The Weekend Guide! August 19 - August 21, 2005

The Weekend Guide for August 19 - August 21, 2005.
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Despite Big Numbers, Housing Is Still Predicted To Increase

By: Blanche Evans: RealtyTimes
Oil prices are at record highs - $2.50 a gallon at the self-serve pump nationwide. That may slow consumer spending down a little, and cause some first-time homebuyers to think twice about buying a home just now. Or they might consider buying a less expensive home. Pressuring first-timers even more are interest rates, which are finally starting to creep up.

Yet, overall, homebuying conditions are still remarkably favorable. Mortgage interest rates are well under six percent. And the National Association of Realtors reports that housing is still on target to hit new records this year.

In fact, the NAR recently reported that out of 149 metropolitan statistical areas, 67 showed double-digit increases in housing prices for single-family homes. Only seven areas posted price declines, and those were generally modest.

The national median existing single-family home price was $208,500 in the second quarter, up over 13 percent from the second quarter of 2004 when the median price was $183,500. The median is a typical market price where half of the homes sold for more and half sold for less.

In all, 94 metro areas saw increases above the U.S. historic average of over six percent. Since 1968, prices generally have risen 1 to 2 percentage points faster than the overall rate of inflation, so a 13 percent increase in prices is incredible.

David Lereah, NAR's chief economist, said the price gains are unprecedented. "When you look at appreciation of home prices relative to the overall rate of inflation, these are the strongest increases on record," he said. "The continuing shortages of housing inventory are driving the price gains."

The strongest price increases in the nation were in the Phoenix-Mesa-Scottsdale area of Arizona, Cape Coral-Fort Meyers, in Florida, and Palm Bay-Melbourne-Titusville, Florida.

Sales are on fire for single-family and condos, with 42 states reporting higher sales than a year ago with the strongest in West Virginia and Washington. Sales are happening at an annual rate of more than 7 million homes annually.

"Record home sales are creating high demand for related goods and services, and they're creating new jobs," says Lereah. "The overall housing sector accounts for about a quarter of total economic activity. In addition, the growth in housing wealth is feeding into consumer spending, which is helping other segments of the economy."

That could put more money back into the pocket of the first-time homebuyer.

The Mortgage Bankers Association is predicting that housing won't cool off until 2006. The MBA's Chief Economist Doug Duncan says interest rates should remain low. "Despite a moderate increase from a currently low rate environment, interest rates will still be quite low by historical standards," he says.

What goes up will come down, but economists are expecting only slight moderation in housing sales.

Says Frank Nothaft, vice president and chief economist at Freddie Mac, but low long-term rates will continue to support residential and commercial real estate activity. "As mortgage rates drift upward, we expect to see some moderation in housing activity. With that said, though, we still expect that 2005 will undoubtedly be a record year for sales and new construction."

That said, it looks like the market's still good for first-time homebuyers overall.
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Economists Don't See Dramatic End to Boom

By: James R. Hagerty: REALTOR® Magazine Online
The housing boom is now peaking or will do so over the next year or so, according to many economists, who add that the boom is not likely end by a dramatic event.

While investors can cause stock prices to plunge by immediately unloading their stocks, it can take homeowners months to sell property. Previous housing busts in California, New England, and elsewhere indicate that homeowners pulled their dwellings off the market if they were unable to secure a desirable price; the historical patterns suggest that home sales plummet but that housing prices tend to fall slowly over several years.

Many economists believe there will be a modest decline in residential prices in some West and East coast cities that have hot markets, but a few market experts anticipate a sharp fall in prices across the country.
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California: Median Home Price Continues to Climb

By: Alex Veiga: REALTOR® Magazine Online
While the total number of homes sold last month in California dropped 2.4 percent from the same time last year, the median price continued to rise, jumping 17.4 percent to $451,000.

On a month-to-month basis, July sales were down 8.3 percent from June, while prices were off 1.3 percent. DataQuick analyst John Karevoll characterizes these shifts as normal and healthy market activity and is dismissive of assertions that the housing market in California is a bubble waiting to burst.

He notes that June 2005 and July 2004, the two benchmarks for DataQuick's analysis, are "the two strongest months out there." The Bay Area and Southern California pull the numbers up, as the median home price in the former rose 17.9 percent from last year to $606,000; while in the south, the median price increased 16.7 percent to $469,000. In northern California, Contra Costa County registered the largest increase, as its median home price climbed 23.3 percent from last year to $555,000.
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Housing Market Still Hot in Los Angeles

Residential real estate here continues to be among the priciest in the U.S.
By: MAURA WEBBER SADOVI: The Wall Street Journal Online
Still near the top of the pile in a nation of soaring housing values, Los Angeles' red-hot rate of home-price appreciation dropped into the single-digit range last quarter. Median home values rose 8.3% to $474,800 in the metropolitan area during the second quarter from the year-earlier period, after rising 25.9% to $446,400 in 2004.

Residents looking to catch a break by renting are also out of luck. They face average monthly payments that are among the nation's highest thanks to a steady influx of new immigrants priced out of the home market, and a high proportion of young adults in the population, according to Property & Portfolio Research Inc. (PPR), a Boston-based real-estate research firm.

Despite the cooling appreciation rate, there's little indication that the fast pace of housing sales will let up any time soon in the area, according to Robert Kleinhenz, deputy chief economist at the California Association of Realtors. Considering that the Los Angeles county market is still very tight in terms of supply and prices are still going up, Mr. Kleinhenz says, this year "there's a pretty good indication we'll match or exceed the record home-sales levels."

The city's median income of $51,541 in 2004 was 14.4% above the national level according to PPR, and the market is considered over-priced based on a comparison of home prices to incomes published in a recent Consumer Reports article.

Los Angeles Market Snapshot

                                             2nd Quarter 2005        2nd Quarter 2004
    Median Home Price                        $474,800                  $438,400
    Days on Market*                               22.4                       20
    Unsold Inventory Index*                  2.1 months               2.5 months
    Average 30-Fixed Mortgage Rate         5.31%                    5.85%
    Average Foreclosure Rate                   0.06%                    0.11%
    Apartment Monthly Rent                    $1,528                   $1,428
    Apartment Vacancy Rate                      4.7%                     5.1%
    *Data for June
    Sources: National Association of Realtors, California Association of Realtors,
    Bankrate.com, LoanPerformance, Property & Portfolio Research Inc.

Coming tomorrow, a look at the commercial real-estate market in Los Angeles.

Email your comments to rjeditor@dowjones.com.
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Southern California real estate prices jump

Market not experiencing bubble symptoms.
Inman News
The median price paid for a home in Southern California reached a new peak for the sixth month in a row in July, while the sales pace eased back from June's record-breaking tempo, a real estate information service reported.

The median price paid for a Southern California home was $469,000 last month, up 0.9 percent from $465,000 in June, and up 16.7 percent from $402,000 for July 2004, according to DataQuick Information Systems.

Year-over-year price changes varied from 5.1 percent in San Diego County to 27.6 percent in San Bernardino County.

A total of 31,069 new and resale homes were sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month, down 12.4 percent from 35,454 in June, and down 5.8 percent from 32,988 for July last year, DataQuick reported.

A total of 204,588 homes have sold during the first seven months of this year, down 2.7 percent from 210,159 for the same period last year.

"We're watching the market carefully for any signs of a turn, for any signs of the 'bursting bubble' that some analysts have been predicting. So far we're not seeing anything other than the normal incremental changes you would expect in the ebb and flow of a real estate cycle," said Marshall Prentice, DataQuick president.

DataQuick monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.
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Boosted Cashout Refis?

By: Kenneth R. Harney: RealtyTimes
In the wake of the Fed's 2.5 point boost in short-term rates in 12 months -- plus hints of additional bumps to come - can once-booming home equity credit line continue to be attractive? Is a move to cheaper long-term rates using cashout refinancings already underway? Ken Harney has the answer.

Bye-bye credit lines? Hello cashout refis? In the wake of the Federal Reserve's quarter-point boost in short-term rates last week, floating-rate credit lines -- arguably the fastest-growing product category in the U.S. home mortgage market for the past three years -- are certain to be less popular among homeowners.

With credit lines typically floating at prime-plus-1 percent, many borrowers are about to begin paying 7 ½ percent on their credit line balances. Even more significant for new borrowers, the Fed seems determined to keep ratcheting up short-term rates indefinitely. By the end of the year, or early 2006, credit line balances could be at 9 percent, with the underlying prime rate at 8 percent and the federal funds rate at 5 percent.

Meanwhile 30-year fixed rates remain below 6 percent for conforming mortgages. Directly linked to prices on 10-year Treasury rates in the global capital markets, fixed-rate 30-year loans appear likely to remain near historical lows, according to mortgage economists.

That combination of financial developments could wean Americans off their multi-trillion dollar home equity line borrowing binge, and encourage them to switch to fixed-rate, cashout refinancings instead when they need substantial money out of their properties.

Freddie Mac believes that shift is already well underway. In its just-released survey of refinancings during the second quarter of 2005, it found that 74 percent of all refinancers pulled cash out -- the highest cashout percentage since late 2000. Freddie Mac defines a cashout as any refinancing that produces a new balance that is 5 percent greater than the original balance.

But the reality is that most cashouts are far larger than 5 percent. Say you need $50,000 for a downpayment on a vacation condo, and you have an existing loan balance of $200,000 on a $400,000 home. You can refinance your $200,000 mortgage and take out the needed $50,000 add-on, and probably walk away with a 30-year rate at 5 ¾ percent or 6 percent. Your loan-to-value (LTV) ratio will still look attractively low to mortgage underwriters -- $250,000 gives you a 62.5 percent LTV, a modest increase in lender risk from the 50 percent LTV you had before.

Some Wall Street analysts say the steady ratcheting-up of rates could put a serious crimp in banks' credit line portfolios. Richard X. Bove, a bank stock analyst for Punk Zeigel & Co., forecasts a mass stampede of homeowners to "get rid of their HELOCs (home equity lines of credit) and replace them with larger, fixed-rate mortgages." That stampede could be bad news for big banks that have rapidly built up profitable, bulging books of credit lines.

For example, Bank of America's home equity loan portfolio soared 114.2 percent in the past year, according to Highline Banking Data Services. JP Morgan Chase expanded is portfolio by 153 percent. Credit card issuer MBNA Corp., starting up a push to home equity lines, increased is portfolio of HELOCs by an astounding 4248 percent last year.

Bank executives say they see the handwriting on the wall. Ken Koranda, president of Mid America Bank in suburban Chicago, says the switch from floating-rate equity lines to fixed-rate cashout refis "is happening already, and it's likely to continue if spreads between HELOCs and 30-year and 5-1 hybrid adjustables widen."

Of course, he also hopes his home equity line customers do their cashout refi's with the bank. After all, he said, "they can refi into one of our very attractive fixed-rate alternatives."
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Double-digit Increases, Modest Declines Round Out NAR's Metro Report

By: Realty Times Staff: RealtyTimes
The majority of metropolitan areas experienced historically strong annual increases in median existing-home prices in the second quarter, according to the latest survey by the National Association of Realtors.

The association's second-quarter metro area home price report, covering changes in 149 metropolitan statistical areas, shows 67 areas with double-digit annual increases in median existing single-family home prices and seven areas posting generally modest price declines; none of the areas seeing declines had previously recorded rapid gains. NAR has expanded the number of metros covered in the report, and revised the definitions of metros due to changes in those areas over time.

The national median existing single-family home price was $208,500 in the second quarter, up 13.6 percent from the second quarter of 2004 when the median price was $183,500. The median is a typical market price where half of the homes sold for more and half sold for less. In all, 94 metro areas saw increases above the U.S. historic average of 6.4 percent. Since 1968, prices generally have risen 1-to-2 percentage points faster than the overall rate of inflation; the historic average price increase appears high because there was a period of high inflation in the U.S. during the 1970s and early 1980s.

David Lereah, NAR's chief economist, said the price gains are unprecedented. "When you look at appreciation of home prices relative to the overall rate of inflation, these are the strongest increases on record," he said. "The continuing shortages of housing inventory are driving the price gains."

NAR President Al Mansell of Salt Lake City said housing remains a good investment. "Given the fact that the second quarter was a record for home sales, it's clear that many people find it is an excellent time to buy a home, even with stiff competition from other buyers," he said. "Americans view housing as a solid long-term investment, and they're taking advantage of favorable conditions to improve their current lifestyle as well as their long term financial interests."

The strongest price increase in the nation was in the Phoenix-Mesa-Scottsdale area of Arizona, where the first quarter price of $243,400 rose 47.0 percent from a year earlier. Next was Cape Coral-Fort Meyers, Fla., at $266,800, up 45.2 percent from the second quarter of 2004. Third was the Palm Bay-Melbourne-Titusville area of Florida, with a second quarter median price of $204,000, up 40.0 percent in the last year.

The areas experiencing price declines were lower-priced markets, with one or both of the conditions necessary for price softness -- local economic weakness, primarily in jobs, or a large supply of homes for sale in the local area. Typically, these are temporary conditions. "Once again, since these areas had not seen rapid gains in the past, there is no evidence of bubbles popping," Lereah said.

Median second-quarter metro area resale prices ranged from $73,400 in Danville, Ill., to nearly 10 times that amount in the San Francisco-Oakland-Fremont area of California where the median price was $726,900. The second most expensive area in the United States was Anaheim-Santa Ana (Orange Co., Calif.) at $696,100, followed by San Diego-Carlsbad-San Marcos, Calif., at $605,600.

Other low-cost markets include the Youngstown-Warren-Boardman area of Ohio and Pennsylvania, the second least-costly metro, at $82,900, and Decatur, Ill., with a second-quarter typical resale home price of $86,800.

Regionally, the strongest increase was in the West where the median existing single-family home price rose 19.5 percent over the last year to $312,600 during the second quarter. After Phoenix-Mesa-Scottsdale, the strongest increase in the West was in Reno-Sparks, Nev., where the median price of $357,400 rose 32.1 percent from a year earlier, followed by the Tucson area, at $228,500, up 30.0 percent, and Honolulu, at $577,800, up 28.1 percent from the second quarter of 2004.

In the Northeast, the median resale price during the second quarter was $243,100, up 13.1 percent from a year earlier. The strongest increase in the region was in the Atlantic City, N.J., area, at $244,900, up 25.7 percent from the second quarter of 2004, followed by the Allentown-Bethlehem-Easton area of Pennsylvania and New Jersey, with a median price of $358,500, up 23.9 percent, and Edison, N.J., at $394,100, up 22.8 percent.

In the Midwest, the second-quarter median existing-home price of $167,800 rose 12.1 percent from the same period in 2004. The strongest increase in the Midwest was in the Davenport-Moline-Rock Island area of Iowa and Illinois, where the median price of $133,900 was 24.0 percent higher than the second quarter of 2004. Next came Rockford, Ill., at $122,700 in the second quarter, up 18.6 percent, and Danville, Ill., up 16.9 percent in the last year.

In the South, the typical existing home price was $179,400 in the second quarter, up 5.7 percent in contrast a year earlier. After the Cape Coral-Fort Meyers and Palm Bay-Melbourne-Titusville areas of Florida, the strongest increase in the South was in the Orlando area, at $232,200, up 36.5 percent from the second quarter of 2004. Next was the Sarasota-Bradenton-Venice area of Florida, where the second quarter median price of $367,800 was 34.3 percent higher than a year ago, and Miami-Ft. Lauderdale-Miami Beach, at $371,600, up 31.7 percent.
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Boom Cool-down? More Homes for Sale

Inventories have risen sharply in some of the hottest markets.
By: JAMES R. HAGERTY and KEMBA DUNHAM: The Wall Street Journal Online
The number of homes available for sale has increased sharply in some of the nation's hottest real-estate markets - one of several recent signs suggesting that air may be seeping out of the frenzied U.S. housing market.

Home prices have surged an average of about 50% in the U.S. in the last five years, largely thanks to the lowest mortgage interest rates in more than four decades and what has been a shortage of available homes in many markets. But some economists and housing-industry analysts believe supply is catching up with demand - a trend that could cause home-price appreciation to slow down in the months ahead.

In San Diego County, for instance, where the median home price has more than doubled in the last five years, the number of homes listed for sale totaled 12,149 on July 8, more than twice the 5,995 available a year earlier, according to the San Diego Association of Realtors.

In northern Virginia, an area dominated by the fast-growing suburbs of Washington, inventories are up 26% from a year earlier. "Sales have slowed down for sure," says Tip Powers, president of Realty Direct Inc., Sterling, Va. He says home prices have flattened out and speculators are starting to shy away from the market because they no longer can count on quickly unloading properties at a profit.

A similar rise is being seen in Massachusetts, where home inventories are up 31%, according to officials of real-estate organizations there. Real-estate brokers say inventories also are up in such markets as Chicago, Las Vegas and Orlando.

To be sure, housing demand has appeared to stall at previous moments in the boom only to pick up steam again. Judging the strength of the housing market is especially tricky in August, which is normally a slow month for home sales because so many people are on vacation. A year ago, inventories also were up at this point in the year, but supplies grew tighter in some cities later in the year and prices kept surging.

Economists and real-estate analysts say they won't be able to determine whether the market as a whole is slowing until September or October at the earliest, and note that housing conditions vary among communities.

Home builders continue to report strong sales and order backlogs in the new-home market. The National Association of Realtors recently reported that its index of pending sales in June was up 3.6% from a year earlier. (A sale is pending when a contract has been signed but the transaction hasn't been completed.)

Still, signs of a possible peak are appearing, perhaps in part a reaction to widely publicized warnings from Federal Reserve Chairman Alan Greenspan about "froth" in the housing market and a torrent of media reports about the "housing bubble."

"We're beginning to see that the housing market is cooling a little bit," says Mark Vitner, senior economist at Wachovia Bank in Charlotte, N.C., "but I stress a little bit."

The National Association of Realtors reported that 2.7 million "existing," or previously owned, homes were available for sale in June, up from 2.4 million a year earlier. At the current brisk rate of sales, the latest supply figure was enough to last 4.3 months, still considered a fairly small amount but up from 4.1 months a year earlier. If the sales rate slows, the inventory would start to look more plentiful.

"We're hearing from some really big Realtors that there is a little slowing [in the housing market] this month," says David Lereah, the chief economist for the Realtors' association.

If mortgage interest rates keep rising, as they have recently, home sales will slow, says Mr. Lereah. "Many times I have said housing has peaked, and I was wrong," he says. "Still, I think we've peaked and we will come down a little bit."

Meanwhile, builders have been putting up new homes at a breathtaking pace. New homes that either were completed or under construction totaled 354,000 in June, up from 320,000 a year before, according to the Census Bureau.

So far, many home builders say they can't keep up with demand and aren't worried about inventory levels. While they note that orders for new homes are soft in a few markets, such as Denver, South Carolina and the Washington area, there's continued strength in San Francisco, Las Vegas, Phoenix and South Florida.

But, warns Ivy Zelman, a housing analyst at Credit Suisse First Boston in New York, "If the music stops and the sales rate declines, then you're going to have a lot more supply" of new homes on the market.

Several factors point to a possible cooling of the market. Mortgage interest rates have been edging higher in recent weeks, raising the cost of purchasing a new home and knocking some potential buyers out of the market. The average rate for a 30-year fixed mortgage is 5.89%, said Freddie Mac, a mortgage-finance company, this week. That's up from 5.53% in late June.

In some markets, such as California and Florida, prices have surged past the ability of many people to afford a home. Additionally, banking regulators have begun to raise questions about whether mortgage lenders are being prudent enough - which eventually could prompt some lenders to tighten credit standards.

House prices have continued to rise partly because some lenders have promoted loans that help people buy houses they otherwise couldn't afford. For instance, Countrywide Financial Corp., the nation's largest mortgage lender, says that about a fifth of its home loans so far this year have been "pay option" mortgages. These loans give borrowers the option of delaying any repayment of principal and even paying less than the interest due some months, which results in a rising balance due.

But if regulators keep raising questions about the risks of such loans, that could push some potential home buyers out of the market, reducing demand, says Ms. Zelman.

George McCabe of Brown & Partners, an advertising and public-relations firm that compiles housing data, says that as prices continue to rise fast, more people are putting their homes on the market. "People want to cash in...so there is a lot of competition for resales," he says. He still sees the housing market as strong, adding: "We're just in an adjustment period."

At Wachovia, Mr. Vitner says supply and demand for houses are beginning to move into better balance. "That doesn't mean prices will be a bargain," he says. "It may mean they won't continue to rise in double-digit rates."

Ms. Zelman of CSFB says that prices in some cities are likely to decline at least modestly once the housing boom ends. She noted that housing booms in the late 1980s led to falling prices a few years later in California and New England.

- Jessica E. Vascellaro contributed to this article.

Email your comments to rjeditor@dowjones.com.
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Read This Sunday's PARADE Magazine

REALTOR® Magazine Online
The Aug. 14, 2005, issue of PARADE, a national weekly magazine that is inserted into the Sunday sections of more than 340 metro newspapers, will have a special report titled “Where America Lives,” quoting a number of leaders of the NATIONAL ASSOCIATION OF REALTORS®.

The multi-article cover feature includes information on whether to buy or sell now, results of a survey about buyer preferences, buying a fixer-upper, renovation projects that pay back, and snapshots of how much house you can buy in different markets at different price points.

The articles cite existing-home sales statistics from NAR and information from Remodeling magazine's Cost vs. Value Report, which REALTOR® Magazine jointly produces with Remodeling. The articles quote NAR’s chief economist David Lereah and three other members of the leadership: Allyson Bernard of Danbury, Conn., who is a 2005 regional vice president; Terry Hankner of Cincinnati, who was a 2004 regional vice president; and Richard Gaylord of Long Beach, Calif., who was a 2003 regional vice president and is the First Vice President nominee.

NAR has been working with PARADE since spring to produce this special report, says Iverson Moore, senior associate in the Public Affairs Department. The issue presents positive coverage of the industry to millions of Americans, Moore says.

PARADE reaches 36 million households, representing more than 75 million total readers, and is considered the most widely read magazine in the country, covering health, technology, food, lifestyle, politics, and entertainment.
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Home improvement a hazard with unlicensed contractors

Injuries, mechanics' liens not worth the cost savings
By: Bill & Kevin Burnett: Inman News
Not long ago we answered a question from a reader who wants a new hardwood floor in her living room. Because cost was her main concern, we suggested that she consider nailing down the floor herself, but hire a professional to do the sanding and finishing.

To further reduce costs, we suggested that she might avoid the middleman and hire the finisher herself without involving a flooring contractor. We cautioned her to do her homework before hiring anyone and recommended against hiring an unlicensed worker unless she knew him and his work.

John Motroni, a consumer affairs producer at ABC television in San Francisco, took us to task for this advice, focusing on our remark about unlicensed workers.

He wrote, "I'm sure you know that it's illegal for an unlicensed contractor to bid more than $500 on a job in California. I've looked at the law and I don't see the exception 'unless you know them personally and trust them implicitly.'

"Unless you can get oak floors installed for less than $500, the homeowner could be hiring a criminal. The contractor who takes the time to get his/her license, bonding and insurance, plus pay workers' compensation, protects the homeowner from liability and provides the real 'trust' that you mention in your article."

Whenever we can, we prefer to do the work on our homes ourselves. Cost savings, the satisfaction of doing the job ourselves and assurance of getting the job that we want are critical factors in guiding us down this path.

But occasionally we will contract work. When we built Kevin's house we paid someone else to install the foundation, heating system and roof. An excavation contractor installed the foundation and a heating company installed the HVAC system. But a neighbor's son, Scott, home on summer vacation from Tulane University, nailed down the shake roof.

Scott had worked several previous summers for a local roofing contractor installing shake roofs and needed a summer job.

For Kevin, it turned out to be a perfect fit. After quizzing Scott at some length, we were satisfied that he had the knowledge and experience to do the job.

Kevin knew the risks of this arrangement. He also had the knowledge of how the job was supposed to be done. He weighed the risks against the cost savings and decided to proceed. The job went smoothly and 10 years later the roof looks great and continues to be watertight.

In advising our reader on her hardwood floor installation, we chose the word "workers" very carefully. We wanted to avoid any suggestion that we advocate hiring unlicensed "contractors." We do not. Besides its being illegal, often the risks are just too great.

That said, there are many expert tradesmen who are employees of licensed companies but who are not licensed themselves. We meant to warn Palacios against hiring unlicensed, unknown workers, while acknowledging that we believe it's OK for some workers to take the occasional "side job" provided that a homeowner knows them and their work, the scope of the job is limited, and the homeowner is willing to assume the risks associated with the job.

Those risks can include liability if the worker is injured, property damage if something goes wrong and the risk of the job being left unfinished, which can include responsibility for bills from unpaid suppliers.

We believe it's OK to have a handyman change out a kitchen faucet or to hire the building electrician you've seen at your job to install a lighting fixture or two in your home. But, we'd draw the line at having that same handyman convert the water lines from galvanized to copper or allowing the building electrician to rewire the entire house.

Although the handyman and electrician might be fully capable of doing the work, the potential risk posed by lack of insurance and bonding outweigh any benefits gained by the decreased cost.

Generally, we agree that a contractor's license is a strong indicator that the company hired is serious about its business and, assuming that the appropriate bond and insurance is in place, provides the homeowner with needed protection. We are also aware that a license is no guarantee that a job will be performed in a professional and workmanlike manner.

The California Contractor's Licensing Law was enacted to ensure that a contractor/tradesman has the minimum requisite skills, character and knowledge of the laws and codes to perform the work for which he or she is contracting.

Generally, a California state contractor's license is required for workers who wish to contract to do any kind of construction work. Insurance requirements protect the homeowner from damage for injury to property or workers. Bonding requirements give some assurance that a project will be completed.

While licensure is the general rule, there are a couple of limited exemptions. Each of these exemptions can apply to Palacios if she hires a floor finisher. The first deals with the cost of the work. If labor and materials total less than $500, a worker is exempt from licensing requirements for that job. This allows for a worker to contract for a small job.

The other exemption is that a homeowner can do his/her own work or hire someone to do the work provided that wages are the sole compensation and the building is not intended for resale. Palacios can hire her floor finisher to work on her house, provided she purchases the materials, and wages are the finisher's only compensation for the job.

(For his roof 10 years ago, Kevin bought all materials, then hired Scott for wages. The house was and is Kevin's private residence and was never intended for sale. Although Kevin's house is in Idaho, his hiring of Scott in this way would have passed any legal test in California.)

We agree with Channel 7's Motroni when he says that a contractor working outside these, or other exemptions, is breaking the law. And it's also true that the homeowner who hires that contractor is facilitating that fact.

While the Contractor's License Law is in place to protect consumers, the worker who chooses to contract without a contractor's license places himself or herself at considerable risk. The penalties for contracting without a license can be severe. California law prohibits a person from engaging in or acting as a contractor unless exempt. Conviction of a second offense is punishable by a fine of 20 percent of the contract price or $4,500, whichever is more, and 90 days in jail. Penalties for additional offenses are more severe.

Even if the unlicensed contractor avoids being brought before the authorities, a person who acts as a contractor, who is unlicensed and who is stiffed by a homeowner for work he performs has no legal recourse. He cannot go to court and sue to collect the money.

Homeowners hiring unlicensed contractors must understand that they are on the hook for workers' compensation (should the worker get hurt), damage done by workers and mechanic's liens (filed for unpaid wages or supplier's bills).

Motroni provided a couple of horror stories to drive these points home:

"A woman hired an unlicensed plumber who did 'great work' and had done several small jobs for her before. Unfortunately, he didn't pay his supplier and the woman ended up paying the supplier after she paid the plumber to avoid a mechanic's lien being placed on her home.

"In another case a San Francisco East Bay couple hired a retired roofer to fix a roof leak. He fell, and her insurance paid out a lot of money for his broken bones."

To sum up, there are substantial risks in hiring unlicensed workers and those risks can outweigh any rewards in the way of savings. Hiring licensed contractors provides some assurance of competence and some protection but does not guarantee satisfaction.
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Property Taxes Pinch Homeowners

By: Paul Katzeff: REALTOR® Magazine Online
To the great ire of many homeowners, local governments increasingly are leaning on property taxes to support increased municipal spending.

The NATIONAL ASSOCIATION OF REALTORS® reports a 140 percent increase in the median price of homes since 1990, which accounts for some of the increase. Even so, property taxes have grown disproportionately compared to personal income tax revenues, with the former having increased 25 percent from 2001 to 2004 and the latter having dropped 1 percent in the same period.

Many states have implemented tax caps to stem the problem and hopefully rein in soaring local spending. Some are even considering eliminating property taxes altogether and recouping the revenue through statewide sales and income taxes, which would benefit many cash-strapped homeowners who have seen their assessments shoot up in recent years.

Some legislators have pursued subtler means of extracting revenue from the real estate market—such as transfer taxes, which siphon off a small percentage of the transaction price from both buyers and sellers. But National Taxpayer's Union President John Berthoud believes taxpayers are taking notice. He warns: "Over the next couple of years, some politicians are going to lose their jobs because they've been so cavalier about spending."
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First-time buyers get guidance on real estate purchase

Excellent credit may make up for no down payment
By: Robert J. Bruss: Inman News
DEAR BOB: My son and daughter-in-law rent an apartment in a great community. They both have good jobs. But they have zero savings for a home down payment. I'm not in a financial position to help them with a down payment. With the high cost of houses where they live, is there any way they can ever buy their own home? – Bill P.

DEAR BILL: Yes. Before looking at homes, your son and daughter-in-law should first get pre-approved in writing by an actual mortgage lender, such as a bank or mortgage banker. A mortgage broker can arrange such a pre-approval, but a mortgage broker's "pre-qualification" is worthless because he is not the money source.

If your son and daughter-in-law lack a cash down payment, that shouldn't stop them if they have decent FICO (Fair, Isaac and Co.) credit scores. With good FICO scores, they can obtain 100 percent mortgage financing.

Armed with a written pre-approval letter from a mortgage lender, then they can shop for a house or condo in the vicinity where they want to live. But you can counsel them not to expect their first home to be their dream home.

The important consideration is to get started on the first step of home ownership. To illustrate, my first home cost me $27,000. My friends thought I was crazy to pay so much. But I built equity from mortgage paydown and market-value appreciation, then by selling and moving up to better residences.

Today, I live in my "dream home" and I own a second, or vacation, home. Looking back, my first home was a "dump" compared to where I live today. But we all have to stretch our budget to buy our first home. Your "kids" can do the same.

ARE "OPTION MORTGAGES" GOOD OR BAD?

DEAR BOB: I constantly hear radio ads for "option mortgages." As I understand them, I can pay either interest only, or the fully amortized monthly payment. Is this a good or bad deal? – Suzanne P.

DEAR SUZANNE: Option mortgages can be a great way to buy a home with minimal monthly mortgage payments at the "interest only" level.

However, if you plan to stay in the home "forever," you should pay the amortized mortgage payment amount each month so you will eventually pay off the mortgage in 30 years.

But watch out for "negative amortization." That means your monthly mortgage payment at the interest only level adjusts annually, but the actual interest rate adjusts monthly. Any unpaid interest is added to your mortgage principal balance. The result can be you owe more than you borrowed.

To avoid "negative am," if you can afford to pay the full amortization payment, then you won't owe more than you borrowed.

PROMISES MEAN NOTHING WHEN INHERITING PROPERTY

DEAR BOB: For over seven years, I cared for my late husband as he gradually died from several causes. We were never married. But he often told me that because I took such good care of him I would inherit his real estate, which consisted of his house and at least three rental properties. However, after he died, his two sons took possession of his house, threw me out, and I have not been able to obtain a copy of his will. How can I claim my inheritance? – Josie H.

DEAR JOSIE: Oral promises mean nothing when it comes to inheriting real estate. Without written evidence, you have nothing.

If you weren't legally married to your "late husband," that is another problem because then you don't have any spousal rights. My best advice is to consult a local family law attorney, but don't get your hopes up.

The new Robert Bruss special report, "The Whole Truth About Reverse Mortgages for Senior Citizen Homeowners," is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.
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Steps for a Successful Real Estate Investment

By: Jeffrey R.Kosnett: REALTOR® Magazine Online
Though rising home prices are making it difficult for investors to snap up properties and quickly rent them out or renovate and resell them at a profit, there are several steps they can take to ensure a successful investment.

Most investors sink their money into single-family homes, and their investments prove profitable if they can earn $100 to $200 more than what they are paying out each month. Given that positive cash flow is nearly impossible to achieve in overheated markets like New York City and Boston, investors would be wise to buy fixer-uppers in less desirable locales and take on most of the repairs themselves.

They should plan on owning the property for at least three to five years to recoup the investment. Those who expect to rent an investment property must decide whether to handle tenants, repairs, and other landlord responsibilities themselves or put upwards of 10 percent of their incomes toward paying a property manager to handle those tasks.

It is also important for them to perform credit checks on prospective tenants and avoid making a rushed investment decision.
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