Condos Solution to College Housing

By: Colleen DeBaise: REALTOR® Magazine Online
Low interest rates and flexible financing have prompted more parents to buy a house or condo for their children to use while they are away at college, at a time when on-campus housing costs are escalating.

According to the NATIONAL ASSOCIATION OF REALTORS®, which tracked the college market for the first time last year, homes purchased for post-secondary students accounted for about 169,000 properties in 2004.

The college market also offers buyers investment potential in that parents can turn the unit into a rental property upon graduation, securing a steady stream of renters from future incoming-student populations. Additionally, mortgage interest and property taxes can be written off.
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Consumer confidence rebounds

More Americans paint rosy picture of job market
Inman News
The Conference Board today announced that its consumer confidence index, which had declined in July, bounced back in August. The index now stands at 105.6, up from 103.6 in July.

The present situation index increased to 123.6 from 119.3. The expectations index edged up to 93.7 from 93.2 last month.

"Consumers appear to be weathering the steady rise in gas prices quite well," said Lynn Franco, director of The Conference Board's Consumer Research Center. "In fact, consumers' confidence in the current state of the economy, and particularly in the labor market, has propelled the present situation index to its highest level in nearly four years (125.4 in September 2001). Expectations continue to suggest more of the same for the remainder of this year."

Consumers' overall assessment of ongoing conditions was considerably more favorable in August. Those claiming business conditions are "good" increased to 29.8 percent from 28.7 percent. Those claiming conditions are "bad" slipped to 15.1 percent from 16.7 percent.

The employment picture was also upbeat. Consumers saying jobs are "hard to get" decreased to 23.2 percent from 23.8 percent, while those claiming jobs are "plentiful" rose to 23.5 percent from 22.9 percent. For the first time since October 2001, consumers claiming jobs are plentiful outnumber those claiming jobs are hard to get.

Consumers' short-term outlook improved marginally from July, with those anticipating business conditions to improve in the next six months increased to 18.7 percent from 17.9 percent. However, consumers expecting business conditions to worsen edged up to 9.7 percent from 9.5 percent.

The outlook for the labor market remains mixed. Those expecting more jobs to become available in the coming months increased to 16.6 percent from 15.6 percent. But those expecting fewer jobs also edged up to 17.2 percent from 16.7 percent. The proportion of consumers anticipating their incomes to increase in the months ahead improved to 19.8 percent from 18.6 percent last month.

The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households.
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Are fixer-uppers a good deal in today's market?

Rapid price-appreciation may be a red flag
By: Dian Hymer: Inman News
There was a time when no one wanted to buy a dilapidated "money pit." That was before the days of high appreciation rates and low inventories of homes for sale. Now fixers are almost as popular as homes that are in move-in condition.

For example, a couple of years ago, a home that was in such bad shape that it wasn't livable sold with nine offers. It sold for over $200,000 more than the asking price. The home was located in the desirable Crocker Highlands neighborhood of Oakland, Calif. It was easy to see that it could be a lovely home with about $250,000 of improvements. But at the $900,000 purchase price, it was hard to imagine how the buyers could turn the house for a quick profit.

In fact, the buyers didn't fix up the house for immediate resale. They fixed it up for themselves and lived in it for a couple of years. When they sold, they did recoup their investment, but only because home prices appreciated more than 20 percent the year before they sold. However, they did not sell for significantly more than they invested, much to their disappointment.

Before jumping into a fix-up project, do your homework and be objective about the upside potential of any project you consider. The primary considerations are the price you pay, the cost of improvements, your carrying costs and the expected selling price.

The most difficult part of rehabbing for profit in this market is finding suitable property to buy at the right price. In some areas, low inventories and high prices are causing more buyers to consider buying a less expensive home that needs work. It's hard for an investor to compete with a buyer who plans to fix up the property for himself rather than fix it up to sell for a profit.

HOUSE HUNTING TIP: The key to success is being able to walk away from a project that doesn't make sense. If you pay too much going in, you'll make less when you sell unless you skimp on renovations or home prices escalate. Don't be too quick to wrap up a deal. Successful real estate investors often make offers on hundreds of candidate properties before finalizing a purchase.

Be realistic about the renovation costs. It's wise to pad the estimates on the high side to cover for unexpected expenses. When renovating an older property, there's always the risk of an unknown defect that will push you over budget.

The best fixer projects are the ones that need only cosmetic improvements. But, these are also the ones that attract buyers who will fix the property up for themselves. These buyers can afford to pay more because they don't need to pay themselves a profit.

Beware of the fixers that no one wants. These might have a serious or incurable defect, like freeway noise, that will limit your upside potential. The buyers in the above example would have realized more from the sale if it weren't for the fact that the property was subject to freeway noise.

Buying fixer-upper properties in this market is risky because of the fact that home prices have experienced extreme appreciation in some areas during the last few years. No one knows for sure where the market and home prices are heading. But, if your buy now and the market slows down and you can't sell quickly for a profit, you'll be looking at higher carrying costs and perhaps a lower price.

THE CLOSING: Keep in mind that your goal is making a profit. It there isn't profit potential, save your money until you find a project that makes sense.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
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Setting remodeling priorities can save money

First, know what you want
By: Paul Bianchina: Inman News
Whether you're doing a facelift on the guest room or a complete kitchen remodeling, have you ever stopped to consider what makes for a truly successful remodeling project? Many people don't, and that can lead to wasted money and an overall sense of disappointment with the finished product.

Successful remodeling is more than good products or quality workmanship, and it's certainly more than how much money you can afford to throw at the project. The key to success is more fundamental then that, and it starts well before the first nail is ever driven.

Success comes from understanding exactly what you expect the remodeling to achieve. If all you want from that guest room is something a little brighter, then success might be as simple as picking a great wallpaper, or adding a skylight.

On the other hand, let's say you want to remodel your kitchen because you want to allow two cooks to work side by side, you need to increase your storage space for food and utensils, and you'd love a wide counter for rolling out those gourmet breads you love to make. If you're remodeling within the confines of your existing cramped kitchen and you don't add more space, the final result is going to be a disappointment. Even if you've spent lavishly on top-of-the-line appliances and granite countertops, you haven't addressed the core reasons for doing the remodeling, so the results will never measure up to what you wanted.

UNDERSTAND WHAT YOU WANT

With all that in mind, the very first step in any remodeling is to understand what you want to do. Break it down into its most basic elements, and then put that on paper. Is it more space? Is it a better traffic pattern or workflow? Is it more natural light? Upgraded appliances or fixtures? Do you really want a bidet, or a six-burner commercial gas range, or a pool table, or a place for the dog to lie under your desk while you work? It doesn't matter what it is, and it doesn't matter how large or small the item might be. What does matter is how important it is to you.

Next, you need to take the needs of other family members into consideration. If you live alone, or if you're the only cook in the family, then maybe your thoughts about that new kitchen are all that matters. On the other hand, if two people share the kitchen chores, or if the family wants it to be a gathering place, then the needs of those people need to get out in the open and down on paper as well.

Now, let's talk about resale value. The person who is remodeling a house prior to putting it up for sale will have a whole different set of priorities than the person who is looking at the house as their forever home and is remodeling it to meet their own specific objectives. When you are remodeling with resale in mind, you need to look at what will appeal to the greatest number of people – from colors and patterns to room layouts and popular amenities – and make your choices accordingly.

Another key element is remodeling for resale to look at the cost of the project versus its potential payback. If your home is one of the few one- bathroom houses in a neighborhood of two-bath houses, then sinking the money into adding a second bathroom might well pay back handsomely when you sell. On the other hand, a room addition that creates a 2,500 square foot home in a housing tract of 1,200 square foot starter houses will almost certainly not gain you enough in resale value to make the project worthwhile.

For your forever house – or at least the one you see yourself staying in for the next 10 years or so – resale value might not be as big an issue for you. While you should never completely turn a blind eye toward the value you may or may not be adding to a home when you remodel, when you intend to stay in the home for awhile the emphasis should shift much more to want you want personally out of the remodeling. Some examples might be creating a room dedicated to certain crafts or hobbies, or adding a play room for a growing family, or remodeling a bathroom to meet the specific needs of a family member with health problems.

Remodeling of any kind is a big, expensive, and exciting undertaking, so take your time and establish your priorities. You'll be amazed at what a difference it makes.

Remodeling and repair questions? E-mail Paul at paul2887@direcway.com.
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Why tax-deferred real estate exchanges are better than selling

Reinvesting profits in another property avoids huge taxes
By: Robert J. Bruss: Inman News
Some investors seem to enjoy paying taxes on their real estate sale profits. I don't. As a smart real estate investor, I hope you don't either. I still occasionally get letters from readers who say their real estate broker, their CPA or their attorney advised them to sell their investment or business property and pay the capital gain tax instead of making a tax-deferred exchange.

For some unexplained reason, realty investors and their tax advisers in a few states have been the last to catch up and understand the huge benefits of tax-deferred property exchanges. I still remember receiving a letter, about two years ago, from White Plains, N.Y., where the investor said her CPA told her tax-deferred exchanges are "experimental" and haven't been tested yet in court! Just for the record, tax-deferred exchanges are legal in every state and they are now even being done in the slow-to-catch-on New England states! But finding CPAs and tax or real estate attorneys who understand them still isn't easy there.

The tax theory of IRC 1031 tax-deferred exchanges is to create one continuous real estate investment, rather than a taxable sale followed by a purchase of another property held for investment or business use. Isn't it better to have the full amount of your sale profit available for reinvestment rather than have your profit diminished by a 15 percent to 25 percent federal tax (plus any applicable state tax)? Avoidance of tax erosion is the major reason for tax-deferred exchanges.

EXAMPLE: Suppose you decide to sell your investment or business property. Your net profit (long-term capital gain) will be $200,000. If it is a depreciable property, such as an apartment building or a rental house, your capital gain will be taxed at the special 25 percent federal "recapture tax rate" on depreciation deducted after May 6, 1997, and at the 15 percent maximum capital gains tax rate on the balance of your profit including pre-May 7, 1997, depreciation deducted. Rather than paying more than $30,000 federal capital gains tax on your $200,000 profit, leaving only $170,000 to reinvest in another property, wouldn't it be much better to have the full $200,000 available to acquire a larger investment or business property? Of course!

But there are many reasons other than "tax erosion" to make tax-deferred real estate exchanges, rather than creating a taxable sale followed by purchase of a replacement property. The "top 10" tax-deferred exchange reasons are:

1. Avoidance of income-tax erosion of property-sale profits and avoidance of depreciation recapture taxes upon the sale;

2. Minimize or eliminate the need for new mortgage financing on the property being acquired;

3. Get rid of an undesirable property, or one that is difficult to sell, and acquire one that is either more desirable and/or easier to sell;

4. Increase the investor's depreciable basis for greater tax shelter by acquiring a larger depreciable building;

5. Acquire a property that better meets the owner's needs, such as providing greater cash flow and/or requiring less management time;

6. Defer part of the capital gain profit tax by "trading down" to a smaller property that better suits the owner's needs. An installment sale note will spread the profit tax over several years while providing the seller with interest income at a rate higher than is currently available with safety elsewhere, such as bank CDs and savings accounts (of course, the interest income received is taxable as ordinary income);

7. Pyramid your wealth into a large estate without paying profit tax along the way each time you trade up to a larger property. That was the basis of the late William Nickerson's wealth pyramid in his famous best-seller classic book, "How I Turned $1,000 into $5 Million in Real Estate in My Spare Time";

8. Refinance either before or after (but not as part of) the exchange to create tax-free mortgage refinance cash to make other investments or use the cash as you wish (the reason you can't refinance as part of the exchange is the cash is then considered taxable "boot," which is "unlike kind" personal property rather than "like kind" real property);

9. Accept an unexpected cash purchase offer to sell a currently owned property at a high price without owing tax on the sale profit;

10. Completely avoid capital gains tax when the investor dies while still owning the last property in the chain of tax-deferred exchanges.

Death is the ultimate tax shelter of all! Although the net market value of your real estate owned at the time of death will be included in your estate, no capital gains tax will be due on your realty upon your demise. However, if you sell your real estate the day before your death, Uncle Sam will be waiting to claim his capital gain tax!

Estates of persons dying in 2004 and 2005 have a $1.5 million federal estate tax exemption. This exemption increases to $2 million for deaths in 2006, 2007 and 2008. In 2009, for deaths that year the federal estate tax exemption will be $3.5 million. But 2010 will be the best year to die because there is no federal estate tax that year! However, unless Congress changes the estate tax law, the $1 million federal estate tax exemption returns in 2011, as do the higher pre-2002 federal estate tax rates on assets above the exempt amount.
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Homeowner loses real estate through careless mistake

Failure to pay property taxes 'puts final nail in the coffin'
By: Robert J. Bruss: Inman News
In 1996, Zarmina Azadozy purchased the property at 421 W. Stanislaus St. in Avenal, Calif., at a foreclosure sale. For some unexplained reason, she failed to record her deed.

Her property taxes went unpaid for several years. Eventually, the county tax collector sold the property for the unpaid property taxes owed. But the successful high bidder paid substantially more than the amount of unpaid real estate taxes.

Under state law, any excess amount paid at a property tax sale goes to (1) any recorded lienholders in order of priority, such as a mortgage lender, and then (2) to any person with title recorded prior to the property tax sale.

Although Azadozy never recorded her deed to the property, which she received in 1996, she claimed the excess proceeds of the 2003 tax sale since there was no mortgage holder or any lienholder claimant.

However, the appellate court ruled because she never recorded her deed to the property, Azadozy is not entitled to receive the excess proceeds exceeding the amount owed for the unpaid property taxes. The case is reported at Azadozy v. Nikoghosian, 27 Cal.Rptr.3d 811.

RECORDING LAWS ESTABLISH PROPERTY RIGHTS. This 2005 court decision is a classic example why all documents affecting real estate titles should be promptly recorded.

The legal reason is recorded documents, such as deeds, mortgages, deeds of trust, contracts for deed, judgment liens, mechanics' liens, income tax liens, and other documents affect the title to a specific property.

However, unrecorded documents do not give "constructive notice" of their legal effect. As Azadozy discovered, her perfectly valid but unrecorded foreclosure sale deed had no legal affect on the property title.

Many types of documents that affect property titles are eligible for recording. The general rule is they must be in recordable form, with the signatures properly notarized. Documents that are not witnessed by a notary public are usually unrecordable.

VERBAL REAL ESTATE TRANSFERS ARE WORTHLESS. "Don't worry. When I die, you will receive all my real estate." Those worthless words have been spoken by many property owners. But, unless backed up by the property owner's written will by appropriate ownership such as joint tenancy with right of survivorship or by state law of intestate succession, such a verbal promise is worthless.

Yet thousands, perhaps millions, of property owners have spoken those worthless words to lovers, friends, relatives and spouses. The reason verbal real estate promises are worthless is the Statute of Frauds requires real estate transfers to be in writing to be valid.

Equally important, written title transfers must be recorded in the county or city where the property is located to have effect against other claimants to the title.

TITLE INSURANCE IS THE BEST PROTECTION. The best way to be certain you own "marketable title" to a specific property is to obtain an owner's title insurance policy. An owner's title policy is valid as long as the insured realty owner or their heirs own the property.

Title insurers carefully research a title before insuring it. If the title insurer made a mistake, which is discovered even many years later, the title insurance company must pay the insured property owner either (1) the full policy limit if the title was completely defective, or (2) the diminished value of the property if the title insurer failed to disclose a recorded document, such as a recorded easement through the home's backyard.

There are many more protections offered by an owner's title policy, such as claims by previous property owners, forged signatures in the chain of title (the primary cause of title losses), and claims of undiscovered heirs and ex-spouses.

RECORDING TIME DETERMINES TITLE PRIORITY. The general recording rule is: "The first in time is the first in right." That means the first claimant to record his/her title or interest in a property wins the race to the courthouse.

Unrecorded deeds, while valid between the grantor and grantee, don't give "constructive notice" to the world.

For example, suppose I sell you my beautiful lot for $100,000 cash and give you a notarized deed in recordable form. But you, being a very busy person, forget to record the deed and put it in your desk.

However, several months later I am in dire need of cash. So I sell the same lot to another buyer for $100,000 cash and give her a notarized deed, which she promptly records.

Who owns the lot?

The obvious answer is the second buyer who had no knowledge of my previous sale of the same property. Legally, the second buyer is known as a BFP (bona fide purchaser) for value without notice of my prior sale of the same property. She won the race to the courthouse.

Of course, as the first buyer of the lot, if you can find me, you can sue for your damages of losing title to the property. However, unless you have an owner's title insurance to prove you received marketable title, your lawsuit is probably worthless unless you know where I moved and hid the $100,000.

This extreme example shows why it is so critical to promptly record every property deed, or any document affecting real estate titles. Although you might think you are dealing with an honest relative or friend, if you fail to record your deed promptly that person might take advantage of your trustworthiness.

QUIET-TITLE LAWSUITS SETTLE PROPERTY DISPUTES. When two parties claim ownership or conflicting interests in the same property, the legal solution is usually for one party to sue the other claimant in a quiet title lawsuit. Then it is up to the judge to determine if the claimant has a legal interest in the property, as determined by the recorded documents.

Unless a document is recorded, it is only valid between the two parties and has no legal effect on other claimants.

Divorces often create problems where the result of the divorce decree is not recorded. To illustrate, I've seen situations where one spouse is given possession of the marital home until the children become 18 or 21 and the house is then to be sold. However, the spouse in possession of the house often then refuses to sell, or worse, tries to sell without the signature of the other ex-spouse who is still a co-owner.

Recording an agreement affecting title to the property will usually prevent problems such as this from arising.

SUMMARY: All documents affecting title to real estate should be promptly recorded to prevent unintended consequences. In conflict situations, the first claimant to record his/her document usually wins the race to the courthouse. Further protection is obtained by insisting on receiving an owner's title insurance policy. When conflicting claims arise, in a quiet-title lawsuit the judge resolves the dispute.
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Economists Continue To Forecast A Rosy Outlook For The Housing Market

RealtyTimes
Freddie Mac today released the results of its Primary Mortgage Market Survey (PMMS) in which the 30-year fixed-rate mortgage (FRM) averaged 5.77 percent, with an average 0.5 point, for the week ending August 25, 2005, down a little from last week when it averaged 5.80 percent. Last year at this time, the 30-year FRM averaged 5.82 percent.

The average for the 15-year FRM this week is 5.35 percent, with an average 0.6 point, down from last week when it averaged 5.40 percent. A year ago, the 15-year FRM averaged 5.21 percent.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.30 percent this week, with an average 0.6 point, down from last week when it averaged 5.34 percent. There is no annual historical information for last year since Freddie Mac only began tracking this mortgage rate at the start of this year.

One-year Treasury-indexed ARMs averaged 4.56 percent this week, with an average 0.7 point, down slightly from last week when it averaged 4.58 percent. At this time last year, the one-year ARM averaged 4.05 percent.

"New home sales hit a record in July while existing home sales were at the third highest level they have ever been," said Frank Nothaft, vice president and chief economist at Freddie Mac. "There is no doubt that low mortgage rates have been the driver of this phenomenal housing market."

"Although mortgage rates slipped a little again this week, I do see rates trending upward over the year. As rates rise, housing sales will undoubtedly start to slow, but that slowdown will come from record levels. I think it safe to say that the housing industry will remain a formidable force in the national economy for the foreseeable future."
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Slow Market? Sell The Deal, Not House

By: M. Anthony Carr: RealtyTimes
If you find yourself with a house on the market and it's just not moving, there are several strategies to put in place to speed up the sale and get going with your next purchase.

Psychologically, the seller has to first prepare himself for selling the house - not marketing it, not holding out for a higher price, not defending your price, not blaming your agent for not doing enough, etc.

Granted, all the above is important and you do want a professional agent with a viable marketing plan to draw as many buyers as possible. Just like any other commodity - a lot of buyers trouncing through your house is a good thing, because more buyers means more potential offers. Thus, the seller needs to hire a company/agent that's going to create such an environment.

But let's say you've done that. You've even fixed up the house better than anyone else on the block and it's just not moving. Then move from selling the product to selling the deal.

We see this strategy in plenty of other products. The auto industry is famous for it - zero percent financing, $500 above invoice, employee discount price … none of these items have anything to do with the product - they are enticing you with the deal.

The Deal for real estate has everything to do about the buyer. Forget that you may still be in a sellers market and you're in the drivers seat. If your house is sitting on the market and you have to move in 45 days -- you're not so much in the drivers seat anymore. Get off your haunches and get the job done.

You could drop the price, but in reality, this doesn't help the buyer as much as cash back at the settlement table.

For every $10,000 you drop on a loan at 6 percent, the buyer saves only $60 per month in a mortgage payment. Is that really enticing enough? Think about it, they're borrowing $250,000 - a quarter of a million dollars -- and you're dropping the price by $10,000 reduces their principal and interest payment from $1,498 to $1438. Is that one move enough to get me excited?

Let's turn that around and offer $7,500 (3 percent of the loan amount) over to the buyer - at a full price contract - and see what it does for the buyer. They could use it for closing costs, which could be a lot of money in their pocket. They could use it to make payments over the next several months (nearly five months worth of payments at the above mentioned payment amount). Is that really more beneficial than $60 per month?

By dropping your price $10,000, it would take them more than 10 years worth of monthly payments to gain the actual financial benefit of simply handing over $7,500 in closing costs to them at the settlement table. Plus, you get to keep the remaining $2,500 for your own bottom line.

It's like this. If you're about to take a hit on the sale of your house, it might as well benefit someone, and the buyer who gets $7,500 at the table is going to get a lot more excited than the one who's price dropped $10,000.

Be sure to check with your mortgage professional to make sure the loan program your buyer is using will allow you to provide this much cash to the buyer.

One last thing. If you decide to market the deal, make it a lot more appealing than "closing costs to buyer." How you say it can be just as important as what you're saying: "No payments for 4 months," "$7,500 back to decorate your house," "Seller will pay off buyers debt (up to $7,500)," are three ways of saying, "Closing costs to buyer."

Which one gets you excited?
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The Weekend Guide! August 25 - August 28, 2005

The Weekend Guide for August 25 - August 28, 2005.
Full Article:
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Mortgage options abound for home buyers

New programs expand on adjustable-rate loans
Inman News
Chase Home Finance has expanded its adjustable-rate mortgage products to allow borrowers to choose from a range of documentation programs for amortizing and interest-only ARMs, the company said Wednesday.

The mortgage lending industry has grown fiercely competitive in the wake of a shrinking refinance market. Many lenders have expanded mortgage product offerings to enable borrowers more flexibility as home prices continue to rise in most U.S. housing markets.

The new Chaseflex ARMs allow borrowers to choose documentation ranging from Full Documentation to No Documentation to purchase or refinance primary homes, condominiums and coops, vacation homes, and one- to four-unit investment properties, according to the company.

The Chaseflex documentation choices include:

    • Full Doc, in which income and assets are verified for now larger loans and
      smaller down payments;

    • No Income Verification, in which income is stated, but not verified; assets
      are verified;

    • No Ratio, in which no income is stated or verified; assets are verified; and

    • No Doc - Neither income nor assets are stated or verified.

"We've expanded our loan choices to meet the broader needs of today's prime-credit home buyers, including those who have seasonal incomes," said Tom Wind, co-CEO of Chase Home Finance, the home finance business of JPMorgan Chase & Co. "We use borrowers' other financial qualifications, such as credit history, to help them get the mortgage they need with minimal paperwork."

The Chaseflex array of documentation programs are available on 5/1, 7/1 and 10/1 ARMs, and interest-only ARMs, according to the company.

Chase Home Finance services more than $500 billion of mortgages. Its parent company, JPMorgan Chase & Co. (NYSE: JPM) was created by a 2004 merger of JPMorgan Chase and Bank One Corp.
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Housing-Bubble Talk Doesn't Scare Foreigners

Global demand for mortgage-backed securities is helping to prolong the housing boom.
By: RUTH SIMON and JAMES R. HAGERTY and JAMES T. AREDDY: The Wall Street Journal Online
Strong demand for mortgage-backed securities from investors world-wide is allowing American lenders to make more loans - and riskier ones - in a way that is helping prolong the boom in U.S. house prices.

The cash pouring in -- not only from U.S. investors but increasingly from Europe and Asia - keeps stoking the housing market even as the Federal Reserve Board continues to raise interest rates, normally something that damps home prices. The market has shown a few signs of slowing recently, and talk of a bubble has grown louder, but prices continue to rise or remain at lofty levels as investors continue to gobble up mortgage-backed securities and banks keep lending.

"As the Fed has tightened, lenders have eased" terms for borrowers, says Mark Zandi, chief economist at Economy.com, a forecasting firm in West Chester, Pa.

Investment banks and other firms have been buying mortgage loans from lenders and packaging them into securities for sale to investors since the 1980s. But investor demand has surged in recent years, largely because in an era of low returns, mortgage-backed securities offer yield-starved investors much higher returns than government bonds.

U.S. lenders will make about $2.8 trillion in home-mortgage loans this year, according to the Mortgage Bankers Association. The MBA estimates that about 80% of these loans will end up in mortgage-backed securities. Mortgage-backed securities outstanding at the end of the first quarter totaled $4.61 trillion, up 61% since the end of 2000. In the same period, total Treasury securities outstanding grew 35% to $4.54 trillion.

Investors' strong demand for mortgage debt, besides allowing lenders to offer many borrowers better terms, has also made it easier to offer mortgages to borrowers who might not easily qualify for a loan. The growth of the mortgage markets spreads the risks around. But some mortgage-industry analysts say lenders have become less stringent in their loan terms because they can sell almost any type of loan to those who package mortgage securities for investors.

"Loose lending standards are probably the single biggest thing fueling the speculative fever we have today" in housing, says Kenneth Rosen, an economist who is chairman of the Fisher Center for Real Estate at the University of California at Berkeley.

In a world of low interest rates, the market for mortgage securities is simply too big and profitable for many investors to ignore. Investors can earn about 5.5% on mortgage securities whose payments are guaranteed by Fannie Mae or Freddie Mac, government-sponsored companies. Those who can stomach greater risk can buy subprime mortgage securities, which come with no guarantee but can yield as much as 15%, according to Bear Stearns. By contrast, 10-year U.S. Treasurys yield about 4.2%; the equivalent government securities in Germany yield about 3.2% and in Japan 1.5%.

The buyers of mortgage-backed securities include U.S. pension funds, hedge funds and insurance companies. But overseas investors are the fastest-growing source of demand. The trade publication Inside MBS & ABS estimates that foreigners held $280 billion of U.S. mortgage securities at the end of 2004, or 6% of the total outstanding. The foreigners' holdings rose 26% last year and have continued to bound ahead so far this year, Inside MBS & ABS says.

"There's this insatiable appetite for mortgage-backed securities world-wide," says Andrew Sciandra, a senior vice president at IndyMac Bancorp, a California thrift, who heads a team that creates those securities. In the past year, Mr. Sciandra has met with investors from places like Germany, France and Abu Dhabi. Asian investors now account for roughly 10% to 20% of mortgage securities sold by IndyMac.

For homeowners, the growing international demand for mortgages means it's increasingly likely that the money they borrow to buy a home or refinance their mortgage is coming ultimately from outside the U.S. When Claude Gaty, a chef and co-owner of a bistro in Las Vegas, recently refinanced the mortgage on his four-bedroom Las Vegas home, the lender was IndyMac. But the bulk of the money came from investors in Asia.

IndyMac pooled Mr. Gaty's loan with about 3,000 other mortgages that carry a fixed rate for the first three, five or seven years. Mr. Gaty is paying both principal and interest on his loan, but most of the loans in the pool are interest-only mortgages, which allow borrowers to pay no principal in the early years. When the $650 million offering of triple-A rated bonds backed by these mortgages came to market in June, it drew more than a dozen investors from Europe, Asia and the U.S., according to Deutsche Bank, which handled the deal. Such bonds typically yield 0.75 to 1.15 percentage point more than Treasurys, Deutsche Bank says.

The most recent entrant to the market is China. Its banks are rich with deposits from Chinese companies that earn dollars exporting to the U.S. Dollars have also been handed to some banks by the government in Beijing as part of its efforts to strengthen their balance sheets.

Until a few years ago, Chinese investors restricted U.S. investment mostly to Treasurys. Now, to boost their yields and because they consider the market safe, bankers from a number of institutions say they are devoting more of their portfolios to mortgage securities. Some bankers say their goal is to have 40% of their U.S. dollars in asset-backed securities.

China's government also is testing U.S. mortgage investment. The country's Bank of Communications, the only bank with a mandate to help manage China's $700 billion of foreign-exchange reserves, has recently put a sliver of those reserves into mortgage-backed issues, according to a banker there. The State Administration of Foreign Exchange, the government agency in charge of the reserves, declined to comment.

Zhu Kai, who helps manage U.S. dollar investments at Bank of China, says in a rare interview that his mortgage-backed portfolio has "plenty of room to grow." Mr. Zhu expresses confidence in the U.S. dollar and the health of the U.S. home market. Housing is so vital to the U.S. economy, Mr. Zhu and some of his counterparts at other Chinese banks reason, that U.S. authorities will prevent a bust.

Even the recent decision by the Chinese government to raise the value of its currency by about 2% isn't likely to lead Chinese banks to shift their plans. "The timing may be a little bit surprising but we will not change our investment portfolio," Mr. Zhu says.

While Asian investors have largely focused on triple-A-rated bonds, other investors are buying lower-rated debt. These bonds, which are created when bankers carve up pools of mortgages, offer higher yields, but also bear the first risk of losses should borrowers default. Investors who buy these bonds in effect set the standards for which mortgages are made by deciding how much extra yield they need to compensate for the added risks of lower-quality loans. They include real-estate investment trusts, hedge funds and investors from Europe.

Strong investor interest has also made loans available to borrowers with poor credit and many other people who might otherwise have trouble getting a mortgage. Subprime loans included in mortgage securities totaled $401.5 billion last year, nearly double the total for 2003, according to Standard & Poor's. Meanwhile, loans with less than full documentation of the borrower's income and assets accounted for 70% of mortgage securities rated by Standard & Poor's in this year's first half, double the level recorded in 2000.

"There's no question that [lending] standards have loosened over the past couple of years," says Arthur Frank, director of mortgage research at Nomura Securities International in New York. If house prices fall, "you may well have some pretty serious credit problems," hurting holders of the lower-rated mortgage securities.

Mr. Zhu, the Chinese fund manager, is sanguine, for now. The U.S. housing market is "maybe losing a bit of steam," Mr. Zhu says. "I think the monetary authorities, they don't want this housing market to burst. I don't think it is a bubble. But if things go on like this for another five years, it's a different story."

Email your comments to ruth.simon@wsj.com.
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Existing Home Sales Ease At Third-highest On Record, Says NAR

By: Realty Times Staff
Existing-home sales declined in July from a record in June, but home prices continue to rise at double-digit rates, according to the National Association of Realtors.

Total existing-home sales - including single-family, townhomes, condominiums and co-ops - slipped 2.6 percent in July to a seasonally adjusted annual rate of 7.16 million from an upwardly revised record of 7.35 million in June. Sales were 4.7 percent higher than the 6.84 million-unit pace in July 2004.

David Lereah, NAR's chief economist, said home sales remain in historic territory. "The level of existing-home sales in July was the third highest on record," he said. "This is a big number any way you slice it, and housing is continuing to stimulate the overall economy." The second highest level of sales activity ever recorded was in April of this year, with a pace of 7.18 million units.

The national median existing-home price for all housing types was $218,000 in July, up 14.1 percent from July 2004 when the median price was $191,000. The median is a typical market price where half of the homes sold for more and half sold for less.

Lereah noted that the strongest rates of price growth tend to move geographically. "In examining the hottest markets for home price appreciation, we see a rolling boom moving from one metro area to another over time, as well as a spillover effect into nearby areas with lower home prices," he said. "This is spreading the wealth of housing returns, with a natural easing of appreciation in areas following a period of extraordinary price growth. Even after slowing in a given area, prices typically have continued to rise faster than historic norms." Over the last four-and-a-half years of record home sales, no area that has experienced a sustained period of double-digit price growth has later seen a price decline.

NAR President Al Mansell of Salt Lake City said the rate of price growth is a simple reflection of supply and demand. "Housing inventory levels improved in July, but they're still quite lean by historic standards," he said. "If the supply of homes rises, it should reduce competition between buyers and take some of the pressure off of prices. Even so, we expect home price appreciation to remain above normal over the next year."
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Housing market risks unraveled

Data analysis puts real estate bubble debate into perspective
By: Jessica Swesey: Inman News
While the nation is consumed with talk of a potential housing-price bubble, an industry trade group today said that when sizing up the possibility of a real estate market downturn, act with caution not panic.

"There are risks, but they are far less dramatic than the hyperbole of recent months," said Doug Duncan, chief economist for the Mortgage Bankers Association. Duncan co-authored a report, "Housing and Mortgage Markets: An Analysis," released today.

Housing price growth will slow, Duncan said, and he expects a flattening in the decline of home-loan delinquencies with "possibly even a slight upturn." All of this will modestly impact the U.S. economy, but it's important to note that the housing and financial markets are fundamentally sound, he said.

The booming housing market is increasingly viewed as a pending problem, putting debates over whether a housing bubble exists back in the spotlight. People everywhere are talking about the possibility of price crashes and wondering what will happen to borrowers who've used risky non-traditional loan products to obtain their homes and the lenders who originated those loans.

The MBA paper notes that a LexisNexis search for the term "housing bubble" for July 2005 returned more than 650 news articles.

The purpose of the 30-page analysis of housing and mortgage markets, Duncan said, is to put the flood of housing market commentaries and analyses into perspective, review the risks and discuss the systems in place to help mitigate risk.

"There's been a crescendo on the issue of house prices since about 2001, and it's been supplemented in the last year with additional information and inquiries with regards to the development of new mortgage products," Duncan said.

The MBA's analysis comes on the same day the National Association of Realtors released home sales figures for July 2005. According to the NAR, total existing-home sales – including single-family, townhomes, condominiums and co-ops – slipped 2.6 percent in July to a seasonally adjusted annual rate of 7.16 million from a record of 7.35 million in June.

The national median existing-home price for all housing types, meanwhile, was $218,000 in July, up 14.1 percent from July 2004 when the median price was $191,000 and up about 0.5 percent. The median is a typical market price where half of the homes sold for more and half sold for less.

Positive economic factors such as low interest rates and strong local employment growth can explain home prices and the differentials in appreciation rates across the country, the MBA analysis concludes.

While the trade group is not predicting a housing-price crash, it does predict a sharp decline in housing-price growth next year, with average appreciation levels dropping to between 4 percent and 5 percent from this year's double-digit appreciation rates, Duncan said.

The housing boom also has created a significant increase in speculative investing in certain markets, the MBA paper notes. Data sources disagree on the extent of the increase, but MBA cautions lenders to monitor the level of speculative activity in certain markets.

In addition to house-price growth and speculative investing concerns, the development of new mortgage products such as interest-only loans and new types of adjustable-rate mortgages has some worried about the long-term outcome when interest rates rise or borrowers find themselves unable to adjust.

Federal Reserve Chairman Alan Greenspan recently said the increase in these types of loans is a concern. "Some households may be employing these instruments to purchase homes that would otherwise be unaffordable, and consequently their use could be adding to pressures in the housing market. Moreover, these contracts may leave some mortgagors vulnerable to adverse events," Greenspan said.

But there are a number of factors that work to mitigate these risks, according to the MBA analysis. For example, there is an alignment of incentives among the borrower, lender and the investor, Duncan said. Each has a stake in the borrower making mortgage payments and the alignment limits the extent of problems caused by any potential downturn.

Duncan said sharing of incentives is why the trade group suggests mortgage borrowers see a lender before seeing a real estate agent. Agents have no stake in loan delinquency once the house is purchased, he said.

Ultimately, borrowers should be sure they are wisely managing the risk associated with new loan products, the study concludes.

Duncan noted six risk factors MBA monitors in examining housing and mortgage markets. They are a high and sustained rate of home-price growth, declines in employment, a significant share of investor and speculative activity, a significant share of condo sales relative to total sales, an unusually large proportion of loan products that expose borrowers to potential payment shocks, and an unusually large proportion of Alternative-A loan products, which offer variances in the amount and quality of documentation required to borrow money.

Duncan said MBA does not rank local markets in terms of risk of price declines because housing markets are driven more by local factors than by macroeconomic factors.

"In addition, there are a number of factors that mitigate those risks," Duncan said, furthering the group's stance that the housing and mortgage markets should be looked at with caution, not panic.

The economist pointed to a healthy economy, growing household net worth, and a strong and well-capitalized banking sector as things working to mitigate risk in the housing market. He also said that effective regulatory oversight, widespread use of technology and the alignment of incentives among borrowers, lenders and investors are positive forces.
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What type of real estate makes the best investment?

Location, floor plan, local economy become vital factors
By: Dian Hymer: Inman News
During the economic downturn of the early 1990s, a home in the Crocker Highlands area of Oakland, Calif., sold twice in two years. The house did not change substantially during this time, nor did its price. But, average prices in the neighborhood dropped about 15 percent during the same time.

Some homes hold their value better than others. It makes sense to pay particular attention to what you buy and where if you're worried that the housing market is overdue for a correction.

What did the Crocker Highlands home have that caused it to be more desirable than other listings? It had a good floor plan. There were four bedrooms on one level. The master bedroom had its own bathroom, and there were two additional bathrooms.

The house was an older home, built in the 1920s, but it had been extensively renovated with quality, high-end finishes. There was no deferred maintenance. It had a spacious eat-in kitchen/family room that opened directly out to a level, private and sunny backyard. It was a house that was easy to live in and it required no work.

The house was also located on one of the best streets in neighborhood. What made it such a desirable street? It was not a thoroughfare, so the traffic was minimal. It was quiet. Yet, it was within walking distance of the local school. The street was virtually level so children could ride bikes and it was easy for homeowners to get in and out of their driveways. There was plenty of street parking for guests.

This is not to say that you shouldn't buy a home unless it includes all the desirable qualities of this particular Crocker Highlands home. However, it does make sense to keep resale value in mind when you're considering a home purchase, particularly if you don't intend to stay there forever.

Other attributes that tend to add to resale value are good storage space, a garage, a bathroom on each level and a convenient location. Good views tend to add value, and so does easy access in and out of the house.

One-level homes are usually in high demand, especially with older home buyers. Two-story homes are often preferred by younger buyers. Homes that are on three or more levels tend to sell for less than a similar sized home with only one or two levels.

It can be difficult to find a home with a good floor plan, good indoor-outdoor living and the right number of bedrooms and baths that is also in top condition. If you're up for the challenge, consider buying a home that you can improve over time. But, first make sure that the basic structure is sound and the floor plan is good.

Also, get a handle on how much you'll need to invest in the property before you start negotiating with the seller. Don't pay an inflated price for a house that needs work.

Location is one of the most important indicators of value in residential real estate.

Neighborhoods with good public schools tend to have higher property values than areas where schools are a problem. Close proximity to a major metropolitan area has a positive effect on home values, particularly if there's good transportation.

Neighborhoods where the residents are predominantly owner-occupants tend to be more desirable than neighborhoods where most of the homes are owned by absentee landlords.

THE CLOSING: The local economy directly affects home values, and so does supply and demand. Areas with a lot of building can end up with a glut of homes for sale when there is a correction in the housing market. This can depress local property values.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
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Online Bettors See More Home Price Gains

By: David Leonhardt: REALTOR® Magazine Online
HedgeStreet is an online betting site that enables investors to take a gamble on the direction of home prices in several cities across the country.

The site tracks prices using the average price as reported by the NATIONAL ASSOCIATION OF REALTORS®.

Despite forecasts of a housing slowdown, HedgeStreet's investors expect third-quarter home prices to shoot up 7 percent in Los Angeles, 5 percent in San Diego, and 2 percent in New York City.

HedgeStreet's founders believe a larger, independent, and more diverse betting market would allow homeowners to hedge against the risk of falling home prices.
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Front Yards: Not Just Grass Anymore

By: Diana McKeon Charkalis: REALTOR® Magazine Online
A growing number of homeowners are putting in courtyards and taking other steps to turn their front yards into an extension of their living space.

By turning the space into a courtyard, complete with fountains and gates, landscapers can create a feeling of privacy without isolating the property from the neighborhood.

Outdoor decoration invites an infinite spectrum of design ideas, ranging from modest gardens with a few chairs to elaborate statues and stone work.

Of the $200 billion Americans spent on remodeling and renovation last year, outdoor enhancements accounted for one-third, according to the Hearth, Patio & Barbecue Association.

The transformation of the front yard into a decorated living space also can foster a sense of community, as neighbors are more likely to interact with one another while working or lounging in their front yards.
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Buying Commercial Real Estate Can Be a Secure Investment

By: Phoebe Chongchua: RealtyTimes
Buying commercial real estate can be a secure and profitable investment if you take the time to research, get advice from experts and know your risks and benefits.

"There are four main reasons to buy investment real estate: cash flow, appreciation, depreciation and principal pay-down," says Mike McCaffery, Investment Property Consultant, GFS Commercial, a division of the Guiltinan Group Real Estate Specialists.

Owning commercial real estate can be a great way to diversify your portfolio, create tax benefits and build wealth. However, buying commercial real estate can be a risky business, especially these days when many people are getting into real estate without completely understanding the industry.

"There are different kinds of investors. There are some people who are very wealthy and they'll buy trophy properties for example and the returns are very minimal, but they hold them because they want to have a long-term hold. A lot of other investors want the cash flow so they're going to go to other areas that have a higher cash flow or higher return but it's not going to be in the best areas," says Investment Property Consultant Eric Warfield with GFS Commercial.

Use industry experts

Whether you're at the beginning stages of looking for commercial properties or you've closed escrow and already have your tenants in the property, it's a good idea to get advice and seek the help of industry experts such as commercial agents and property management firms, to guide you through the process.

"If you're smart and you hire a good management company and you let them do what they do best, you may get a little less of a return, a little less cash flow. But you're still going to get all the other benefits [of owning commercial real estate] but you also know that your risk is not as high as it would be if you tried to manage something that you didn't know anything about," says McCaffery.

Know the demographics for the surrounding area

Warfield says, "You want to know what the incomes are, for example, within a radius of five miles - what is the average household income, average age, what is the breakdown of ethnicities. Also, if it is a freeway frontage property, how many cars are going past that property per day?"

Study the vacancy or absorption rate

"You have to go back a few years and study those absorption rates to see what they are," says McCaffery.

Also know how long the leases are for the current tenants and if they're under market.

"Initially the return on investment might be very good but then the leases might come up very quickly and completely change the equation," says Warfield.

Leverage when buying commercial

Another thing that is very important, especially in commercial real estate, is leveraging. Warfield uses this example to explain the risk: "One investor might buy a building that only has one tenant in it as opposed to buying, for example, a shopping center that might have 15 or 20 tenants in it."

That, of course, would bring the risk level down unless the tenant is a big name company.

"You could buy a single tenant that's say a McDonald's or a Burger King, a national tenant on a long-term lease, that's a corporate signature, even if [that tenant] walked away from that location [that tenant] is going to keeping paying you even if the building is vacant," says McCaffery.

"But it's a different story if it's not a national tenant and there is only one tenant in the building, if that person goes you're completely upside down," says Warfield.

As with any investment, commercial real estate requires due diligence so that you end up in the best possible financial scenario.
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Female Homebuyers Tackle Repairs Alone

By: Marilyn Gardner: REALTOR® Magazine Online
Women increasingly are tackling home repairs on their own, thanks to the swelling numbers of single females purchasing homes.

For many single women, who may have more modest stores of disposable income than their male counterparts, completing home improvement projects themselves is an economic imperative.

This, in turn, has spawned a growth industry of do-it-yourself manuals, seminars, and television programs aimed at women.

Having the right tools is important, as lighter hammers and tools with smaller grips facilitate many projects for women. It also is important for women to educate themselves by asking questions at hardware stores, for even if she chooses to have a project done professionally, a woman will be treated with more respect by her contractors if she demonstrates that she is knowledgeable.

A study conducted by Sears has shown that almost half of women 50 or older fear that they will not be able to keep up their houses, though the growing trend of single female homeownership should do much to boost general confidence among women facing daunting home repairs.

The NATIONAL ASSOCIATION OF REALTORS® reports that 20 percent of home buyers are single women, compared to single men, who account for just 10 percent.
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Impending housing bubble inspires many to sell

Is now the best time to take the money and run?
By: Robert J. Bruss: Inman News
DEAR BOB: I can't believe the high prices home sellers are receiving in my neighborhood. But I've read in the Wall Street Journal and elsewhere that we may be in a "real estate bubble" for home prices and today might be the time to sell. What is your opinion? – Richard C.

DEAR RICHARD: When I bought my first property more than 38 years ago, the Realtor proudly told me home prices in the area appreciated an astronomical 3 percent in the previous year.

I quickly figured a 3 percent return on my cash down payment was a terrific return. That's called "leverage," meaning the owner controls the property with a small investment. Someday, I should write a whole article about leverage benefits.

Recently, the National Association of Realtors reported the median U.S. home value appreciated 15 percent in the last 12 months. But in 2004, homes only appreciated about 10 percent, according to NAR.

That means, for example, a home buyer who made a $10,000 cash down payment to buy a $100,000 house (if you can find one) earned 50 percent, or $5,000, on that $10,000 cash investment.

Of course, average home market-value appreciation varies widely by location and even specific properties.

But the real estate value trend has always been up. However, along the way there are peaks, valleys and plateaus.

My best advice, if you want to sell your property, is sell now and enjoy your profit. If you have no reason to sell, enjoy the property. Even if its market value plateaus, or even drops a little, unless you recently purchased the property very recently you probably still have a handsome profit.

Is this a good time to buy a home, I am often asked (especially on radio talk shows). My answer is it is always a great time to buy a home but never make more than a 20 percent down payment so you limit your maximum loss.

Real estate is a long-term investment, not a get-rich-quick scheme, so plan to hold your property at least five years.

IF HOME IS IN A LIVING TRUST, DO HEIRS GET A STEPPED-UP BASIS?

DEAR BOB: My mother owns a wonderful house worth about $1.2 million. When she passes on, my two sisters and I are her living-trust beneficiaries. Although the house is held in her living trust, will we get a new stepped-up basis to market value? – Jerry VonB.

DEAR JERRY: Yes. Holding real estate title in a living trust is just an ownership method, such as tenancy in common, joint tenancy or partnership. A living trust has no effect on the stepped-up tax basis rules for inherited real estate. For more details, please consult your tax adviser.

GET A NEW TAX ADVISER IF YOURS CAN'T EXPLAIN A STARKER EXCHANGE

DEAR BOB: You often refer to a "Starker exchange" of investment property. My CPA and real estate brokers I know have never heard of this tax concept. The whole process seems quite complicated if I sell my rental property. But the tax savings could be very profitable for me. What should I do? – Pete W.

DEAR PETE: Hire a new tax adviser. If your tax adviser or real estate broker doesn't understand Starker exchanges for investment property, found in Internal Revenue Code 1031(a)(3), you need to locate a new tax adviser and a new real estate broker.

This is very basic tax saving information for real estate investors. For full details, I suggest you invest $4 to receive my special report, "How the New Tax Deferred Exchange Rules Can Make You Very Wealthy," available 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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Safety a key issue in popcorn-ceiling removal

Renovation depends on presence of asbestos
By: Bill & Kevin Burnett: Inman News
Q: My daughter just bought a fixer-upper. Do you know of any fairly inexpensive, somewhat-easy solutions for dealing with 1970s blown-on ceilings – you know, the kind that looks like flat popcorn?

A: Blown-on acoustical ceilings were all the rage in new homes in the '60s and '70s. For the life of us, we can't understand why. We don't imagine they deadened sound to any great degree. As far as adding any architectural interest, well, fuhgeddaboutit.

This ceiling came in two flavors that we've seen – plain and sparkles. We suppose someone thought the sparkles looked like starlight. How tacky!

About the only good thing we can say about these ceilings is that they go on quickly. That was good for the builder.

What we've come to know as a popcorn ceiling is really a cellulose concoction blown on with a sprayer. In new construction, before the carpet is down and the paint is on the walls, a little masking where wall meets ceiling, and voila! A worker can blow on the ceiling of a normal room inside an hour.

As we see it, there are three ways you can minimize or eliminate the popcorn effect. All are relatively inexpensive but somewhat labor intensive.

First, paint it. Second, scrape the popcorn off, re-texture the ceiling and then paint. Third, Sheet-rock over the popcorn.

As you consider these options, be aware that some of the old popcorn textures contained asbestos. Depending on the age of your daughter's home, you might want to have the ceiling tested. The older the ceiling, the more likely asbestos is present.

If the ceiling does contain asbestos, scraping is not an option. Asbestos is a serious health hazard when the tiny particles become airborne, also known as friable. Asbestos should only be removed and disposed of by a licensed, bonded asbestos removal contractor.

If asbestos is detected, Options 1 and 3 are left. Painting or covering the ceiling with new Sheetrock encapsulates the asbestos and prevents fibers from becoming airborne.

The easiest way to spruce up the ceilings is to paint them. Use a thick-napped roller cover or a sprayer. Textured ceilings soak up paint like you wouldn't believe. We'd suggest you start with a good coat of oil-based primer. Let that dry thoroughly and then apply one or two finish coats. Plan on two to three times the normal coverage. If you go this route, the ceiling will be a clean color of your choice, but it'll still look like colored popcorn.

When we're faced with this situation, we opt for re-covering the ceiling with drywall. Re-rocking provides a new surface and the option of a smooth or textured effect.

Drywall comes in either 4-by-8-foot or 4-by-12-foot sheets. The pros usually work with 4-by-12s because there are fewer joints to finish. We prefer 4-by-8s because they're lighter and a few extra joints are no big deal on a small job.

To begin, first locate the ceiling joists. A hammer and a nail work well for this. Mark the joist locations on the wall where the wall and ceiling meet. Go to the opposite wall and repeat the process. Snap a chalk line on the ceiling connecting the marks you've made on the walls. The lines should be your ceiling joists.

Use 1/2-inch- or 3/8-inch-thick drywall and use drywall screws, not nails, to attach the sheets through the popcorn and old ceiling into the ceiling joists. Use either 1 5/8-inch or 2-inch drywall screws depending on the thickness of the ceiling. To find ceiling thickness, cut a small hole in ceiling, enough to get the end of a ruler or tape measure through, and measure it.

To make life easier, go to your local rental store and rent a drywall lift. This is a neat machine that allows a piece of Sheetrock to be placed on a vertical table, which is then rotated to horizontal and cranked to the ceiling. The lift allows the drywall to be positioned without having to hold it in place with hands, head or a homemade T-brace.

Hang the drywall perpendicular to the ceiling joists. We've found it best to snap a chalk line on the ceiling 4 feet away and parallel to a wall. This will ensure that the first sheet hung is square to at least one wall. If the room is a true rectangle cutting is kept to a minimum.

Once all the drywall is screwed in place, tape and mud the joints. Either paper tape or fiberglass tape will do. If you opt for fiberglass tape, use a powdered joint compound such as Durabond 90 for the first coat.

For a textured finish count, apply three coats of mud with a light sanding between coats prior to texturing. If a smooth finish is desired, we've never been able to do a job we're satisfied with in less than four coats.

We know this sounds like a lot of work, and it is. But we think it's well worth the effort to banish the popcorn forever.
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Alternative Mortgages Gain In Popularity

Novel products accounted for up to 25% of new home loans over the past year.
By: MICHAEL SCHROEDER: The Wall Street Journal Online
Banks are increasingly making interest-only loans and offering other novel mortgage products, but those alternative financings accounted for less than a quarter of all home loans originated over the past year, according to a Federal Reserve report.

For the first time, the Fed's July survey of senior loan officers provides information about lending trends for nontraditional home loans, such as mortgages that initially let borrowers pay interest and no principal, and keep payments low in the first years.

The survey indicated that over the 12 months ended in July, 19 of the 46 banks that responded said nontraditional mortgages had risen to 5% to 25% of total originations. The 19 banks accounted for 72% of all residential mortgages on the books of all respondents at the end of the first quarter. The largest banks reported the share of alternative loans was 16% to 25%, the Fed said. More than half of respondents said the share has increased moderately or substantially over the previous 12-month period.

Federal financial regulators - the Fed, the Federal Deposit Insurance Corp. and the Treasury Department's Office of the Comptroller of the Currency and Office of Thrift Supervision - have identified the new mortgage loans as a cause for concern and are preparing joint guidance for banks on writing them.

With rising property values, low interest rates have helped keep delinquencies down by keeping monthly payments in check and making it easy for borrowers who run into trouble to refinance or sell their homes at a profit. Just 1.08% of residential mortgages were in foreclosure proceedings at the end of the first quarter, down from 1.17% five years earlier, according to the Mortgage Bankers Association.

The mainstream marketing of products that initially had been geared toward the most sophisticated borrowers indicates lending standards overall are loosening. In addition to interest-only loans, the alternative mortgages include option-adjustable mortgages that carry introductory rates as low as 1% and give borrowers multiple payment choices. Borrowers who elect the minimum payment can see loan balances rise.

According to the Fed, more than 85% of the loan officers said their institutions had resold less than 25% of the loans through mortgage-backed securities. In contrast, three large banks that accounted for 40% of the group's residential mortgages said they had securitized more than three-quarters of their nontraditional home loans.

Email your comments to rjeditor@dowjones.com.
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So, You Want to Be A Landlord...

Investors may underestimate the complications associated with owning a rental property.
By: JAMES R. HAGERTY: The Wall Street Journal Online
Determined to profit from the housing boom, many Americans are acquiring rental properties. But some of them may be underestimating the risks and complications that come with being a landlord.

"We get a lot of inquiries from naive people," says Mike Phillips, who owns Century 21 All-Pro, a real-estate brokerage firm in Kansas City, Mo. He gets calls from people in California, Florida and New York who figure property in Kansas City must be a steal.

Mr. Phillips tells inexperienced investors they need to examine such factors as the health of the local economy and the supply and demand for rental housing. In much of the country, the fundamentals look bleak for landlords. Low interest rates have allowed many former renters to buy their own homes in recent years, removing some of the most reliable tenants from the mix. According to the Census Bureau, the vacancy rate for rental housing in this year's first quarter was 10.1%; that rate has been gradually rising since the late 1970s, when it was around 5%.

Investors also need to ask whether they can cope with the hassles of dealing with tenants. "What if the renter's kid shoves G.I. Joe in the toilet?" Mr. Phillips asks. "You have to have a game plan, because they're going to call you."

Yet Americans' faith in real estate is remarkably strong. During this year's first four months, investors accounted for nearly 10% of new mortgage loans used to buy homes in the U.S., up from 6% in 2001, according to LoanPerformance, a unit of First American Corp.

For those willing to put up with the ordeals of owning rental property, here are some tips from seasoned landlords.

FIGURE OUT YOUR TOTAL COSTS. Unless you take into account all of your costs, you won't know whether you're making money.

"Most people underestimate their expenses dramatically," says Jonas Lee, a managing partner at Redbrick Partners LP, a New York firm that invests in single-family rental housing in Baltimore, Philadelphia and other Northeastern cities. The costs include obvious things like insurance, maintenance and property taxes. But they also include items that some landlords overlook, such as periods of vacancy, bad debts, the occasional need to replace expensive items like roofs or furnaces, and time spent managing the properties, Mr. Lee says.

All of these costs can easily eat up half of expected rental income, Mr. Lee figures. And that's before you consider financing costs, which may absorb the rest of your rental income, or more.

SCREEN POTENTIAL TENANTS. Many landlords use a variety of Internet services to check on applicants' credit histories as well as any past evictions or criminal troubles. "My theory is that if they don't pay Citibank, they're not going to pay me," says Jean Yevick, a veteran rental-housing owner in Pittsburgh who is president of the Western Pennsylvania Real Estate Investors Association.

Some landlords also consider such things as whether the applicant shows up on time for an appointment and can communicate clearly. Neatness helps. "If they have a car that's full of junk and is disgusting-looking, the likelihood is that they're going to keep a dirty house," says Ms. Yevick.

Don Werner, a Denver landlord who is chairman of a committee of independent rental owners who belong to the National Apartment Association in Alexandria, Va., requires his tenants to have monthly income of at least three times the rent.

UNDERSTAND THE FAIR HOUSING ACT. Among other things, this 1968 law prohibits discrimination in the renting of housing based on race, color, national origin, religion, gender, family status or disability.

That doesn't mean you have to rent to anyone who comes along. But you should strictly follow written policies about your criteria for selecting tenants so you can't be accused of bias. It is lawful, for instance, to refuse to rent to convicted criminals. But you could be vulnerable to complaints of discrimination if you applied that rule only to certain applicants. If you want to run criminal checks on some applicants, run them on all.

"Where people get in trouble is when they eyeball a situation and just go with their gut," says Bryan Greene, a senior official at the U.S. Department of Housing and Urban Development who helps enforce the fair-housing law. HUD and local housing agencies last year investigated more than 9,000 complaints about possible violations of the law. The penalties can include fines of as much as $11,000 per discriminatory action as well as damages to victims.

REACT QUICKLY WHEN TENANTS CAUSE TROUBLE OR DON'T PAY. "There are a lot of people who have convincing stories" about why they haven't paid the rent, says Chris Ballard, who owns rental houses in the Atlanta area as well as Century 21 Gold Medal Realty in Atlanta. But "you have to stick to your standards," he adds. "You learn over time to be polite but firm and direct." After 30 days, he starts the eviction process. Some landlords start even sooner.

Many rely on the courts to evict deadbeat renters. But Rich Sommer, a landlord in Stevens Point, Wis., says he can usually work out problems informally by visiting tenants. "Most often a five-day notice will encourage them to leave," he says.

If tenants violate Mr. Sommer's rules, which include a ban on kegs of beer, he urges them to find another home more suitable for their lifestyle choices. To show his good faith, he sometimes shows up with a check refunding part of the deposit and promises to pay the rest if the tenant leaves within a few days without causing damages.

INSPECT THE PROPERTY REGULARLY. Mr. Ballard, in Atlanta, makes sure to inspect each unit once every six months. In the past, he was less disciplined about inspecting. He then discovered that one tenant had let more people move into the house without Mr. Ballard's knowledge. That eventually caused a septic tank to overflow and leak into the backyard. During his inspections, he carries a camera so he can record any evidence that a tenant isn't fulfilling responsibilities.

BE READY FOR PROBLEMS. Landlords need strong stomachs. Mr. Sommer has had a suicide in one of his apartments and a drug raid in another.

Expenses can come in big lumps. Mike Weston, a financial planner in Highlands Ranch, Colo., says sewer lines broke in two of his rental units within a month. "I'm assuming it was a total coincidence," he says. The cost totaled more than $10,000. Other tenants called him in to unclog toilets or shoo away bees from the backyard. Eventually, he decided the headaches were too frequent and sold his properties. "Every time I went out of town, I had nightmares about what would happen to the property," he says.

MAKE SURE YOU ARE PROPERLY INSURED. Ted Webersinn, a commercial-property appraiser in Surry, Maine, and his wife, Susan Sokol, owned rental rowhouses in Baltimore in the 1980s. They initially expected the neighborhood where they invested to improve, but the crime and blight only grew worse. The property manager they hired carried a gun while collecting rents. Eventually, the couple sold four of the houses and gave one to the city.

More than a decade later, a former tenant sued them, alleging that the tenant's children had suffered from exposure to lead paint. The case rumbled on for years before being settled out of court. The couple's insurer paid for the settlement and legal fees. As soon as that suit was settled, a second tenant filed a similar one. Altogether, Mr. Webersinn and his wife endured about a decade of litigation. Without insurance, Mr. Webersinn says, they probably would have had to file for bankruptcy.

DON'T COUNT ON RAPID APPRECIATION. "People are real high on appreciation right now," says Mr. Sommer, the Wisconsin landlord. "They think they're just going to make gajillions." But house prices are unlikely to keep rising indefinitely at the rapid clip of the past few years. That means some investors may find themselves remaining in the landlord phase longer than they expected while waiting for a good opportunity to sell. A landlord for the past 35 years, Mr. Sommer describes real estate as a way to "get rich slowly."

BE GOOD TO GOOD TENANTS. Mr. Sommer's wife, Carolyn, bakes Christmas treats for them every year.

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Professionals Help Get Gain With No Pain

There are many times in your life when doing something yourself, or the way you want to do it, just doesn't make sense. Real estate is no different.
By: M. Anthony Carr: RealtyTimes
During my last workout at the gym, I watched a professional trainer attempt to instruct a very amateur member in how to build more muscle and prevent injury. The amateur just wouldn't listen, it seemed. Instead of dropping his dumbbell down to 45 pounds in each hand, he argued with the trainer that he wanted to do 60 pounds in each hand to build muscle.

The trainer explained that the lighter weight with higher repetitions would provide him with a complete range of movement and provide more even definition. Again, the man said, "Oh, I can do 50, I'm just doing 60 pounds to build up."

The trainer walked away, shook his head and just chuckled, "Some people just think they know it all." With his expertise and the body to show it, exchanging advice with a string-bean seemed like a waste of time at the least and an insult to his obvious learning and expertise at the worst.

There are many times in your life when doing something yourself, or the way you want to do it, just doesn't make sense. Real estate is no different. You need professionals when it comes to investing, maintaining and selling real estate to make sure you don't commit costly mistakes in regards to your money, energy, and time.

Most professional investors I know have no problem hiring the right person for the job. If the house needs painting, they pick up the phone and find a good, professional painter. They don't have time nor expertise to do it themselves. It's in the world of private owners who are dealing with their personal residence that I see many consumers try to fix up, sell or buy their home on the cheap.

It's the professionals listed below that I see more homeowners try to do themselves and realize many times it would have been worth the effort and financial investment to hire the right person:

General contractor: This is the big one. Most homeowners like to think that they are a bit handy with the toolbox. The thought goes like this: "How hard could it be to fix that dry rot, anyway? Cut it here, insert new wood there, paint it. Why pay someone to do that?"

If your house needs a lot of fixing up, a general contractor can bid out all the different jobs, supervise the work and watch your budget for you and get it done faster than you doing it yourself.

Carpet layer: It's amazing how many people want to take this one on themselves. I saw a house once that had a beautiful curving stairway with white carpet. I guess the owner wanted to preserve this virgin floor covering, so he placed a clear runner down the stairway -- fastened down with roofing nails.

Painter: While most people I know could handle a paint job in their house, this task is fraught with accidents ready to happen: splattered paint along the floor, on the trim, and ceiling; spilled paint buckets; different colors (that were supposed to be the same) painted on adjoining walls -- all of which has happened with paint jobs I've done myself. Why torture yourself?

Plumber/Electrician/HVAC Technician: These three are probably the ones that most homeowners will default to immediately if something goes wrong in the house. Nevertheless, I have seen some finished spaces that homeowners completed themselves without the assistance of these trade specialists. The problem comes when you're home is being inspecting during your sale and the inspector asks for the county permits and certificates. These pros come with certification and specialty training -- it's best to leave such projects to those who know exactly what their doing.

Realtor: Well, you know I couldn't get through a "hire a professional" column without laying this one out there. In many a hot market, a lot of homeowners want to try this one themselves. But just like all the other professionals mentioned above, a good Realtor is worth every penny.

Most homeowners simply don't have the time, negotiation skills, expertise or training to sell their house themselves and maximize their bottom line -- which is the most important service a real estate agent (who's doing her job) brings to the table.

Regardless of the job you need to complete to purchase or sell your home yourself, at least consult with a professional before tackling the job yourself and possibly making a mess of things.

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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What Is Fueling High Condo Prices?

A demographic shift or a speculative bubble may be driving the trend.
By KEMBA J. DUNHAM and RAY A. SMITH: The Wall Street Journal Online
As condominium prices reach never-before-seen heights, a debate is brewing over whether a fundamental demographic shift is driving the trend or whether this is simply the latest speculative bubble in a corner of the real-estate market that has seen plenty of them.

Last year, for the first time since the National Association of Realtors started tracking the data, the national median price of a condo was higher than that of a single-family home. In June, the median price of a condo was $223,500, compared with $218,600 for a traditional house. Between 2001 and 2004, condo values appreciated 57%, while those of single-family homes rose 25%. And the condo market is booming even in second-tier cities such as Minneapolis, Charlotte, N.C., and Omaha, Neb.

Demographic changes in the middle class can explain some of this. The ideal of the two-parent family with 2.2 children living in a suburban house is being supplanted by an array of arrangements, including single professionals, divorcees, active retirees and single parents. For many of these people, an urban condo is both more luxurious and convenient than a house with a yard.

"Today's middle class looks more like the cast of 'Friends' than 'Ozzie and Harriet,' " says Jason Schenker, an economist at Wachovia Corp. in Charlotte. "They're younger, they're urban and they live in high-cost areas of real estate -- these sorts of things are all conducive to the growth in condominiums."

But economists and housing experts are increasingly concerned that too many people, trying to cash in on the phenomenon, are buying speculatively, causing prices to rise faster than economic fundamentals can support.

Developers started construction on about 802,000 condo units in the past five years, according to the Census Bureau. More are on the way. About 270,000 condos will be started in 2005 and a further 255,000 in 2006, estimates Michael Carliner, an economist with the National Association of Home Builders, a Washington-based trade association. That doesn't include the sizable but hard-to-quantify number of new buildings that start life as rentals and switch before completion, or the existing offices, hotels and rental properties being converted into condo developments.

"In the past, the highest and best uses of land were commercial, but now with condo prices and single-family homes getting such high prices, the demand for land that would have been used for commercial is being shifted to residential," says Anthony Downs, a senior fellow at the Brookings Institution and a real-estate specialist. Median prices for condos may be skewed because many of the newer properties tend to be located in pricey coastal cities or in parts of town where land prices are higher.

Buyers like Keith Battaglia embody both the hot money flowing into the condo market and the changing face of the middle class. Last summer, when the single, 36-year-old hotel executive relocated to Minneapolis, he quickly decided to ditch the suburbs and embrace the city. He waited all night outside the sales office of an unbuilt, luxury-condominium development called the Carlyle.

"I'm so excited to actually be moving to a place that offers Central Park-style living without having to fly to New York to get it," says Mr. Battaglia.

Instead of buying one apartment, he bought two: a fifth-floor unit for $305,000 and a 19th-floor unit for $439,000. When the building opens early next year, he plans to live in one and rent out the other.

It's a new era for the condo, once viewed as the stepchild of the housing market. Condominium owners buy the walls and interior of their apartment and a percentage of the building's common areas, which are typically managed by a condo association. Condos leapt to prominence after the 1961 Housing Act enabled the Federal Housing Administration to insure mortgages on the units. In those days, the properties were simple and affordable, a starter home for first-time buyers whose dream was to own a more substantial home in the suburbs.

Because the condo market is liquid and prone to speculation, these apartments -- or sometimes townhouses -- typically lost value more rapidly during recessions, compared with other types of residential property. Beginning in the late 1980s, condo prices in Boston fell by as much as 50% in some areas over several years due to overbuilding and rapid conversions, says Karl Case, professor of economics at Wellesley College. He adds that single-family-home prices fell less than half that amount during that time. It took nearly 10 years for condo prices to return to their 1980s peak.

But now, families that can easily afford to buy a home are choosing to live in condos, and that says a lot about Americans' changing lifestyles. Between 1970 and 2000, the percentage of nuclear families among U.S. households declined to 24% from 40%, according to the Census Bureau. Some studies show that the number of households without children will increase in the next 10 years, while those with children will fall slightly.

Home builders say the rise of the condo also reflects a desire among buyers to live downtown, with easy access to restaurants and entertainment, and no tough daily commute or time-consuming domestic upkeep.

Pat Crosby, 38, who owns a Minneapolis company selling products for commercial architects, lives with his girlfriend, Marti Zacher, in Grant Park, a high-end condominium development in town. The divorced father of two young girls lived in the suburbs just a few years ago, gritting his teeth through a 45-minute commute to work.

Aside from offering massages and a 24-hour concierge, Grant Park has guest suites and full-service business facilities. That allows Mr. Crosby to conduct business meetings while his daughters splash in the pool next door. "You can't get back time, so I like to spend my free time doing what I like doing, not shoveling snow or taking care of a lawn," says Mr. Crosby. "I would much rather prefer a great sushi dinner and drinks with friends."

Gourmet Kitchens

Unlike the drab structures of yesteryear, many newly constructed condos are plush abodes, containing the kinds of amenities found only in the most upscale suburban developments, such as marble bathrooms, gourmet kitchens, tennis courts, swimming pools and health clubs. High-end features such as broadband access are also becoming standard. Many new units are larger than those of the past.

Spanish View Tower Homes, a luxury development five miles from the Las Vegas strip, sports a $6.3 million penthouse. The four-bedroom apartment includes a Jacuzzi and warming drawers for towels and robes, plus a 5,800-square-foot roof garden with spa and barbecue area, a media room with a 100-inch television, maid's quarters with separate entrance, wine-storage room and a wine-tasting room.

An unanswered question is whether developers are flooding the market. "The froth in several of these markets is approaching Cisco-stock-price levels circa 2000," says Hans G. Nordby, an analyst with Property & Portfolio Research, a Boston-based firm. Miami, for example, has so many investors, "it's going to implode," he says, adding that he's not convinced there's enough job growth there to support all the condos being built.

Mr. Nordby says Miami's market is dependent on speculators buying condos before they're built and flipping them in what is known as the preconstruction market. Developers building high-end condominiums often sell individual units long before construction is scheduled to begin, in part because banks won't provide financing until a large percentage of the units are reserved. In many cases, buyers can obtain a purchase contract by putting down just 10% of the sale price.

Miami-based Zilbert Realty Group, one of the city's largest brokers of preconstruction condos, has launched a Web site, Condoflip.com, catering to these speculators. Mark Zilbert, president of Zilbert Realty and creator of the site, says he's received thousands of emails from condo owners who want to gauge the market, but he doesn't yet see many interested buyers.

"Right now, people can just go ahead and buy a new unit, so they aren't interested in going through the hassle of buying a flip," says Mr. Zilbert.

Economists and real-estate investors say the ratio of real buyers to investors will ultimately determine the strength of the condo market. In Chicago, for instance, the large number of condo constructions and conversions -- including plans for what would be the nation's tallest building -- has created a supply glut. Several luxury projects have suffered slower-than-expected sales and some high-profile projects have narrowly averted foreclosure after banks came to the rescue.

"In the past there wasn't a whole lot out there, but you have a whole bunch of condos all over the place," complains Serge Masyra, a 32-year-old ad-sales executive who put his two-bedroom, two-bath condo on the market last month. He's asking $399,000 for the property, located just five blocks north of Chicago's Wrigley Field, about $50,000 more than he paid for the brand-new unit in early 2004. A year ago, it would have been snapped up in days. Mr. Masyra, so far, has no takers. Still, Chicago has over 8,000 more condo units in the construction pipeline.

Condo fever is also hitting unlikely cities, like Minneapolis, driven by young professionals who want to re-create a big-city lifestyle. "High rises are such a notable change to the landscape here," says Tom O'Neil, director of market research at DSU Research, a unit of Minneapolis planning consultants Dahlgren, Shardlow & Uban Inc. "There's some prestige to being in a tall building, so people are getting excited about it."

Karen Van Dongen, a 34-year-old sales manager for a consumer-products company, moved to Minneapolis from the suburban town of Lodi, N.J., late last year to work on her company's Target Corp. account. Target is based in Minneapolis. She initially considered buying a loft in an old industrial building that needed some work -- "something that would mirror a Manhattan, cosmopolitan life" -- but ditched that plan after checking out the amenity-jammed condos in Grant Park.

'Doing Nothing'

Ms. Van Dongen said she was making "a lifestyle choice." Since she likes to spend her free time "doing nothing," she wanted the extras offered at the condo without maintenance work.

In Omaha, out-of-town developers have proposed a slew of condominium projects hoping to capitalize on the city's relatively sparse market. A steady stream of companies has either relocated to the city or expanded their local operations in recent years, including Union Pacific Corp. and Gallup Organization. Developers are betting on an influx of white-collar professionals from cities such as Denver, St. Louis and Houston.

Omaha real-estate agents say the new residents have brought along their tastes for city living. Most of the first phase of condos and townhouses at the Riverfront Place development have sold out at prices ranging from $250,000 to $1.65 million since going on sale last November. Greg Deman, 50, who owns a warehouse-distribution company in Sioux City, Iowa, earlier this year purchased three condos in one Omaha building as an investment. They cost between $250,000 and $350,000. He's looking for more.

"I might be guessing right or I might be guessing wrong, but I think this area's going to continue to grow," says Mr. Deman, who visits Omaha about six times a year. He's also interested in investing in Phoenix and Las Vegas.

Developers along Alabama's Gulf Coast are currently replacing beachfront property damaged by last year's Hurricane Ivan with high-rise condo buildings. The area has 11,850 condominium units and 12,600 more are in the pipeline, according to the Alabama Gulf Coast Convention and Visitors Bureau.

The market is drawing baby boomers and investors, some of whom are using letters of credit instead of cash down payments to reserve preconstruction units. A letter of credit is a promise backed by a bank to make a future payment, sometimes secured by personal assets. Local real-estate agents say these buyers are requesting larger-than-average units, such as condos that take up the whole floor of a building.

At the Admiral's Quarters condominium resort in Orange Beach, Ala., a 1,500-square-foot two-bedroom condo sold for $860,000 a few months ago, compared with $483,000 in 2003. The units come with Jacuzzis, wet bars, walk-in closets and oversize balconies with views of the Gulf of Mexico. Residents have access to a heated indoor swimming pool, sauna and boardwalk to a private beach.

Over the past few years, these condos have appreciated in value more than 70% each year. "The market down here is extraordinary," says Elizabeth Helton Walls, an Orange Beach, Ala., real-estate agent. "Since Ivan, people were worried that properties were going to drop, but they've gone up every month."

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