who do not live near their investment real estate. Finally, they should consider purchasing Quicken's Rental Property Manager program to facilitate record-keeping tasks.
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Real estate gems abound during late-peak sales season

Low rates, new loan products foster favorable environment
By: Robert J. Bruss: Inman News
You probably have been reading and hearing about the record home sales volumes and prices in most communities. Although it's summer when home sales volume usually slows after the peak sales season of April, May and June, it's not too late to sell your home if you are motivated. If you are a home buyer, bargains appear as the peak sales season cools and buyer competition becomes less intense.

Home mortgage interest rates remain near record lows. Procrastinating buyers are still in the market, hoping to find their dream homes.

Mortgage lenders are advertising terms too good to be true. A few days ago I heard a radio ad for no down payment home loans even for buyers with FICO scores as low as 600.

The major trend in home mortgages is interest-only loans. Some lenders call them "option" mortgages. The result is home buyers can pay rock-bottom fully tax-deductible all-interest monthly payments, or they can select partial or fully amortizing payments.

If you are the home seller, you don't care how the buyer finances the sale as long as the cash is green. Just be sure, when accepting a purchase offer, the buyer has a pre-approval letter or certificate for the necessary mortgage.

TODAY IS STILL AN EXCELLENT TIME TO SELL YOUR HOME. If you are motivated to sell your home, and are not just "testing" to see if you can get your outrageous grossly inflated dream price, this is a great time to sell. In most markets, there is a balanced inventory of homes listed for sale to meet buyer demand. Few markets have a glut of homes for sale without qualified buyers.

But before putting your home on market for sale, and interviewing prospective listing agents, it pays to get it ready to earn a top-dollar sales price. A fresh coat of exterior and interior paint, new light fixtures, fresh landscaping, new wall-to-wall carpets or hardwood floor refinishing, and a general cleaning are inexpensive ways to add thousands of value dollars and special appeal to home buyers.

Purely by accident, a few weeks ago I discovered another inexpensive value adder. It's called a "power washer." I was having my deck power washed to clean off the grime. Then the handyman asked if I would like my house power washed. How much? About $200 he said. I figured that was far cheaper than repainting so I gave the go-ahead.

After the job was finished and I realized my house didn't need repainting, my neighbor asked if I was getting ready to sell. I took that as a compliment although I have no plans to sell. That $200 house power wash saved me several thousand dollars, which I was planning on spending to repaint the exterior.

INTERVIEW THREE SUCCESSFUL REALTY AGENTS TO GET TOP DOLLAR. If you are serious about selling your home during this late peak sales season, after your home is fixed up in its best ready-to-sell condition, it's time to interview successful local realty agents about listing it for sale.

Even if you are thinking of selling alone without a professional agent, it pays to interview three successful agents to learn what is involved in the sales process.

The primary reason it pays to interview at least three realty agents is then you won't be misled by one who estimates a sales price too high or too low. Each agent interviewed should give you their written comparative market analysis (CMA).

This CMA form shows recent sales prices of comparable nearby homes, asking prices of neighborhood homes listed for sale (your competition), and asking prices of recently expired competitive listings (probably overpriced). In other words, the CMA is a mini-appraisal of your home's market value and probable sales price.

While you are separately interviewing the three or more agents, be sure to ask each agent what documentation is involved in your home sale.

In addition to the buyer's purchase offer, there will probably be a seller's defect disclosure form, lead-based paint disclosure and booklet for the buyer, professional inspection report, termite or pest control inspection report, and other forms such as radon inspection, building code compliance, energy efficiency, and possibly more depending on local ordinances and customs.

BE CAREFUL ABOUT SIGNING A LISTING AGREEMENT. Even if you think you can sell your home alone without a professional agent (known as a "for sale by owner" or FSBO), ask each agent you interview about his/her listing terms. Some might demand a long six-month exclusive right to sell listing. But others will recommend a 60-day or 90-day listing.

For most home sellers, the 90-day listing gives the listing agent plenty of time to market the home, but without tying up the seller for an unreasonable time just in case the buyer chose the wrong agent.

Even if you decide to try selling your home as a FSBO, the agents you interviewed won't mind. The reason is they know most FSBO sellers are unsuccessful and wind up listing their homes with one of the agents interviewed in 30 to 60 days.

When I visited Las Vegas a few weeks ago, in the newspaper real estate section I saw an ad by a local Realtor that said: "Selling your home FSBO? Call me and I'll help you." When I phoned him and identified myself as a real estate writer, he said that ad works so well to get listings from unsuccessful FSBOs he only runs it when he is short of listings.

SUMMARY: Most communities are still enjoying a peak sales season for homes, fueled by abnormally low mortgage interest rates and innovative mortgages from lenders eager to help home buyers.

To earn top dollar, after getting their homes into tip-top condition, motivated home sellers should interview at least three successful agents who sell nearby homes. Only by consulting at least three agents, and obtaining their CMAs, can home sellers be sure their asking price is correctly based on recent comparable sales prices.
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Fixer Upper To One Is Cosmetic To Another

Everyone wants the quick fixer upper resulting in the quick buck. In some communities, that's very doable, while others are just unaffordable even when the house is about to fall in.
By: M. Anthony Carr: RealtyTimes
I receive emails regularly from people wanting to find the diamond in the rough so they can walk away with tens of thousands of dollars in one transaction like all the people on the infomercials.

Everyone wants the quick fixer upper resulting in the quick buck. In some communities, that's very doable, while others are just unaffordable even when the house is about to fall in. Even I would take such a treasure. I toured one such property recently with a fellow investor and the house truly needed a lot of fixing up.

It had been a rental for several years by the sight of it. The carpet was in a mess with bare spots throughout. It was simply filthy -- there's just no other way to describe it. It wasn't even "broom clean" which is what most contracts require when a renter or former owner moves out.

The walls had needed painting several years ago and the flooring in the kitchen had cuts and gouges all over. On the back deck, we had to be careful not to step too firmly as to not fall through and the back yard (it was a townhouse) was overgrown and unkempt. The fencing was fraught with rot and mold.

The bathrooms were also filthy with rust in the sink and tub, and the faucets needed replacing. The owner had turned off the water, so we couldn't test if it was working or not. There were only a few light bulbs throughout the house so that we could get a good look at the crevices of the dwelling.

In the basement, the ceiling was drooping from previous water damage from above, the carpet needed replacement. There was also a smell of mildew throughout.

We were drawn to the property because the listing remarks said: "Priced below other comps. Needs cosmetic fixes."

Well -- what I was seeing was more than cosmetic. In addition, when you see that the interior is in such disrepair, you have to wonder about all the stuff you can't see in a casual visit -- the attic, roofing, rot around the base of the house, termites, etc.

The investor-owner used the house truly as a commodity and did not take care of the product. However, in our escalated market, the asking price was $359,000. So is this the type of fixer-upper you're looking for? A comparative market analysis of that area today -- 60 days later -- shows properties of that type selling for upwards to $410,000. In a market such as the Washington, D.C. area, such a gamble may be worth it.

The problem with this target property is that the owner was not offering the property up as a fixer upper, but the market showed it could be moving up to that level. The property needed at least $25,000 in repairs and then the marketing costs would be about another $20,000 to $25,000 -- so there goes the equity and your quick-turn profit.

If you're in a more normal market, you need a lot more equity to walk into before being willing to start polishing that diamond. There should be a projected profit margin of at least double your expenses -- thus after fixing up a property and selling it, all those expenses should equal your profit.

Example: You purchase a fixer upper for $150,000, put in $25,000 to fix it up, and sell it for $225,000. Your gross profit would come in at $50,000, subtract commission and closing costs of 7 percent and you're down to $34,250. To be sure that you're going to get the amount of money here that you want, you MUST insist on a thorough home inspection by a qualified (preferably, certified) home inspector. This person will be key in finding out how much money you're about to put out in return for your investment. In addition, you want a Realtor involved who can give you comps of the area so you know what your target price will be.

When it comes time to your first fixer upper investment the key point here is patience and don't let dollar signs in your eyes blind you to the reality of the return on your investment.

Mr. Carr has covered real estate since 1989. He is the author of "Real Estate Investing Made Simple." Got a personal real estate issue? Questions can be posted at Anthony's blog.
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The Weekend Guide! July 28- July 31, 2005

The Weekend Guide for July 28 - July 31, 2005.
Full Article:
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Make Moves Less Traumatic for Children

By: Patricia Long Allbee: REALTOR® Magazine Online
More than 10 million children in the United States move prior to the start of the new school year, and there are several measures that can make the transition less stressful.

Youngsters might want to consider keeping a journal, detailing their worries or aspects about the move that are exciting. They also should surf the Web to familiarize themselves with their new neighborhood, as the local Chamber of Commerce site generally features information about activities, schools, restaurants, and other amenities.

Children can take a greater role in the move by planning the design of their new bedroom; while putting together a scrapbook with pictures of their old residence, neighborhood, and friends can help them say goodbye.

Other suggestions include contacting a church or other local organization to find a pen pal in their new school and throwing a going-away party with a "White Elephant" gift exchange or yard sale to rid themselves of belongings that would otherwise be thrown away.
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Condos Fuel Rise In Existing-Home Sales

In June, condominium purchases boosted home sales to a record annual rate.
By: KEMBA J. DUNHAM: The Wall Street Journal Online
Home sales rocketed to new highs last month, led by America's insatiable appetite for condominiums.

The National Association of Realtors said sales of existing, or previously owned, homes rose 2.7% in June from a month earlier to a seasonally adjusted annual rate of 7.33 million units, the fastest pace on record. The previous record was 7.18 million, set in April.

Sales rose for all types of homes in all regions of the U.S., but the star performers were condos and cooperatives, where the sales pace has been running twice as fast as for single-family homes. The trade group's report said sales of condos rose 4.5% in June to a seasonally adjusted annual rate of 960,000 units, the fourth consecutive month that sales of condos hit a record.

Sales of single-family homes rose 2.4% to a seasonally adjusted annual rate of 6.37 million, also a record.

During the second quarter, condo sales were up about 37% on an annualized basis, compared with 22% for single-family homes.

Prices for condos also are higher than and are rising faster than prices for single-family homes. Last year, the nationwide median price of a condo was $193,600, up 17% from the previous year, according to the group. The median price of a single-family home was $184,100, up 8.3% from the previous year.

In June, the national median existing-home price for all housing types was $219,000, up 14.7% from a year earlier. The June rise was the strongest increase since November 1980, when year-over-year price appreciation was 15.6%. The median price of a condo was $223,500 last month, up 14.8% from a year earlier. Median means that half of the homes sold for more and half sold for less.David Lereah, the Realtors association's chief economist, attributed the strength in condo sales to empty nesters who are downsizing from larger single-family homes and young professionals who might have rented in previous years but now are tending to buy instead of rent. The jump in condo sales and prices also reflects investor purchases, he said, as well as interest-only loans being used to finance many condos. "That worries me, because I'm not that comfortable with the stability of interest-only loans," he added.

Condo sales are strong nationwide and have reached frenzied levels in Miami, Las Vegas and San Diego. There is some concern that these markets could peak soon, just as developers are adding lots of new supply to the market. In Chicago, for instance, some condo developers have reported slower-than-expected sales in recent months because buyers have so many choices.

As inventories rise, economists expect home-price appreciation to begin to slow. Total housing inventory levels rose 3.8% at the end of June to 2.65 million existing homes, which represents a 4.3-month supply at the current sales pace. The supply of homes on the market has been inching up since January's record low of 3.8 months, but is still relatively low.

"We don't want to see this measure going up too much, but I would be more concerned if we start to see the month supply of new homes going up as opposed to existing homes," said J.P. Morgan Chase economist Haseeb Ahmed. "You can't just take new homes off the market."

Mr. Lereah of the Realtors group said he expects home sales to remain robust in the second half. "There's a lot of momentum right now, with all the major housing measures going strong," he said. "There will be signs of a slowdown only if mortgage rates go up."


Email your comments to rjeditor@dowjones.com.
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Reverse Exchanges: A twist on 1031 exchanges helps make this tax-deferring investment strategy more viable

An alternate route
By: ROCHELLE STONE, JOHN MANGHAM: REALTOR® Magazine Online
Betty vacations at the beach each year. This year she decides to buy an investment property there. With the help of a real estate salesperson, she finds the perfect condo unit—at a below-market price of $400,000. Betty wants to use the proceeds from the sale of her rental house, another investment property, to buy the condo. To defer taxes on the capital gain, she plans to use a 1031 tax-deferred exchange. However, because of the hot beachfront market, Betty is afraid to wait to make an offer on the condo until she’s found a buyer for her property. To solve the timing problem without losing the deal, the salesperson suggests a reverse exchange.

A reverse exchange shares similar requirements with the more common deferred exchange. In a delayed exchange, once an exchanger has sold the property to be relinquished, the person must use a qualified third party (an intermediary) to receive the sales proceeds at closing and then use the money to acquire title to the replacement property.

However, in a reverse exchange, a second intermediary, called an accommodation titleholder, takes title to either the relinquished or the replacement property since the exchanger can’t hold title to both properties at once. The AT may remain as the owner for 180 days, allowing the exchanger time to locate a buyer for the property to be relinquished. Note: The two intermediaries in a reverse exchange can be the same person.

Like the more common delayed exchange, in which the property the exchanger owns is sold first, a reverse exchange allows exchangers to defer taxes completely if they use all net proceeds from the sale of a property to purchase a replacement property of equal or greater value.

There has been a significant increase in reverse exchanges since 2000, when the Internal Revenue Service issued Revenue Procedure 2000-37, which set guidelines for those transactions. In fact, some investors look for replacement properties before marketing property they intend to relinquish.

Reverse basics

Under IRS rules for reverse exchanges,

∙ Investors must use an AT to purchase and warehouse either the relinquished or the replacement property for up to 180 days.

∙ The AT can’t be the exchanger undertaking the exchange or a disqualified person, as defined by the Omnibus Budget Reconciliation Act of 1989. A disqualified person is anyone who has acted as the exchanger’s agent within the preceding two-year period, including an attorney, an accountant, an investment banker, or a real estate broker.

∙ The AT must be named on the title of either the replacement or the relinquished property.

∙ There must be a written qualification exchange accommodation agreement between the exchanger and the AT defining the intent and obligations of the parties and the restrictions on the proceeds by the exchanger.

∙ The exchange agreement must state that the AT will be treated as the beneficial owner of the warehoused property for federal tax purposes, including reporting interest and depreciation.

∙ The property to be exchanged must be identified in 45 days, and the transaction completed in 180 days, just as required for a delayed exchange.

∙ The exchanger may make and guarantee loans with the warehoused property as collateral, lease or manage the property being warehoused, or supervise construction or act as the contractor for improvements on the warehoused property before the exchange is final.

Structuring reverse exchanges

A reverse exchanger must have liquid financial resources to make the exchange viable. Reverse exchanges can be structured in two ways, depending on the exchanger’s resources and the financing available.

Option 1. The exchanger has sufficient funds to purchase the replacement property for cash, or the seller of the replacement property will take back financing. Under this option, the exchanger “lends” the AT the money to buy the replacement property. Once a buyer purchases the relinquished property, the intermediary uses the proceeds from the sale to acquire the replacement property from the AT and deed it back to the exchanger.

Option 2. When the exchanger doesn’t have the funds to purchase the new property for cash, the transaction must be structured differently. In this case, the exchanger must obtain cash from a line of credit or other source and then “lend” those funds to the AT so that the AT can purchase the relinquished property. The sale to the AT means there are proceeds the intermediary can use to purchase the replacement property.

The intermediary then deeds the replacement property to the exchanger, who can now use the property as collateral for the new mortgage loan. The subsequent sale of the relinquished property by the AT provides the funds to pay back the exchanger’s loan to the AT.

Although reverse exchanges are complicated and require financial strength, real estate practitioners and their investor clients would be well served to add this powerful financial tool to their portfolio.

Stone is the president and founder, and Mangham, CPA, is the southwest regional manager of Starker Services Inc., a national company that performs all types of 1031 tax-deferred exchanges. You can reach the authors at rstone@starker.com or 800/332-1031.
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NAR: Existing-Home Sales Smash Record Again

By: NAR: REALTOR® Magazine Online
Existing-home sales surpassed market expectations and reached another record in June as low mortgage interest rates and favorable market conditions continued to attract buyers, according to the NATIONAL ASSOCIATION OF REALTORS®.

Total existing-home sales – including single-family, townhomes, condominiums and co-ops – rose 2.7 percent in June to a seasonally adjusted annual rate* of 7.33 million from an upwardly revised pace of 7.14 million in May. Sales were 4.4 percent above the 7.02 million-unit level in June 2004; the previous record was 7.18 million in April of this year.

David Lereah, NAR’s chief economist, said home sales were expected to ease slightly from peaks reached over the last couple of months. “Just when you think sales activity is ready to settle into a more sustainable pace, the housing market continues to surprise,” he said. “We’ve been expecting sales to remain at historically high levels, but this performance underscores the value of housing as an investment and the importance of homeownership in fulfilling the American dream.”

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 5.58 percent in June, down from 5.72 percent in May; the rate was 6.29 percent in June 2004. “Job growth and economic improvement also are boosting home sales,” Lereah said.

The national median existing-home price for all housing types was $219,000 in June, up 14.7 percent from June 2004 when the median price was $191,000; this is the strongest increase since November 1980 when annual appreciation was 15.6 percent. The median is a typical market price where half of the homes sold for more and half sold for less.

NAR President Al Mansell, of Salt Lake City, said home sales are expected to ease as the year progresses. “When the housing market eventually slows from red-hot levels, we should see some cooling in price gains,” he said. “Home prices continue to be bid-up in tight markets across the country. Eventually, appreciation rates will slow and come down to normal levels when the shortage of homes on the market improves and comes closer into balance, hopefully, by the second half of next year.”
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Stone is a Growing Trend for Home Décor

It's as old as time, but as popular as ever.
By: Phoebe Chongchua: RealtyTimes
Stone is rapidly making its way into homes as perhaps one of the fastest growing decorating trends. The European Old World look brings with it not only a luxurious style but also an ease and comfort that gives a home personality.

Homeowners are leaving behind the once-preferred 70's looks of wall-to-wall carpeting throughout the house, linoleum kitchen floors and vinyl tiles in the bathroom, and instead choosing natural stone, Versailles patterns, travertine, and limestone, with honed-matte finished surfaces. For countertops, homeowners are using two tones, finishing their kitchen island in maybe limestone and the surrounding kitchen countertops in granite materials for a unique style.

At one time granite and marble were only seen in office buildings, while rustic style stone only was used in vacation homes.

"People are trying to personalize their homes more than they did before. Before you used to go through the house and you'd do everything pretty much the same overall. Now people are bringing in different types of materials like glass tile, mosaics, different designs, different sizes, textures, into the same room. They tend to want to give each room more personality by adding different types of products," said Giovanna Gomes, President of Stones Unlimited on Miramar Road.

What is completely losing a place in homes is the white tile countertops that was the staple in every home for decades. "White tile used to be typical when building or remodeling a house. Now we're seeing all white ceramic tile is being replaced with solid surface countertops such as granite which has no grout lines and is easier to care for," said Lilliana Bosforo, Director of Fabrication for Stones Unlimited.

There are many different choices, sizes, textures and styles of stone. Pricing varies depending on the type selected. Some very expensive flooring is even brought back from old chateaus and farmhouses in Europe that are scheduled for demolition. The 100 to 200-year-old stone material is brought to the US for cleaning, sanitizing, sizing and cataloging.

The chic look and durability of stone makes it appealing to homeowners. But experts caution that before it's put in homeowners should understand the maintenance required and the issues that may come up. One of the most common problems is stains. Because stone is very porous, if you spill things on it, the stone can easily absorb the liquid. However, proper care such as sealing the stone can alleviate this problem.

Gomes also said that you should consider how much foot traffic you have in various areas of your home before putting in stone floors. "Honed surfaces are usually the best because they're matte finishes so they don't wear like a polished material would. A polished marble will scratch and if you drop something acidic it'll etch which means the polish will be removed in that particular area. So there are more maintenance issues with polished surfaces," said Gomes.

However, honed surfaces show less wear pattern. Gomes said you can also be more aggressive with your cleaning, "It'll always look beautiful."

For countertops Bosforo recommends granite because it is dense and easy to maintain. "You're going to have your least amount of problems with a granite over marbles or limestone which some people do put those in their kitchens, but we let them know that there will be more maintenance with a marble or a limestone and, of course, you'd want to do it honed," Bosforo said.

Another reason granite is recommended over marble or limestone is because acids in some foods can etch the stone and cause it to leave marks or rings on the materials.

When deciding which stone to choose, keep in mind these handy tips from Stones Unlimited:

    1. Granite is most suitable for kitchens and bar counters because it is the most
       dense. It also resists hot and cold. Acidic foods will not etch the polish.

    2. Marble is not as dense as granite but is more so than travertine. Marble
       works well for bathroom flooring, on back splashes and fireplaces.

    3. Travertine is not as dense as marble but is more so than limestone.

    4. Limestone is the softest and most porous of the stones. It requires more
       frequent sealing.

    5. Slate is an excellent choice for outdoors or indoors.

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Overnight real estate rates march higher

30-year fixed rate up at 5.31%; 10-year Treasury down at 4.22%
By: Inman News
Long-term mortgage interest rates continued rising Friday, and the benchmark 10-year Treasury bond yield fell to 4.22 percent.

The 30-year fixed-rate average rose to 5.31 percent, and the 15-year fixed-rate gained to 4.91 percent. The 1-year adjustable was up at 3.74 percent.

The 30-year Treasury bond yield sank to 4.44 percent.

Rates are current as of 7:15 p.m. Eastern Standard Time.

Mortgage rate figures are according to Bankrate.com, which publishes nightly averages based on its survey of 4,000 banks in 50 states. Points on these mortgages range from zero to 3.5.

In other economic news, the Dow Jones Industrial Average gained 23.41 points, or 0.22 percent, finishing at 10,651.18. The Nasdaq rose 1.14 points, or 0.05 percent, closing at 2,179.74.

Stock and bond figures are current as of 7:30 p.m. Eastern Standard Time.
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New tax law affects rental real estate

Tax-deferred exchange rule applies to home sales after Oct. 22, 2004
By: Robert J. Bruss: Inman News
DEAR BOB: In a recent response to a reader, you said Congress enacted legislation effective Oct. 22, 2004, affecting rental property acquired in an Internal Revenue Code 1031 tax-deferred exchange. Does this apply to all such property, or just to rental property acquired after that date? – Harry S.

DEAR HARRY: The amendment to Internal Revenue Code 121 affects a rental property, later converted into a principal residence, and sold after Oct. 22, 2004. The date of property acquisition in a tax-deferred exchange doesn't matter.

Thousands of savvy realty investors have sold their rental properties, such as apartments, commercial property, or a business property, and made IRC 1031 tax-deferred exchanges for single-family residences of equal or greater cost and equity.

To qualify for the IRC 1031 exchange, the acquired property must be held for investment or business purchases. After renting the house for a reasonable time, perhaps six to 12 months, the investors often move in to convert it to their principal residences.

Then, after owning and occupying the principal residence at least 24 of the 60 months before its sale, it can qualify for the IRC 121 principal residence sale tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing jointly).

However, the Oct. 22, 2004 tax law change now requires the acquired property be owned at least five years before the principal residence can qualify for the IRC 121 $250,000 or $500,000 sales exemption. The sales date is what matters; the date of acquisition is irrelevant. For full details, please consult your tax adviser.

UNLESS YOU CAN FIND THE OWNER, YOU CAN'T ACQUIRE TITLE

DEAR BOB: There is a vacant lot next to our house we want to buy. Our purpose is to build a modest house for my wife's mother so she will live nearby but not in our house where we don't have extra room. But we can't find the owner of the vacant lot. Title is held in a trust which is apparently managed by an out-of-town bank. My letters and phone calls produce no results. The property taxes haven't been paid for 16 months. How can we locate the lot owner so we can negotiate a purchase? – Neil W.

DEAR NEIL: Until you find the owner, there's nobody to convey title to you because the bank trustee can't act without the approval of the trust beneficiary.

One approach I used years ago to get the attention of a bank trust department was to deliver a client's purchase offer on an apartment building with a $10,000 deposit check to the bank trustee. As a fiduciary, the bank had a legal duty to deliver my client's purchase offer to the property's owner.

Eventually, after about six months my client bought the property held in the trust. But until that purchase offer was made, bank trust department wouldn't even disclose the name of the trust beneficiary. The same technique might work for you.

UP TO $500,000 EXEMPTION FOR HOME SALE IN YEAR OF SPOUSE'S DEATH

DEAR BOB: My wife died in April 2005. If I decide to sell the house where we lived together almost 50 years, can I qualify for a $250,000 or $500,000 tax exemption? I am receiving conflicting answers – Fred W.

DEAR FRED: If the house was the principal residence for both you and your late wife, if at least one of you held title, and if both spouses occupied it at least 24 of the 60 months before its sale, then you can qualify for up to $500,000 tax-free capital gains if the sale closes by Dec. 31, 2005.
The reason is 2005 is the last year you and your late wife can file a joint income tax return.

However, don't rush to sell by the end of 2005 if you don't want to do so. If your wife's name was on the title, and if you inherited her half of the house, then you receive a new stepped-up basis to market value on the date of her death for that half. If the house was community property, then as surviving spouse inheriting her share you get a 100 percent stepped-up basis. For full details, please consult your tax adviser.

The new Robert Bruss special report, "The Whole Truth About Senior Citizen Homeowner Reverse Mortgages," 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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Turning Real Men Into Appliance Shoppers

Manufacturers are giving a shot of testosterone to fridges and televisions.
By: CHERYL LU-LIEN TAN: The Wall Street Journal Online
Retired pro-football player Jerry Ostroski recently splurged on a hulking piece of steel equipment that he's been showing to his buddies on weekends.

A new workout machine? The latest All-Terrain Vehicle? Actually, a giant freezer/refrigerator. Whirlpool Corp.'s "Freezerator," at $1,099, comes with rugged tread-like pattern on the steel.

Gladiator GarageWorks Freezerator Price: $1,099 Comment: Appliance where the freezer is the larger compartment on the bottom; designed for the garage, with a silver tread-plate finish.

Appliance makers have long targeted men with gear like fire pits and recliner chairs. But now they're giving a hefty shot of testosterone to a broader array of appliances, from fridges to TVs.

The Taiwanese company Hannspree California Inc. has a new line of 10- to 23-inch televisions ($499 to $1,399) that look like baseballs, basketballs and golf balls. The baseball one comes wrapped in Major League-quality horsehide.

Refrigerators don't tend to get men's pulses racing, but appliance manufacturers and retailers are trying to change that. Heartland Appliances Inc. recently introduced a line of fridges for motorcycle enthusiasts that the company's pitch promises will "bring the thrill of the open road into their homes."

The $5,800 to $6,500 Ten50 refrigerators come with black doors that feature huge, Harley-Davidson-style flames. Some have handles that look like motorcycle handlebars and chrome frames that resemble car grilles. (The company is also developing fridges for fishing fans that have doors plastered with the image of a jumping walleyed pike.)

Heartland Appliances Ten50 refrigerator Price: $5,800 to $6,500 Comment: Bikerthemed refrigerators with Harley Davidson-style flames and chrome detailing.

Electrolux AB's Frigidaire brand is selling the "Beverage Center," an $899 stainless-steel fridge that has a spigot on the front and can hold and dispense a 16-gallon keg of beer.

This effort to get men to think beyond grills and pool tables comes as sales of some appliances are leveling off. Unit shipments of combo refrigerator/freezers are expected to increase less than 1% this year after growth rates of 2.8% to 5.8% in each of the past three years, according to the Association of Home Appliance Manufacturers. And unit shipments of freezers have been fairly flat, hovering at about 2.5 million since 2002.

The good news for manufacturers and retailers is that men are increasingly trying to carve out their own hang-out areas in garages, entertainment rooms and outdoor kitchens. More than a third of new homes being built now have recreation or media rooms, up from less than 10% a decade ago, according to the National Association of Home Builders. At the same time, garages are getting bigger: They're expected to be an average of 22 feet by 22 feet this year, compared with the usual 20-by-20, says Gopal Ahluwalia, the association's director of research.

Marvel Industries Humidrawer Price: $599 Comment: Airtight drawer designed to store cigars; made for installation in Marvel wine refrigerators

Because women are often still the driving forces in most of these purchase decisions, the manly pieces can sometimes be a hard sell. In January, Sears Holding Corp. stopped carrying Maytag's Skybox vending machine-style beverage dispenser for the home. The $499 appliance, which was introduced in August, dispenses cans or bottles of soda and comes with panels that can be customized to display the logo of your favorite sporting team. Sears said it ultimately concluded that the fridge was too much of a niche product after selling fewer than it expected.

But that's not stopping appliance companies from using sports tie-ins to get the attention of the male gender. This fall, Avanti Products, which sells low-price refrigerators and wine cellars, plans to start displaying its refrigerators with huge magnetic or acrylic panels festooned with the logos of Nascar stars or college teams.

Hannspree California baseball TV Price: $539 Comment: TV with 10-inch screen and leather frame with baseball-style stitching

The refrigerators, which are sold at retailers such as Kmart, will come with order forms that homeowners can use to buy the $19.99 to $399 panels. "It'll help make the sale," says Mike Flynn, Avanti's vice president for sales. "And for women, if you don't want the decal, you don't have to order it."

Mr. Ostroski, who played for the Buffalo Bills and now lives in Tulsa, Okla., says he'd never thought much about refrigerators until he saw the "Freezerator," which is part of Whirlpool's Gladiator GarageWorks line, on a TV segment about two months ago. "I thought it was awesome -- there's nothing feminine about it," says Mr. Ostroski, who adds that he had always let his wife pick their appliances. He installed the Freezerator in a part of his garage where he hangs out with his friends to watch TV, drink beer and play videogames.

To reach men like Mr. Ostroski, manufacturers have started tweaking their marketing tactics for these appliances. At the Las Vegas kitchen industry show in May, Electrolux turned a section of its booth into a "men's lounge" complete with a plump leather chair and sports pennants -- a setting designed to show off its Frigidaire keg fridge. And Heartland has been trucking its Harley-Davidson-style refrigerators to bike rallies. "The response from the males is that they want one," says Brad Michael, Heartland's president and CEO. "But the females say, 'you've spent enough money on your bike already.' "
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Can woman in assisted-living center claim home-sale tax break?

Son gives wrong advice about residency requirement
By: Robert J. Bruss: Inman News
DEAR BOB: I am 84 and in excellent mental health. Everyone says I'm "sharp as a tack." But my body is declining. For the last two and a half years I have lived in a beautiful assisted-living center. Thankfully, my son insisted I move here (practically dragging me) and I am very happy with the superb care I receive. The only problem is my house. When I moved out, my son rented it to a lovely young couple. Their rent pays most of my bills. They visit me every month or so to beg to be allowed to buy my house. Last month, they brought their brand-new baby girl to visit, too. But my son says if I sell my house to them, I will have a huge capital gain tax to pay. He says because I no longer live in the house, I cannot qualify for that $250,000 home-sale tax exemption you often discuss. Is that true? – Naomi R.

DEAR NAOMI: No. Your son sounds like a wonderful person. But he is mistaken about Internal Revenue Code 121, which entitles you to a principal-residence-sale tax exemption up to $250,000 (up to $500,000 for a married couple filing jointly).

To qualify, you must have owned and occupied your principal residence any 24 of the 60 months before its sale. You appear to qualify.

The property need not be your principal residence at the time of its sale. You can rent it to tenants for up to three years after moving out and still qualify, as explained above.

But you better get busy to complete the home sale while you still qualify for the $250,000 tax exemption. For details, please consult your tax adviser.

RECOMMENDED BOOKS FOR REAL ESTATE AGENTS

DEAR BOB: I will soon be leaving my current job to become a real estate agent. Some time ago, you highly recommended a book for new real estate salespersons. But I failed to write down the title. What book should I read? – Nicholas H.

DEAR NICHOLAS: There are several excellent books for real estate sales agents I reviewed within the last year.

They are "Double Your Income in Real Estate Sales, Third Edition" by Danielle Kennedy; "Success as a Real Estate Agent" by Marilyn Sullivan; "The Millionaire Real Estate Agent" by Gary Keller; and "Real Estate Agent's Field Guide" by Bridget McCrea. All are available in stock or by special order at local bookstores, public libraries, and www.amazon.com.

LIFE ESTATE IN A HOME ISN'T WORTH MUCH

DEAR BOB: My late husband left me a life estate in one of our two homes. My estate attorney seems unsure how a life estate should be valued. Any information will be appreciated – Elaine C.

DEAR ELAINE: I don't understand why you need to value your life estate in the home. Most life estates aren't worth very much. The reason is, when you die, your life estate terminates.

To be blunt, if you get hit by a truck while crossing the street, your life estate ends and becomes worthless.

If you want to sell your life estate, buyers are virtually nonexistent unless they can also buy the interest of the remainderman who receives full ownership of the house after you die.

Years ago, I received a letter from a Texas homeowner whose neighbor held a life estate. She offered to sell that life estate to the neighboring letter writer. I advised him not to pay very much and to take out a life insurance policy on the life estate tenant.

Life estates aren't worth very much, except to a life tenant like you who can enjoy the property as long as you want to live in it. For more details, please consult a local real estate attorney.

WHAT IF BUYER BULLDOZES PROPERTY BEFORE SALE CLOSES?

DEAR BOB: My father died five years ago, leaving 72 acres to his five daughters. For the past three years we have been working with a realty agent to sell the property. Last March we signed a sales contract for $190,000. The buyer discovered a thin strip running through the property belongs to the power company. Then we had to reduce the price by $7,500. Next, he wanted a $1,000 reduction for a defective septic system. But the buyer's wife is the real estate agent handling the sale and she let him start bulldozing the property. Our lawyer says no matter how outraged we are we shouldn't do anything to mess up the closing. We are five sisters without a lot of money. What should we do about the buyer occupying and bulldozing our property before the closing? – Pat M.

DEAR PAT: You have a smart lawyer. If you file a lawsuit against the buyer or the real estate agent for damages, it will be difficult to prove any loss. And you won't get rid of that property and receive your money.

I suggest you get the sale closed. After the closing and you have your money, you might want to file a complaint about that real estate agent with the state real estate commissioner for violation of her fiduciary duty to you.

CAN LANDLORD INVADE PROPERTY FOR LANDSCAPE WORK?

DEAR BOB: I rent a house in a quiet neighborhood. My landlord decided to replace some landscaping. She has been coming over, unannounced, by herself or with landscapers. My family uses the yard for kids to play. I am upset our privacy is being invaded for beautification we did not request. While we're paying rent for the house, doesn't our space include our yard? We're moving out in two months when our lease expires. Can we stop our landlord from further landscaping? – Zoenda McI.

DEAR ZOENDA: Yes. When you and the landlord signed the lease, as the tenant you became entitled to exclusive possession of the rented house and its yard. The landlord is entitled to inspect the property without advance notice only in the event of an emergency, such as a fire or a broken water pipe.

Otherwise, the landlord must give you at least 24-hour advance inspection notice. However, if the landlord's frequent inspections of the grounds are unreasonable, you do not have to consent.

When the landlord shows up unannounced, your appropriate remedy is to refuse admittance and phone the police to report a trespasser if the landlord enters your rented premises without permission since you don't want any landscaping work. For further details, please consult a local real estate attorney.

CAN LANDLORD FORCE TENANTS TO MOVE OUT EARLY?

DEAR BOB: We have tenants living in our house. Their lease ends on Oct. 1. But we are moving back to the area and would like to live in our home as of Aug. 1. Since it's my house, can I give my tenants notice to move out as of August 1? – Claudia S.

DEAR CLAUDIA: No. You must wait until the tenant's lease expires on Oct. 1. However, you could politely ask the tenants if they would like to move out early.

If that doesn't work, you can "encourage" them to move out early, perhaps by payment of $1,000 or $2,000 cash moving money.

WHAT RECOURSE IF NEIGHBOR CAUSES LATE-NIGHT NOISE?

DEAR BOB: When my husband and I bought the lot where we built our home, we asked the developer what was going to be built in back of our house. He said he didn't know. It turns out a Wal-Mart store was built adjacent to our home. We are living in a nightmare. All night long there are noisy trucks delivering to Wal-Mart. It is almost impossible to get a good night's sleep. I've talked to the city mayor, city attorney, planning manager, etc., but they refuse to help us. What can we do? – Darolyn B.

DEAR DAROLYN: The situation you describe is legally a private nuisance because it only affects you and perhaps a few neighbors.

If you can prove the loud late night noise would disturb normal persons, you may have a cause of action against Wal-Mart and the shopping center property owner for damages. Your situation is much like a neighbor's barking dog that howls all night, disturbing your sleep.

Fortunately, you have "deep pocket" defendants such as Wal-Mart and the shopping-center owner. Please consult a local real estate attorney for details about a private nuisance lawsuit.

The new Robert Bruss special report, "The Whole Truth About Senior Citizen Homeowner Reverse Mortgages," 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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What Renovations Are Worth Doing?

Pointers from "The Wall Street Journal Guide to the Business of Life" on real-estate basics.
By WALL STREET JOURNAL STAFF REPORTERS
A growing area of coverage for The Wall Street Journal is what we call the business of life. The intent is to report the latest news in a way that helps readers make sound decisions about their own lives. The new book, "The Wall Street Journal Guide to the Business of Life," edited by Journal editor Nancy Keates, offers strategies on everything from getting the best medical care to helping a child get into his or her top college.

Below is an excerpt about how consumers can choose their home renovations wisely to get the best return on resale.

* * *

What's Worth Doing?

It's long been known that when it comes to renovating your home, it isn't how much you spend -- it's how you spend it. Bathrooms and swimming pools have always added value, but some other home improvements are more susceptible to fading in and out of fashion.

A study sponsored by the National Association of Realtors analyzed the effect of various housing characteristics on residential property values these days, shedding light on what renovations have integral value and what kind of housing styles are gaining or losing popularity.

What homeowners are currently willing to pay more for:

· central air-conditioning and fireplaces
· eat-in kitchens
· utility rooms
· in-ground swimming pools

What they aren't:

· dining rooms
· dens or studies
· intercom systems
· kitchen pantries
· above-ground swimming pools
· home offices
· in-law suites

More Things Worth Doing

As reliable as the daffodils, each spring the housing industry encourages owners to renovate their homes to enhance resale value. Remodelers talk about investing in new bathtubs or windows, while real-estate agents tout the value of new carpeting and countertops. It makes sense, at least on the surface. But experts say that unless an upgrade is to correct something functionally obsolete -- say, to add a second bathroom in a four-bedroom house -- most remodeling projects return only a fraction of their cost. Studies by organizations ranging from consumer groups to trade magazines show that, on average, improvements made in the year before a home's sale return only about 70 or 80 cents on the dollar. There are exceptions, of course. Studies have shown that larger, upscale remodelings in hot housing markets like Washington, New York or San Francisco can even turn a profit for the homeowner. But whether your house is in a sizzling market or one that is stagnant, you have to be smart about the kind of improvements you undertake.

The trick is to bring your home up to neighborhood standards, but no higher. But how do you know the difference between an improvement that's excessive and one that will help sell your house -- and maybe pay for itself? The Wall Street Journal asked a number of experts which modest upgrades would bring the best returns in today's market, and which are a waste of money. Since remodeling for resale value is a dicey proposition, we limited our inquiry to projects or products that cost less than $10,000.

Worth Doing:

1. Granite countertops: Price: $3,600 for 90 square feet. At $40 a square foot or more installed, granite is about 40 times as expensive as plastic laminate. But upscale-home buyers have come to expect it. Although honed, light-colored granite is trendy, stick with polished black stone -- it's elegant-looking, and more durable.

2. Carpets: Price: $6,375 for 2,500 square feet with a 10-year wear warranty.

Yes, how boring, but next to a paint job, nothing makes a house look fresher. Though the Federal Housing Administration demands a minimum of 3⁄8-inch pad and 23-ounce density carpet, choose a half-inch pad and a 27-ounce density. And don't stray from earth tones.

3. Pull-out kitchen faucet: Price: $300 for a European-style chrome faucet. Faucets occupy center stage in a kitchen, so they attract buyers' attention. Trendy finishes like brass and nickel cycle in and out of style, so stick to standard polished chrome. Gooseneck styles high enough to put a pot under are currently popular, but pull-out styles with a hose are the most versatile. Forget redoing bathroom faucets, though. They're more a matter of personal taste, and a buyer may just junk yours.

4. Melamine closet systems: Price: $1,600 for a walk-in closet with three rods, six shelves and five drawers. Coated-wire systems are okay for mid-range homes, but upscale buyers shun them. On the other hand, furniture-finished wood is overkill if you're remodeling for resale. Spring for shelves made of melamine-surfaced particleboard or medium-density fiberboard. Melamine is a plastic laminate available in different finishes, but consider a wood-look finish.

5. Synthetic entry doors: Price: $1,730 for a fiberglass door with beveled glass inserts and two sidelights. Front doors are the first things a buyer sees up close, so they shouldn't look dumpy. Five years ago, most synthetics looked fake, but improved veneers and finishes have made fiberglass and steel doors resemble the real thing. And though fiberglass dents and steel rusts, both provide better security with less maintenance than solid wood, especially if the door faces the sun.

6. Laminate wood floors: Price: $1,630 for a 15-by-15-foot room. Made of either thin-wood veneers encased in plastic, or photographs of wood on a plastic base, laminates have also become more realistic looking in the past couple of years. Because you can wet-mop it, laminate has become more popular than real wood for areas subject to spills, like kitchens and basements. It can't be refinished three or four times like real wood can, but if you're moving soon, who cares?

7. Body-spray showerheads: Price: $2,383 for shower tower with two telescoping overhead sprays, four moveable body sprays and a handheld spray. Multiple-showerhead systems do everything from misting to massage. They're still rare enough to get a buyer's heart beating faster.

8. Garage storage systems: Price: $220 for hanging storage-wall starter kit with 11 hooks, a wire basket and a shelf. A recent survey by real-estate brokerage Century 21 found that the garage is the most important amenity to buyers, outranking a large kitchen, formal dining room or big backyard. And what they prize most about the garage is its storage capacity. But you don't need to add pricey cabinets, which can easily push the bill for a storage wall into the thousands. Just give buyers the idea of how they can personalize, while you get your hoes and rakes off the floor.

And...More Things To Skip

1. Wet bars: Save the $1,875 average price. Novel in the '80s, wet bars have become clichés. Unless you plan to turn a corner of your basement into a wine cellar, they're losers.

2. Concrete countertops. At around $9,000 for an average installation, they're hot and trendy -- but Realtors report far too many buyers hate them. Plus, they need resealing twice a year and are prone to cracking. Moreover, they tend to bring out the inner artist in homeowners -- we've seen owners incorporate everything from computer chips to toy plastic people into designs. Remember: Another person's art may be hard to live with.

3. Chandeliers. Save the $4,000 for the Italian crystal gold-leaf model. Like concrete countertops, they alienate too many buyers in a world in which chic recessed lighting is increasingly popular.

4. Structured wiring. It seemed a good idea five years ago to spend $5,000 to hardwire your home for broadband PC networks and stereo speakers. But wireless has come and changed all that.

5. Saunas. Spend the four grand if you like them, but like wet bars, they're yesterday's ideas.

6. Indoor swim spas. The $5,000 you spend on one of these 14-foot-long tanks that lets you swim against the current will attract a certain kind of fitness-inclined buyer, but too many others will worry about maintenance, leaks, humidity and mildew.

Some Basics To Remember

1. You're in for the long haul. The National Association of Home Builders says to count on a major home remodeling taking as much as twice as long as you'd planned.

2. Expect the unexpected. The National Association of the Remodeling Industry recommends setting aside as much as 20% of your budget for contingencies.

3. Relationships with contractors are everything. One common mistake -- many people don't complain at the beginning, then blow up at the end. Communicate all the way through.

4. Details, details. Count on as much as a fourth of your budget being taken up by finish-work, which includes everything from light switches to the kitchen sink.

5. Don't pay too quickly. If you do, you won't have leverage if something goes wrong. Experts recommend holding back 10% of fees.

-- Adapted from "The Wall Street Journal Guide to the Business of Life," edited by Nancy Keates (Crown Publishers/Wall Street Journal Books, 2005). For more information, please visit http://wsjbooks.com.
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Real estate booms not always followed by busts

Economists weigh in on debate
By: Tom Kelly: Inman News
WASHINGTON, D.C. – How do you define a housing boom? Does a bust always follow a boom? What's the difference between a significant slowdown and an absolute bust?

With real home-growth prices (appreciation minus inflation) rising to their highest levels since the data was first collected in 1977, the Federal Deposit Insurance Corp. has brought some definition to the amazing national housing picture, announcing that there were 55 boom metro markets at the end of 2004, up from 32 a year earlier.

Boom markets, where real price-growth increases at least 30 percent over three years, were heavily concentrated in California (21), the Northeast (18) and Florida (11). And, according to the FDIC, boom does not necessarily lead to bust – only 17 percent of all housing booms ended in busts. Most busts were preceded by a significant stress in local economies, such as loss of jobs. A bust is defined as a nominal drop of 15 percent over five years.

"One of the factors that is fueling this market is the number of investors who have no intention of ever occupying the home they are purchasing," said David F. Seiders, chief economist for the National Association of Home Builders. "In fact, some of them have no intention of even renting them out. But when you look at the risk involved, you begin to understand why they are investing in the housing market."

Seiders and other analysts say that the two other factors contributing to the run-up in sales and prices are the prevalence of "innovative" mortgage products and lower-than-expected interest rates. More European dollars, especially from France and The Netherlands, have also been dumped into United States Treasury securities, surprising bond traders and supporting lower long-term home mortgages rates.

"I think the bond market has totally misread the tea leaves," said Seiders, who, like most everyone, thought higher home-loan rates would have begun to reign in home-sale activity by now. "Long-term rates have continued to go down, yet I do think they will begin to move up toward the end of the year. I just don't know when they are going to behave as I have forecasted."

What caught the housing industry by surprise was the recent statement by Richard W. Fisher, president of the Federal Reserve Bank of Dallas, that the country was "in the eighth inning" of a monetary tightening process, sending long-term interest rates lower and the stock market higher.

David Lereah, chief economist for the National Association or Realtors, said that some of the financing tools offered by lenders to investors really amounted to renting because there was no positive stake in the property.

"If you take out an interest-only loan or a negative amortization loan, is it really owning?" Lereah asked. "It's more like renting. And, if you end up owing more than you originally borrowed, it's not going to help anybody involved."

The most worrisome aspect of the current housing market is the "hidden supply" of homes – those units swept up by investors that will be put back on the market after making a quick buck or at the first sign of a housing decline. Jack McCabe, managing partner of a Florida-based research firm, estimates 70 percent of some Florida condominium communities in the past few months will be back on the market within two years. John Cox, senior vice-president for Avalon Bay Communities, said the percentage was about 25 percent in the District of Columbia area.

"Some of these people see what has happened the past few years, think they are going to make $100,000 in a hurry and then put the place back on the market," McCabe said. "That's going to create downward pricing pressure. We will get to a point where people will not pay over-inflated prices."

Seiders said some builders were so concerned about "hidden market" homes that they were writing contracts that included a $50,000 penalty if the home were sold within 12 months of purchase. Or, the builder had the right to repurchase the home at the original sales price, plus a modest increase.

"Some builders were reporting that the $50,000 penalty was even going to stop them from selling within a year," Seiders said. "They anticipated their gain would be much greater."

Sounds like many folks are still betting on the boom.

Tom Kelly's new book "The New Reverse Mortgage Formula" (John Wiley & Sons) is now available in local bookstores and on Amazon.com. Tom can be reached at news@tomkelly.com.
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'Workout' to Prevent Home Foreclosures

Terri Cullen looks at how lenders and borrowers renegotiate mortgage terms to help people keep their homes.
By: TERRI CULLEN: The Wall Street Journal Online
While many potential home buyers are eager to revel at the real-estate party, some homeowners are sobering up the hard way.

Dorothy Monroe is one of many homeowners who took advantage the low interest-rate environment of the past few years to refinance her mortgage and borrow more cash against the equity she'd built in her home. The 60-year-old Wilmington, N.C., resident used her new mortgage to consolidate her debts. "I was making good money then and could easily afford the payments," she says. "But it turned out to be the biggest mistake I've ever made."

After being laid off from her job as a kitchen manager, she suffered a cash crunch that left her unable to make the payments on her mortgage. After three months of missing payments, the foreclosure notice arrived.

Many homeowners who end up in this position resign themselves to losing their homes, but Ms. Monroe managed to avert foreclosure by finding new employment and negotiating a new loan with her lender, known in the industry as a loan "workout."

Workouts can take the pressure off homeowners with bill-repayment or loan-restructuring plans that roll the missed payments into a new loan or allow the borrower to catch up on delinquencies by increasing the amount of a few future months' mortgage payments.

This week, I'll look at how workouts and other tactics can help some homeowners prevent foreclosure.

Understand the Risks

Typically, mortgage delinquencies and foreclosures result from an unexpected financial crisis - a job loss or medical illness that leaves homeowners unable to pay the bills. But now experts are warning that homeowners who - thanks to low rates - have taken on more debt than they should have, face a growing risk of mortgage delinquencies and foreclosures.

Indeed, the first signs of it are starting to emerge. The number of homeowners seeking loan workouts reached 89,741 in the first quarter of 2005, compared with 155,495 for all of 2004, according to the U.S. Department of Housing and Urban Development.

Last month, Standard & Poor's Ratings Services in New York said the risk of defaults is growing on certain adjustable-rate mortgages. These loans initially can lower monthly mortgage payments, allowing some buyers to purchase homes they otherwise couldn't afford. Some borrowers may face increases in their monthly payments of 50% to 90% when the low-rate period ends, S&P warned, and homeowners who haven't planned carefully, or whose income proves insufficient, may default.

"With some of the very unique and potentially risky loan products out there now, and the very high rate at which they're being used, it could turn into the full employment act for loan workout specialists," says Laurie Maggiano, deputy director of the office of single family asset management at HUD.

Evaluate Your Options

If your finances suddenly become tenuous, don't wait until you've missed a mortgage payment to attempt to fix the problem, those in the home-loan industry say.

"It's a very cold, hard world when it comes to debtor-creditor relationships and some lenders can be really tough once they know they have you over a barrel," says Ellery Plotkin an attorney with Cacace, Tusch & Santagata in Stamford, Conn., who represents homeowners facing foreclosure. "Make decisions now while you're still in control."

Get out of a bad situation. If you're a borrower with an ARM that is about to see a rate spike, and you're clearly going to be in over your head, it's time to make some hard decisions about your ability to remain in the home, says Ted Cornwell, editor of Mortgage Servicing News, a trade publication in New York.

Most often people in this situation choose to sell the home and downsize to a more affordable home, or rent, he says. But because mortgage rates have remained so low, he says, homeowners may be able to refinance now to a longer-term hybrid ARM, which combines a fluctuating rate mortgage with a fixed-rate introductory period, or a 40-year fixed rate mortgage.

Consider a "workout." When selling your way out of potential foreclosure isn't an option, it's time to bring in the lender. Ideally a homeowner should contact the lender as soon as it's clear a payment is going to be missed. The clock starts ticking on the foreclosure process after a payment has been delinquent 90 days. Experts say homeowners who reach out early are more likely to succeed in avoiding foreclosure.

Through their loss-mitigation department, lenders may allow homeowners to modify their existing mortgage terms through a workout, to avoid the expense of proceeding with a foreclosure. A foreclosure can cost lenders more than $50,000 in attorney fees and closing costs, according to Ronald Khan, a real-estate attorney in New York.

"Banks don't want to take ownership of homes, particularly in depressed markets where it may take months to sell," he says.

Workouts typically take the form of a bill-repayment or loan-modification plan.

In cases where borrowers have faced temporary financial hardships that they've now put behind them, lenders may allow a portion of the missed payments, say 1/2 or 1/4 of the monthly payment due, to be added to payments going forward, until all the missed payments have been made up. In cases of a current job loss or illness, a homeowner may be eligible for forbearance, where a lender will agree to suspend monthly payments for a period of time, say six to 12 months, until the homeowner can get back on his feet.

Loan-modification programs generally are granted when an individual's financial circumstances have changed for the worse, with no end in sight. They are essentially refinanced mortgages without any upfront costs. The lender may change the terms of the loan entirely, either by extending the loan term to make the monthly payment more affordable, or rolling the missed payments into the mortgage balance to bring the loan current.

Either way, with a repayment plan or loan modification, there generally aren't any direct fees, but the borrower can end up paying more in interest payments on the loan over the long haul. For example, a homeowner with a $250,000 mortgage on a 6% 30-year fixed mortgage who has missed three $1,500 payments could have the $4,500 tacked onto the loan, increasing it to $254,500. The bump would result in the homeowner's paying $5,213 in additional interest over the life of the loan.

It's up to the homeowner to explain what's wrong and work with the lender to come up with a solution. Take a hard look at your financial resources and your basic living expenses, then consider what kind of payments you could realistically make. You'll also need to present your lender with copies of your pay stubs, monthly bills, medical bills and financial accounts and tax records. If you've suffered an illness, a letter from your doctor explaining your condition can be helpful as well.

Above all, be truthful in what you can afford and be prepared to explain how you intend to come up with the money to cover the loan. For example, Ms. Monroe, the homeowner, was able to prove her determination to keep her home by taking on two part-time jobs to cover the one she lost, while she looks for a better-paying steady full-time job.

When a "workout" doesn't work out. If lenders aren't willing to negotiate a workout that you can agree upon, or if you feel uncomfortable approaching the process on your own, consider turning to a pro. Local organizations, such as the regional offices of the U.S. Department of Housing and Urban Development and the Association of Community Organizations for Reform Now may be able help homeowners negotiate workout packages with lenders for little or no cost, or direct them to legitimate, for-profit mediation services.

But beware "foreclosure rescue scams." No doubt by now you've seen the flyers: "We Buy Homes for Cash." The National Consumer Law Center last month released a report showing that scam foreclosure-mediation services are rampant. Read this report to learn more about what to look for, and what pitches to avoid before you start shopping for professional help with a foreclosure.

Finally, even if you're comfortably carrying your monthly nut, take nothing for granted. Create your own foreclosure-prevention plan by socking away at least three months' worth of living expenses to help you weather any short-term financial crisis.
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The Weekend Guide! July 21 - July 24, 2005

The Weekend Guide for July 21 - July 24, 2005.
Full Article:
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California: Downtown Renaissance in L.A.

By: Sara B. Miller: REALTOR® Magazine Online
Los Angeles has long lacked a traditional downtown area, but developers are converting empty buildings into upscale lofts and condominiums, transforming the city into what many are calling SoHo West.

"It's the real creation of a true downtown community," says Ken Bernstein of the Los Angeles Conservancy. The conservancy reports that 44 of the city's 50 convertible historic buildings have become residences or are works in progress.

Additionally, the Los Angeles Downtown Center Business Improvement District estimates that the number of downtown housing units has hit 16,000, up from 12,000 before 1999.

Among the projects in the works is a $1.8 billion development to include 2,000 residential units, a park, gourmet store, and entertainment facilities.

The downtown renaissance is putting luxury units just blocks from the area called home by hundreds of homeless people, but it is this reality that is luring some artists from the suburbs.
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Housing Prices Aren't Fed Target

Alan Greenspan says he rejects using monetary or regulatory policies to control a potential bubble.
By: GREG IP: The Wall Street Journal Online
Recent warnings by bank regulators on risky housing-related lending aren't meant to rein in a potential bubble, Federal Reserve Chairman Alan Greenspan said.

"The regulatory system is not designed to influence or control asset bubbles, but rather to ensure that bubbles, should they develop, do not lead to unsafe lending practices," Mr. Greenspan said in a letter to Rep. Jim Saxton (R., N.J.), chairman of the Joint Economic Committee of Congress.

The remarks, dated July 11 and released yesterday by Mr. Saxton's office, show the Fed has rejected using either of its major tools -- monetary or regulatory policy -- to rein in housing prices. Mr. Saxton had asked whether the Fed and other bank regulators that had recently issued guidance on risky home-equity loans, were using "regulatory suasion" instead of higher interest rates to rein in a housing-price bubble.

In his letter, Mr. Greenspan also said that the economy is "coping pretty well" with higher oil prices and that the shrinking gap between short-term and long-term interest rates isn't a worrisome sign for the economy. But Mr. Greenspan said his staff expects the rise of crude-oil prices to the range of $60 a barrel to reduce U.S. economic growth by about three quarters of a percentage point this year from what it otherwise would have been, a bigger effect than in 2004.

Mr. Greenspan has long rejected the use of interest rates to tame asset bubbles, such as the stock bubble of the 1990s. He has argued that bubbles are difficult to identify in advance and reining them in may require interest rates so high that they do more damage than a burst bubble. Still, some have speculated the Fed might use its regulatory sway over banks to tamp down the mortgage lending that is now fueling housing activity. In May, the Fed and other bank regulators warned lenders about interest-only home-equity loans, loans made with little or no documentation of the borrower's credit-worthiness, and higher loan-to-value and debt-to-income ratios. Similar guidance on mortgage loans is expected.

But Mr. Greenspan said the guidance isn't a form of bubble-pricking. "It was a response to indications that some banks were not appropriately managing risks in the home-equity area," he wrote. The factors cited by regulators in May "have not necessarily had a material effect on housing prices. The possibility that home prices may be unsustainably high does, however, contribute to the risks associated with such lending, since it may suggest that the value of some loans' collateral may be vulnerable to declines."

The shrinking gap between short-term interest rates and long-term bond yields isn't a "foolproof indicator of economic weakness," Mr. Greenspan wrote. Moreover, forecasting models based on that gap spell "continued moderate" growth "for the foreseeable future," he wrote.

-- Joseph Rebello contributed to this article.
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Real estate purchases inch up

Refinance loans increase in latest survey
By: Inman News
Overall mortgage applications inched up slightly last week, going up 1.2 percent on a seasonally adjusted basis from the week before, according to the Mortgage Bankers Association’s weekly survey.

The MBA seasonally adjusted purchase index went down by 0.1 percent to 488.7 from 489.0 the previous week. The seasonally adjusted refinance index increased 2.5 percent to 2618.2 from 2554.3 one week earlier.

The refinance share of mortgage activity increased to 45.7 percent of total applications, from 45.1 percent the previous week. The adjustable-rate mortgage share of activity increased to 28.5 percent of total applications, from 27.9 percent the previous week.

The average contract interest rate for 30-year fixed-rate mortgages increased to 5.72 percent from 5.62 percent one week earlier. Points including the origination fee decreased to 1.14 from 1.26 for 80 percent loan-to-value loans.

The average contract interest rate for 15-year fixed-rate mortgages increased to 5.28 percent from 5.21 percent one week earlier. Points including the origination fee decreased to 1.26 from 1.28 for 80 percent loan-to-value loans.

The average contract interest rate for one-year adjustable-rate mortgages increased to 4.63 percent from 4.56 percent the previous week. Points including the origination fee decreased to 0.99 from 1.01 for 80 percent loan-to-value loans.

Washington, D.C.-based Mortgage Bankers Association is a national association representing the real estate finance industry. The survey covers approximately 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts.
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SoCal real estate prices reach new heights

San Bernardino-area home values rise more than 30% annually
By: Inman News
Both sales counts and prices reached new highs in Southern California real estate markets last month, according to DataQuick Information Systems, a real estate information company.

While the appreciation rate continued to ease, a new price peak was reached in each of the Southland counties, the company reported. And led by a surge of buying activity in the Inland Empire, sales topped a monthly record set in 1988.

A total of 35,454 new and resale homes were sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in June. That was up 14.8 percent from 30,886 in May, and up 2.1 percent from 34,731 for June last year, according to DataQuick Information Systems.

June's sales count edged past the 35,339 reached in August 1988, which, until last month, had been the highest in DataQuick's statistics, which go back to 1988.

"Seventeen years ago, about one of six homes sold in Southern California was in the Inland Empire. Now it's about one in three. While the region is attracting buyers from coastal counties, it's also generating demand on its own this time around," said Marshall Prentice, DataQuick president.

The median price paid for a Southern California home was $465,000 last month, a new record. That was up 2 percent from $456,000 in May, and up 14.5 percent from $406,000 for June 2004. The year-over-year price increase was the lowest since March 2002 when the $257,000 median was up 12.7 percent. Year-over-year price changes peaked in May last year at 26.9 percent.

A wide variation in year-over-year price increases reflects how far along individual markets are in their local cycles, DataQuick reported San Diego County started seeing double-digit price increases in early 2000, and last month's annual increase was down to 6.3 percent. In San Bernardino County, double-digit increases started in mid-2002 and last month's median was up more than 30 percent.

The typical monthly mortgage payment that Southland buyers committed themselves to paying was $2,021 last month, down from $2,028 for the previous month, and up from $1,928 for June a year ago.

Adjusted for inflation, current payments are about 5 percent below their peak in the spring 1989.

Indicators of market distress are still largely absent.

Foreclosure activity has bottomed out, but is still low. Down payment sizes are stable, as are flipping rates and non-owner occupied buying activity, DataQuick reported.

Median prices were up 30.9 percent in San Bernardino County from May 2004 to May 2005, DataQuick reported. Prices were up 23.2 percent in Riverside County in that time, up 16.8 percent in Ventura County, and up 14.7 percent in Los Angeles County.

The lowest median-price increases were in San Diego County, at 6.3 percent; and Orange County, at 11.7 percent. The number of home sales in San Diego dropped 8.8 percent from May 2004 to May 2005, while increasing 16.4 percent in Ventura County and 9.5 percent in San Bernardino County.

DataQuick, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates, monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.
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Fed's action finally expected to hike long-term rates

Economic slowdown 'nowhere in sight'
By: Lou Barnes: Inman News
Upward pressure on interest rates continued to build last week, although 30-year mortgages held at 5.75 percent. The all-important 10-year T-note maintained a tenuous grip below 4.2 percent, but more good economic news – or the Fed – could cause an upward break at any moment.

The inflation reports were ideal: core producer prices fell .1 percent in June, and core CPI increased only .1 percent. June retail sales soared 1.7 percent, and excluding artificially boosted auto sales still had a strong .7 percent gain. Deals offered by Ford and GM have reached a new level of giveaway (all buyers get the employee discount) – anything to keep production lines going. There is no profit, but sales and production count in the real world, keeping suppliers in business and employees at work.

The gain in industrial production doubled expectations, up .9 percent (autos again, partly), and industrial capacity in use reached the important 80 percent level – 10 points above blown-bubble bottom in '02. Consumer confidence surveys are improving, especially in a "jobs-are-plentiful" attitude.

Tax revenue is now running $100 billion over the '05 forecast. Politicians are all over it, left-side quibblers dismissing a one-time increase from real estate and stock sales, and the Republicans declaring budget victory.

Forget the posturing (both sides are mistaken): economies generating $100 billion in surprise revenue are doing pretty damn well, thank you – well enough that the Fed has reason to worry about leftover liquidity from the bubble-rescue percolating into speculation or inflation. The much-anticipated economic slowdown of last spring, the one sure to follow an aggressive Fed, is nowhere in sight.

The behavior of interest rates from short to long maturities continues to be peculiar, and a new pattern is developing now. The last year of Fed tightening pushed up short-term rates, but left long ones unusually low. Now the Fed is creating a bulldozer effect, shoving all rates upward in a single heap.

In the last week, as it has become clear that the Fed will keep going after a hike to 3.5 percent on Aug. 9, all Treasury rates have risen toward convergence. The most Fed-sensitive 2-year T-note has gone from 3.58 percent on July 8 to 3.85 percent on Friday, and the 5-year from 3.67 percent to 3.99 percent, each three times the move in the 10-year T-note from 4.08 percent to 4.18 percent. There may be a recession-signaling inversion up in the fours somewhere (if the Fed went to 4.5 percent in January, and the 10-year began to sink toward 4 percent, then look out below...), but it seems more likely that all rates will rise with the Fed, very grudgingly at the long end, until the Fed thinks it has reached equilibrium.

This bulldozed heap already shows in mortgage rates. Teaser rates aside, assuming no points or origination, the rate Friday for every mortgage in America – fixed, adjustable, conforming or jumbo – is somewhere between 5.5 percent and 6 percent.

OFHEO, the regulator for Fannie and Freddie, has published a brief but extraordinary study: "Single-Family Mortgages Originated and Outstanding: 1990-2004." It opens by describing the unreliable and approximate data available on mortgages, even at the Fed.

The tables following show some amazing things: $8 trillion total outstanding, $1.4 trillion ARMs; FHA and VA mismanaged to insignificance, only 8 percent of the total.

There was a surge in ARM borrowing in 2004, but it was very much the same as in two prior years of Fed tightening: 1994 and 2000. Rates came down after those two peak-Fed years, leaving ARM borrowers feeling impervious to the Fed. This time, the Fed has tightened for two years, and its cyclical peak may be years away.

Awareness of the inevitable ahead has hardly begun among ARM borrowers.

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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