First things first: What to do to get your home ready to sell

'Tis the spring selling season, or, more precisely, the season to get your home ready to sell. Especially if you hope to move on before the kids have to head back to school.
By: Dinah Eng, Special to The Times: LA Times
No matter how grand or modest your fix-up plans, cleaning should be the top priority, the pros say.

"If I only had $100 for prep work, I would spend all of it on cleaning," says Frank Marshall, a Realtor with Re/Max Real Estate Specialists in Long Beach. "Clean the windows, the carpet, shine the sinks, make everything spotless. Nothing is as important as a clean, clutter-free environment."

A cleaning service will charge, on average, about $60 per hour for a two-person crew that can whip your home into shape. An average three-bedroom, two-bath house will take about two to 2 1/2 hours to clean (for a cost of $120 to $150).

When it comes to prepping a place for market, what needs to be done will depend on the home's condition, and the cost will fluctuate accordingly.

Realtors say that for homes of up to 1,800 square feet, owners generally spend $3,000 to $5,000 to prepare a place for sale. For larger homes, the budget goes up, depending on what needs to be done.

So, besides making the house sparkle, what improvements do experts say translate into higher prices and faster sales?

Fix-up budget: $500

Sellers should concentrate on cleaning, landscaping and painting. After that, any money left over can be spent on creating a more polished look, like upgrading plastic patio furniture with a nicer table and chairs.

Curb appeal is a priority.

"I had one client whose lawn was yellowed, and [he] hadn't had an offer in six months," says home stager Ed Marshall, a former Realtor and now owner of Marshall Design Group in Sherman Oaks.

"We hired a gardener to dye the lawn, which takes a couple of hours to do and costs about $150. We also had him plant one tall ficus tree and some shrubs in front of a bare wall, which also cost about $150. The place sold within 10 to 12 days."

Marshall says the dye, when properly applied, looks realistic enough to give buyers an idea of what the lawn could look like if properly maintained.

For enhanced curb appeal, popular plants are calla lilies ($6 for a gallon-size plant); Ranunculus ($2 for a gallon-size plant) and date palms ($11 for a gallon-size plant).

If there are no flowers outside, put geraniums in full bloom in containers. Make sure you buy the right type of geranium, as some prefer sunlight and others shade. And unless the home is small and cottage-like, skip window boxes — which Marshall says are outdated.

Moving inside, he suggests investing $85 to $150 on a contemporary Asian-style area rug, in vogue now.

The home stager dismisses mirrors as a way to enhance the size of a room. They simply add clutter, he says. Instead, paint the walls a light color and use an even lighter shade on the ceiling. A 10-by-10 room requires 2 gallons of paint — at a cost of $23 or less per gallon.

"Arrange your furniture for good pathways," Marshall says. "Don't put your sofa so that it blocks the entryway to the living room. If you have heavy drapes, tie them back to open the space and let light in from the window."

Natural light should sell the house, he says, but if the windows don't let enough in, supplement with table lamps.

To give buyers a sense of comfort and style, Marshall suggests setting the dining table with your best china and putting wine bottles and a dish of nuts or candy on the counter.

Homeowners can cut labor costs by doing some work themselves. James Palomaria, general manager of the Home Depot in Marina del Rey, says the most popular home-prepping materials aren't that expensive. Many people, he says, buy plastic totes (about $5 each) to store knickknacks and clutter.

Other inexpensive fix-ups that make a difference? A basic kitchen faucet in brushed nickel runs about $128, a bathroom faucet, $99.

Fix-up budget: $5,000

For those with $5,000 to spend, rule No. 1 still prevails: Use the money first to clean, landscape and paint.

With what's left, take care of any necessary repairs. Update and replace whatever appliances you can — microwave, refrigerator, dishwasher — and replace or refinish old kitchen cabinets, advises Jimmy Wood, a Realtor with ZipRealty in Los Angeles. Clay Hinrichs, a Realtor with Prudential California Realty in Studio City, says hardwood floors are a hot-ticket item; it costs about $2,500 to sand, re-stain and varnish floors in an 1,800-square-foot home. "People are darkening them into walnut, mahogany and dark cherry tones," he says. "I recommend that people pull up carpets if they've got hardwood underneath."

Recessed lighting is also very popular. It costs about $150 per light, plus the electrician's fee. People install them in hallways and kitchens, and use them in rooms to spotlight artwork.

Homes built in the 1960s and 1970s often have textured "cottage cheese" or "popcorn" ceilings, which were popular at the time. Realtors recommend removing the material, but be sure to test it first for asbestos, a common ingredient until it was banned in 1978. If there's asbestos, you'll have to hire a professional to remove it.

When Donna Heinel of Long Beach put her Belmont Heights condo on the market, she spent about $3,000 to paint, wax the floors and add crown molding.

She was able to save money by doing most of the smaller tasks herself, including installing a new shower head and bathroom sink faucets, pulling out the old medicine cabinet and putting in a new mirror, installing new electrical plates and changing doorknobs and pulls.

Fix-up budget: $10,000 or more

For sellers with this much to spend, the same principles apply: First do basic fixes, then upgrade the look of the place.

Experts suggest painting the whole house if it's needed. Painting the exterior of a one-story, three-bedroom house can run $1,500 to $4,000, depending on the condition of the home and the painter's fees.

Wood, the L.A. Realtor, recommends putting new hardwood flooring in the living areas, flagstone in the kitchen and tile in the bathroom.

Owners with large amounts of discretionary money to spend should evaluate the return on their investment before upgrading simply for the sake of style, says Hinrichs, of Prudential California Realty.

"A lot of people ask, if I put in a new kitchen and remodel the bathroom, would I get more money for my house," he says. "If you remodel, the house will sell quicker, but it's a hassle to deal with construction. You may or may not make the money back, depending on the amenities and condition of the rest of the house, and area comps."

Regardless of how much your budget is, though, sprucing up a home for sale is more imperative in a transitional market, Hinrichs says.

"Our listing inventory's gone up, so you have to make your house look a little bit better than the one next door," he says. "Buyers have more time to look at houses now, which wasn't the case two years ago.
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A Dose of Reality for the Housing Market

Economist discusses depth of correction this year.
RISMedia
“The housing market continued to dazzle with its resilience in 2005, despite widespread expectations for a correction.

Home sales and starts surged to record highs, home values skyrocketed, and speculators continued to place aggressive bets," says Diane Swonk, chief economist of Mesirow Financial, in her April issue of Themes on the Economy available here.

"Speculation played a much larger role that we would like, with mortgages used for investment purposes rising to a record-breaking 12.1% of the market in the fourth quarter. This leaves us worrying about the magnitude of a market correction, now that cancellations for new homes-largely condos-are on the rise, and speculative investment appears to be cooling," notes Swonk.

In her April newsletter, Swonk discusses the housing market, the depth of the correction in 2006, and what that slowdown will mean for the rest of the economy.

- Sales. "Home sales are forecast to slide a little more than 8% from
2005 in 2006, with much of the slowdown occurring in the second half.
Sales actually surged a bit at the start of the year in response to
unseasonably warm winter weather, which increased buyer traffic;
however, some of those gains are now being given back."

- Starts. "Housing starts are forecast to drop at a more aggressive 11%
rate in 2006 from 2005. The give back to early weather-related is
expected to be greater for starts than it is for sales."

- Appreciation. "Median single-family home prices are forecast to rise
7% in 2006, a sharp slowdown from the almost unbelievable and
unsustainable 12.8% pace of 2005, but still respectable ... Other
factors dampening appreciation include: rising energy prices; the
Alternative Minimum Tax Rate; and, a push by realtors to lower
sellers' expectations."

- Residential Investment. "Actual construction activity is expected to
slow much less than starts in the year ahead, supported by the need to
complete projects that were already started."

- Consumer Spending. "Home buying is the single largest trigger of other
types of consumer spending ... so it follows that it should slow along
with housing, which is forecast to do in both 2006 and 2007."

- Defaults, delinquencies, and foreclosures in the housing market are
expected to rise fairly dramatically over the next several years.

"The worst of the problems associated with a slowdown in housing are expected to be felt in 2007, not in 2006 ... However, the real test of the credit worthiness in the of the national mortgage market will not occur until unemployment rises and the economy slips into a recession later in the decade," concludes Swonk.

The April issue of Themes on the Economy as well as archived issues can be found at www.mesirowfinancial.com.

Mesirow Financial is a major independent financial services firm offering Investment Management, Investment Services, Insurance Services, Investment Banking, Consulting and Real Estate.

Founded in 1937, Mesirow Financial is an employee-owned, private company with more than 1,000 employees in 29 offices across the country and in Puerto Rico. The firm has $25.5 billion in assets under management, advisory and custody and nearly $150 million in capital. For more information about Mesirow Financial, visit its Web site at www.mesirowfinancial.com.

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Why home buyers and sellers must understand 'as-is' sales

'As is' usually doesn't get top dollar
By: Robert J. Bruss: Inman News
If you are buying or selling an "as-is" residence during this peak home selling season, it is very important to understand the pros and cons of such a home sale. Thousands of houses and condos are sold "as-is" every day.

But an "as-is" sale usually isn't the best way for a home seller to get top dollar. The reason is an "as-is" sale gives a warning signal to prospective buyers there might be something wrong with the property.

However, an "as-is" home purchase might be an incredible bargain for the buyer who understands the possible benefits and detriments.

WHAT IS AN "AS-IS" HOME SALE? Most of us are familiar with "as-is" used car sales. It means the seller makes no warranties or representations as to the car's condition.

Although similar, "as-is" home sales are a bit different, thanks to state laws and court decisions.

The old days of "caveat emptor" (let the buyer beware) are long-gone in most residential sales. Today's rule seems to have become "Home seller, beware of the buyer's lawyer."

When a home is sold "as-is," that means the seller makes no warranties or representations, and will not pay for any repairs of even obvious defects. However, in most states "as-is" home sellers are now required to disclose to their buyers all known defects in the residence. The buyer can then consider these disclosed defects when making a purchase offer.

For home buyers, an "as-is" sale is a "red flag" warning to be especially careful. At a minimum, buyers of "as-is" houses and condos should make their purchase offers contingent on a satisfactory professional inspection by a reputable inspector.

Personally, I recommend members of the American Society of Home Inspectors (ASHI) because of their tough membership requirements. Local ASHI members can be located at www.ashi.com or 1-800-743-ASHI.

WHY SOME HOME SELLERS SELL "AS-IS." As experienced real estate agents know, many homes are listed for sale "as-is" for a variety of reasons.

The three major reasons for selling "as-is" are 1) the seller doesn't have the funds to correct the disclosed defects and prefers to discount the sales price instead, 2) an older fixer-upper house is likely to be renovated to the buyer's standards, and 3) the seller doesn't want the inconvenience and hassle of making repairs.

Additional reasons for "as-is" home sales include the seller 1) didn't live in the house and is not familiar with its possible defects, 2) recently acquired the property by inheritance or purchase and just wants to make a quick profit, or 3) has owned the home many years and doesn't care about getting top dollar for the property.

THE UNSPOKEN REASON FOR SELLING "AS-IS." But there is another unspoken reason some home sellers sell "as-is." They think they can get away with selling a home, which has a hidden defect that the buyer or a professional inspector won't discover.

For example, a few months ago I received a letter from a nice couple who bought their first home with virtually every dollar they had. Shortly after moving in, the sewer backed up into the basement. Upon investigation, the buyers learned the sewer pipe to the street was badly broken and needed replacement. They spent about $4,750 for a new sewer line and basement cleanup.

After talking with their new neighbors, they learned the Roto-Rooter man was a frequent visitor to the house so the seller obviously knew of the problem. Unfortunately, for the buyers, the seller had moved out of the area and couldn't be easily sued for damages.

Unless there was evidence in the basement of previous sewer backups, even the world's greatest listing real estate agent and professional home inspector probably never would have discovered this serious defect.

DON'T REJECT AN "AS-IS" HOME. Personally, I've bought many "as-is" residences for investment, which were incredible bargains. However, I always insisted on making my "as-is" purchase offers contingent upon approval of a professional inspector's report.

To illustrate, the best "as-is" bargain I ever purchased was a house that had been rejected by dozens of other prospective buyers. As I walked into the living room and saw the ugly crack in the fireplace brick, my first reaction was "yuck."

However, I made a very low purchase offer, contingent on the approval of a professional inspection, thinking my "low-ball" offer would be rejected. To my surprise, my offer was accepted.

Of course, I accompanied my professional inspector and asked him many questions about the fireplace, which he thoroughly inspected, even up in the attic. He reported it was just a superficial but very ugly crack, which could be repaired for about $150 with special fireplace mortar.

HOW TO HANDLE UNDISCLOSED HOME DEFECTS. Buyers of "as-is" homes should always 1) insist their sellers provide a written disclosure statement of all known defects, and 2) make their purchase offer contingent on the buyer's approval of a professional inspector's report. The buyer should always accompany the inspector to discuss any undisclosed defects, which are discovered.

If the inspection report reveals significant unexpected defects which, in fairness to the home seller, might have been hidden (such as attic roof leaks), the buyer then has two choices: 1) cancel the purchase and obtain an immediate refund of the good faith deposit, or 2) re-open negotiations to obtain a repair credit for the estimated cost of correcting the unexpected defect.

Many sellers are so anxious to sell their home, especially in a slow "buyer's market," they will gladly agree to buyer repair credits for the undisclosed defects, even if the seller was unaware of those problems.

CONCLUSION. For various reasons, many houses and condos are offered for sale "as-is." That means the seller must disclose all known defects but will not pay for any repairs.

Home buyers should not automatically reject "as-is" homes. However, they should 1) insist the sellers provide a written disclosure statement of known defects, and 2) make their purchase offer contingent upon a satisfactory report by a professional home inspector. More details on "as-is" home sales are available from a local real estate attorney.
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Night Bites

More restaurants put midnight on the menu
By: RACHEL BROWN: Los Angeles Business Journal
Los Angeles is starting to get some late-night eateries, thanks to the influx of residents to urban areas of the city.

For New York transplant Steve Adelman, late-night dining doesn’t mean popping a frozen pizza into the microwave. Before uprooting and coming to Los Angeles three years ago, he frequented places like Soho’s Balthazar, where steak with pommes frites at midnight is standard nosh.




Late Meals: Diners can nosh until 4 a.m. at the Hollywood restaurant Honey.





In his new home, Adelman didn’t find the landscape so accommodating to culinary night crawling. It wasn’t because people didn’t want to eat late, he concluded. It was because they didn’t have many appetizing places to do it.

“L.A. was known as an early night scene simply because there wasn’t a lot to do late at night,” Adelman said. “The more that opens up, the more it becomes a late-night town. A town defines itself by its options.”

As owner of Hollywood Entertainment Partners LLC, the outfit responsible for the Avalon and Spider Club, he decided he would provide two of them: Honey, a restaurant tucked into a Hollywood alley that caters to restaurant goers with a craving for Kobe beef and roasted chicken from 9 p.m. until 4 a.m., and Lift, a 24-hour eatery in the restored Hillview Apartments on Hollywood Boulevard. Honey opened in December, Lift will open in May.

Late night here is evolving – some would say maturing – with a fledgling crop of restaurants staying open later and later to serve sophisticated fare.

“The trend is definitely more people eating late,” said Lonnie Moore, co-owner of the Dolce Group, which has the restaurants Geisha House and Bella Cucina Italiana in Hollywood as well as Dolce in West Hollywood. “People are as hungry in Los Angeles at 1 a.m. as they are anywhere in the country.”

Outsiders often chide L.A. for its seemingly provincial lack of late-night activity.

“New Yorkers, they are vampires. Here, we are not scared of the sun, we kind of like it,” quipped Merrill Shindler, a senior editor of Zagat Survey. “Our roots in a lot of ways are Midwestern: early to bed, early to rise and all that. Things have definitely improved, but it was pretty bad for a while.”

Certainly, Hollywood is at the center of the shift. The changing restaurant business is reflective of the metamorphosis of the neighborhood. The restaurants are staying open later because there’s a market for it: people packing crowded bars and moving into pricey condos provide one.

But Hollywood’s not the only place where late-night bites are possible. In Koretown, BCD Tofu House, a 13-unit chain, dishes out Korean specialty bibimbap at all hours. Toward the Beverly Center, Berri’s Pizza Café is busy late at night with diners chowing on its thin-crust pizza. And downtown, there’s always the stalwart Pacific Dining Car, where the same juicy steak can be had at lunch and at the witching hour.

Club crowds
The restaurant scene and the club scene are closely related. Oft-neglected urban areas can be sparked to life by clubs – and that’s certainly the case in Hollywood. With the clubs now transformed from isolated outposts to mainstays of nightlife, entrepreneurs sense that other businesses, including restaurants, can capture the money that club goers are willing to spend during a night out.

Honey, on the main floor of the Avalon, has taken advantage of those night owls. Adelman estimates 2,000 people filter through the club on a given evening and it takes only a small portion of that crowd to fill up the 110-seat restaurant. At Geisha House, Moore said that late-night diners at the restaurant are often going to or coming from the clubs.

Even as recently as two years ago, Moore said there weren’t nearly as many clubs around Geisha House as there are now. Since then, hotspots LAX and Mood moved in. “There are so many more places open now,” he said. “That has brought all these people into the area and has been great for us.”

In addition to club patrons, Lee Maen, a partner in Innovative Dining Group, which owns the restaurants Sushi Roku, Katana and Boa, said people going to award shows and other events often stop by at his venues for late-night goodies. “They don’t really eat there, so they wind up coming to our restaurants afterward,” he said.
Not all restaurants are looking to capitalize on the shows or clubs. The Bowery and Magnolia, two late-night restaurants on Sunset Boulevard, attract locals who have a hankering for a casual, yet classy, meal as the morning hours draw near.

Co-owner Laurie Mulstay said Magnolia appeals to customers who live in the surrounding areas, including Whitley Heights, Beachwood Canyon and Hancock Park. “Most people think (her customers) are Hollywood kids coming out from clubs. It is not that at all. It is the neighborhood people,” she said.

George Abou-Baoud, owner of the Bowery, said these neighborhood people were yearning for restaurants such as those along Third Street and Beverly Boulevard – AOC, Toast and Grace are among them. Now, restaurants like his are filling in the gap so Hollywood Hills residents, for instance, don’t have to travel so far.

It’s probably not a coincidence that Abou-Baoud and Mulstay, as well as Adelman, are New Yorkers. These restaurateurs have a vision for what a city block should look like: filled with eateries teeming with customers through the night. Names of restaurants created in that mold – Pastis and Blue Ribbon Brasserie, for example – pour off their tongues.

“In New York, it is so fun. You go walking, you are hanging out, and you can go to restaurants,” said Abou-Baoud. In L.A., there wasn’t a similar vibe, but he thought he would try to foster it at the Bowery.

But a crucial element was missing: in New York, people eat where they live. Here, that’s often not the case. In fact, Shindler cites the car culture as one reason late-night dining hasn’t been cultivated. People end up eating at home, not out, if they want a midnight meal because it’s inconvenient to hop in the car.

However, as the middle- and upper-class types take up residence in locales where they’ve been absent – Hollywood and downtown in particular – a walking environment could develop that would lend itself to late-night dining.

Late bill
Opening a restaurant is never simple, and late-night restaurants have their own set of concerns. Abou-Baoud explained that while location is always critical for restaurants, it is even more so for late-night eateries. Also, he said, a late-night restaurant shouldn’t be too pricey: at the Bowery, the $9 burger is one of the most popular items.

Over the long haul, Abou-Baoud believes the more expensive restaurants won’t make it. The loaded check, he believes, precludes dining repeatedly. “There are some of these places that are doing the whole velvet-rope thing,” he said. “If you are spending between $25 and $55 at midnight, you are going to do it once or twice.”

By charging customers less, Abou-Baoud said he maintains the feel of an unpretentious neighborhood restaurant, and people will be able to come often because they are not taking a chunk out of their wallet on each visit.

Adelman said that the clientele dictates the price point. Young people in Hollywood who are eating late are on a budget, he said, and they can be turned off by entrees that cost almost as much as a day’s pay.

“Cool Hollywood people don’t have money. Struggling writers don’t have money,” he said. “You can build a place where they can’t come, or you can build a place where they can come.”

The menu also has to suit a variety of late-night tastes. While some people may devour a late steak, many others are in the mood for lighter fare. Mulstay said she gets customers coming from the movies who order a full dinner, while others simply order calamari at the bar.
Late-night restaurants tend to have their own rhythms. Customers often show up in packs after leaving clubs, movies or theatrical performances. That can mean that the activity peaks from 11 a.m. to 1 a.m.

Most of the operators of the city’s late-night restaurants admit they are still finding their way. But they all agree that they’re filling a niche.

“If you drive around at 12:30, you can count on your fingers the options available,” Moore said.
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Program Aims at Cultural Diversity

By: Lew Sichelman: Realty Times
About 250 Hispanic men and women in the military and their families have enrolled in the 18-month-old "Welcome Home" program designed to increase Latino home ownership opportunities.

Sponsored by Freddie Mac and the Mortgage Bankers Association, Welcome Home provides free training for bilingual service men and women in an attempt to increase the number of Spanish-speaking professionals in the mortgage banking industry. Industry leaders believe that more bilingual personnel are needed to handle the expected increase in prospective Latino home buyers.

The program provides a tuition-free, Internet-based training program designed by the MBA to prepare past and present Spanish-speaking members of the armed forces for post-service careers in all phases of the residential and commercial lending industry. The effort seeks to provide an estimated 1,000 new graduates a year for potential careers in mortgage sales, origination, underwriting, servicing, collections, and commercial and multifamily lending.

"We are proud of the men and women who have served this country and are pleased to offer them an opportunity to work in this dynamic industry," said MBA President Jonathan Kempner at the time the program was launched in September 2004.

Freddie Mac, the Puerto Rican Telephone Company, Univision, the Hispanic War Veterans and the National Puerto Rican Coalition are supporting the no-cost program in ways ranging from direct financial support to promotion. Lender participants, which include BB&T, CitiMortgage, GMAC Mortgage and U.S. Bank Home Mortgage, meet with eligible students to discuss potential job options.

"This is a program that addresses the needs of a key segment of the community, those who serve in our nation's military and their families who share the commitments of military duty," said National Puerto Rican Coalition president Manuel Mirabal. "We believe this will advance many bilingual service men and women into careers in the banking industry, helping to improve their economic mobility, increasing Hispanic diversity in the banking industry, and fostering improved banking services to Hispanic borrowers."

According to several studies, the general lack of bilingual information about home buying and mortgage finance is keeping thousands of Latino families from seriously considering home ownership. For example, 84 percent of Mexican-American renters have a strong desire to buy homes, according to a recent survey from the Tomas Rivera Policy Institute at the University of Southern California. But 51 percent are uncomfortable with English and 60 percent say it is difficult for them to find an advisor they can trust and understand.

The initiative is "groundbreaking solution to two important challenges: helping our military's brave men and women pursue rewarding new careers after they retire from active service and helping the mortgage industry bring a new level of opportunity to America's fast-growing Latino community," said Craig Nickerson, Freddie Mac's vice president of expanding markets

Welcome Home is open to all bilingual (fluent in both English and Spanish) active duty personnel, reservists and National Guardsmen and women, and veterans who have received an honorable discharge. To make the effort as accessible as possible to qualified personnel, the MBA maintains a special website to provide convenient on-line course delivery around the clock.
After completing the required course-work and receiving a professional certificate, students will be asked to complete an on-line form to identify the type of job they are seeking, as well as geographical preferences. Lender participants then receive the students' personal information forms and make contact to discuss potential employment options with the graduates.

The Department of Defense Reserve Forces Policy Board is promoting the program, and current outreach efforts include coalition representatives attending job fairs at military bases. Last month, for example, they visited a military a job fair in San Antonio to talk with Hispanic men and women in the military and their family members to consider a career in mortgage banking.

"With an estimated 40,000 Mexicans living in San Antonio and future population projections soaring, the mortgage banking industry needs Spanish speakers to accommodate the significant number of underserved Hispanics buying homes," the MBA's Kempner said. "We know that the military instills a 'can-do' attitude into its men and women that works well in the fast moving, real estate banking field."

Coalition representatives as well as service men and women who are currently enrolled in the program plus and program graduates also were available during the job fair to discuss the difficulties of transitioning to civilian life. Hispanic real estate professionals were on hand, too, to discuss the great need to have bilinguals in the housing sector.
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Spending on Remodeling Soars Nationwide

By: Robyn A. Friedman: REALTOR® Magazine Online
Americans spent an estimated $210 billion on residential remodeling last year, an all-time high, according to the National Association of Home Builders.

The NAHB Remodelers Council forecasts a 13.2 percent jump in remodeling spending this year, to a record $238 billion, the largest increase in spending in more than 10 years.

Three things are driving growth in remodeling. Low interest rates encourage home owners to do cash-out refinances, which provide cheap funds for home repairs or renovations. Second, the active 2005 hurricane season forced the need for repairs, particularly in the U.S. Gulf Coast states. Third, a resurgence in the rental market has encouraged many apartment building owners to update their properties to maximize rental income.

Regionally, more remodeling is done in the South than in other parts of the nation; it accounts for 31 percent of all spending on remodeling. The highest per-household spending, however, occurs in the Northeast. The residential remodeling market accounts for about 40 percent of all home construction, the NAHB says.
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Income Tax Time 2006 - Benefits of Homeownership

Typical Homeowner could reap more than $7,000 Annually in Tax Savings.
California Association of REALTORS® (C.A.R.)
There are numerous tax benefits of homeownership available to filers, according to a Research Briefing Paper released by C.A.R.'s Research and Economics Dept. In addition to home equity gains that can be shielded from income tax through the sale of a home, there also are interest and property tax deductions available to homeowners when tax time approaches.

According to the paper, the purchase of a single-family home in California today at the 2005 median price of $524,020 would generate a property tax deduction of approximately $5,240 each year - about 1 percent of the property value. Over a 12-month period, mortgage interest paid would total $24,470, assuming a 20 percent downpayment and a mortgage interest rate of 5.87 percent. That translates into a total tax savings for homeowners in the 25 percent tax bracket of approximately $7,430 for the first year of homeownership.

More Below:

It's Tax Time yet again and the California Association of REALTORS® (C.A.R.) decided to take a closer look at the benefits that go along with homeownership with respect to the consumption and tax benefits. We dived into the tax benefits of homeownership, as well as other of benefits being homeowners. Let’s take a look how this affects homeowners this tax season.

In the midst of tax season, homeownership reaps well-established tax benefits. Homeowners not only enjoy a roof over their heads, they have a long-term nest egg investment and are able to save on their taxes because of it. Because of the Mortgage Interest Deduction (MID) portion of the Federal tax law, homeowners are allowed to reduce their taxable income by a sizable amount. But how much do homeowners actually save? By how much more do they save in taxes over their renting counterparts?

In the last several years, we have seen homeowner’s equity gains—in other words, “return-on-investment”—rise steadily with an average return of over 20 percent per year because of record increases in home prices. Make that comparison with your stock portfolios or even your 401k performance, and real estate has offered quite a good return on your investment.

Yet along with home equity gains and overall appreciation, there are other huge tax advantages to owning your own home—interest & property tax deductions. For example, a homeowner who has purchased a home at the median price in 2005 would have paid $524,020 for that home. With property taxes at the going rate of about 1 percent of the property value, the property tax deduction for that home would be approximately $5,240 a year. In the first 12 months the interest paid on that home loan would total $24,470 (Interest calculated assuming a 20% downpayment with 5.87 percent fixed-rate mortgage – Freddie Mac). Therefore, that homeowner’s total MID and property tax deduction for the first year of homeownership would be $29,700. If the owner falls in the marginal 25 percent tax bracket, the total tax savings in the first year of owning the home would be around $7,430 ($29,700 interest paid & property taxes multiplied by the 25 percent marginal tax bracket). The IRS allows the homeowner to deduct the entire amount of interest paid on a home loan up to $1,000,000 ($500,000 if married filing separately) as long as the owner includes Schedule A on IRS 1040, the loan is in the owner’s name, and the mortgage is secured by collateral (usually the home itself—IRS Publication 936). The long-run tax savings would be over $36,000 if the homeowner holds onto that home for five years (assuming no change in the tax bracket).

Put differently, the current tax system helps homeowners because it makes homeownership more affordable. For example let’s take a look at two different households. One is a first-time buying household who bought their home during 2005 for $445,400 (assuming 85 percent of the median price in California for 2005). After accounting for mortgage interest and property tax deductions, their taxable income would be $87,150. Assuming these new homeowners had no other deductions their total taxes owed to the IRS would be approximately $15,120 (for married filing jointly). Now let’s look at a renting household with the same earnings and marital status. Its taxable income would be $105,000, higher than that of the buyer because they do not have any mortgage interest or property taxes to deduct (assuming the standard deduction for 2005 of $10,000). Under these same assumptions (holding all else constant), the renter household pays approximately $19,580 in taxes. Because of the interest and property tax deduction, homeowners are able to reduce their taxable income and achieve almost $4,500 in tax savings.

As we have seen, homeownership reaps tax benefits. Yet, homeownership has benefits beyond the checkbook or 1040 forms. High and stable homeownership rates contribute many important social benefits by boosting the quality of living areas such as education and civic involvement while lowering the crime rate and welfare dependency. (Source: NAR’s Social Benefits of Homeownership and Stable Housing). As homeowners, you not only reap the many advantages when tax season comes around, but also bask in the social benefits homeownership brings to your community.
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Golden State real estate loses luster

Part 4: Home sales, prices soften in California and rest of West
By: Dave Myers: Inman News
Editor's note: Though experts are divided over what the next 90 days may bring for the housing market as a whole, they all agree on one point: Each region of the nation has its own unique set of circumstances, and how those factors shape the attitudes of home buyers and sellers over the next several weeks will also help to decide how local home sales and prices will fare through the rest of this year and beyond. This four-part series looks at regional trends that are emerging as the peak spring home-buying season gets under way. (See Part 1, Part 2 and Part 3.)

For months, Los Angeles-based aerospace consultant Doug Roberts has stewed over a real estate deal that went sour last November.

It was bad enough that the seller first accepted but then rejected his full-price offer of $699,000 for the modest three-bedroom house near the airport, Roberts says, but even worse that the busy Realtor he was working with took three weeks to call him back to break the bad news.

"I was in limbo for almost a month, not knowing whether I had a deal or not," Roberts says. "The seller was a real jerk, and the agent wasn't any better."

But Roberts' anger turned into laughter last week, when the same Realtor he finally fired last December called to say that the previous deal with the other buyer had fallen apart and the house is now back on the market -- for $50,000 less than he offered to pay last fall.

Despite the price reduction, Roberts isn't biting. "I told the Realtor to get lost, and I told her to tell the seller the same thing," he says. "They treated me like garbage when the market was strong, but now it's a different story that sales are tanking.

"A year from now, that same house is probably going to be worth $200,000 less and the agent will be working at McDonalds."

Though Roberts may be exaggerating, it's clear that California's market is starting to cool after years of record-breaking sales that helped push prices in areas from San Diego to San Francisco up as much as 20 percent annually -- and sometimes even more.

February single-family resales across the state tumbled nearly 16 percent from year-earlier levels, the California Association of Realtors reports. Though prices were up 14 percent from a year ago, they fell nearly 3 percent from the previous month and were down about 6 percent from last year's peak of $568,890 in August.

The inventory of homes for sale more than doubled from a year earlier, to a 6.7-month supply. That's one of the highest inventory levels in years and suggests that the recent softening in values could continue, some economists say.

"There is no justification for the prices we're seeing now," Christopher Thornberg, chief economist at UCLA's Anderson School of Business, said when issuing the school's gloomy quarterly economic forecast last week.

Thornberg predicts that the downturn now under way will cost the state a staggering 200,000 jobs in the real estate and construction industries alone. And though he foresees a modest 6 percent gain in statewide home prices for this year, he also says they'll flatten in 2007.

Many Realtors say the spreads between asking and offering prices have already widened dramatically.

"Some sellers in markets that have had rapid appreciation are listing the price of their home too high, but those homes are just languishing on the market," says Thomas M. Stevens, senior vice president of brokerage giant NRT Inc. and president of the National Association of Realtors.

"At the same time, some buyers who have believed hype about a housing bubble are hoping prices will drop [sharply] but that's not happening either," Stevens says. "Both sides should adopt more realistic expectations."

The recent sales slowdown is affecting the way some brokerage firms divide their commissions. Instead of the typical 50-50 split between agents for the buyer and seller, Realtors who are working with one of the increasingly scarce number of prospective purchasers can sometimes get 75 percent or even more of the commission pie.

The softness in several California markets has also spurred more interest in "price-range marketing," in which sellers offer their homes in a range -- such as $475,000 to $525,000 -- instead of setting a fixed, predetermined offering price.

The concept was introduced in the mid-1990s but was largely ignored for the last several years, when sellers could instead set a firm price and often found multiple buyers willing to pay even more.

Perhaps the biggest proponent of price-range marketing is Prudential Real Estate, which claims that sellers who offer their homes in a general price range attract a broader group of prospective buyers. "It's like fishing with a net compared with a single hook," says Carlton Lund, a Prudential broker in the San Diego suburb of Carlsbad.

More than half of all closed sales in San Diego County last year involved range pricing, he adds, and it's growing more popular in other slowing markets as well.

The slowdown has also spread to new home markets across the West, especially at developments geared toward move-up buyers.

Denver-based MDC Holdings Inc. recently said that its fourth-quarter orders for new homes dropped 10 percent from a year earlier, with an even sharper 39-percent decline in Arizona. At some of its Arizona projects, incentives can equal 3 or 4 percent of the new home's purchase price, says CFO Gary Reece.

Beazer Homes USA recently offered reductions of up to $44,000 on about 100 of its completed but unsold homes in the Phoenix area. Many of the properties were already sold once but the buyers backed out, a company spokesperson says.

And upscale builder Standard Pacific Corp. of Orange County, Calif., blamed its 13 percent drop in orders during the first two months of the year on steep declines in California and Florida.

Yet, builders who focus on first-time buyers are also feeling the pain. KB Home, the West's largest builder of starter houses, recently said orders in its fiscal first quarter ended Feb. 28 were off 12 percent.

The weakness in demand for starter homes is particularly worrisome, analysts say, because a strong first-time buyers' market typically helps to fuel sales and prices of more expensive properties in both the resale and new-construction segments.

With rising mortgage rates continuing to knock thousands more buyers out of the market every month, "builders may still be too optimistic about the future," says Ivy Zelman, a leading analyst with Wall Street giant Credit Suisse Group.
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The Weekend Guide! April 13 - April 16, 2006

The Weekend Guide for April 13 - April 16, 2006.
Full Article:
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Housing Prices in L.A. Aren't Letting Up

The county median, up 15% in March, tops the half-million-dollar mark for the first time.
By: Annette Haddad, Times Staff Writer: LA Times
If this is a bubble, it's sure taking a long time to pop.

For the first time, the median price of a Los Angeles County home topped the half-million-dollar mark last month, data released Wednesday showed.

Four years ago, the median was half that. By doubling in such a short period, it's no wonder Los Angeles County appears on many lists of the nation's most-overvalued home markets.

The increasing prices comfort recent home buyers such as Brian Kite. The West Los Angeles resident waited three years to buy a house because he thought prices were too high. He plunged in about a year ago, spending slightly more than the median price for a three-bedroom home not far from UCLA. The median is the level at which half the homes are sold for more and half for less.

"I felt at the time that I was buying at the top, but I knew I had to do it," Kite says. "But in the back of my head I keep thinking: Are prices still going to go up? I wonder how they can."

Yet they are. In March, the median hit $506,000, up 15% from a year earlier and 3% above the prior month, according to DataQuick Information Systems, a La Jolla-based research firm that analyzes property transactions.

Los Angeles County thus joined Orange, Ventura and San Diego counties in crossing the half-million-dollar mark, keeping Southern California's place among the nation's priciest housing markets. Orange and Ventura counties' medians sailed through the $600,000 level in the middle of last year, and San Diego's broke through the $500,000 point last fall.

To buy a house at the median price, a household would need an annual income of at least $120,000 to qualify for conventional financing with a 20% down payment. The county's median household income: about $47,000.

And half a million doesn't exactly get you a castle. Don't even think about Beverly Hills. Try Norwalk, South Los Angeles or Panorama City, where the median price buys 1,500 square feet with three bedrooms and two baths.

Want something bigger? Head to Palmdale, where $500,000 gets you 2,200 square feet and two stories. Want ocean breezes? There's a two-bedroom condo in Playa Del Rey, built in 1971.

Such stratospheric prices and low affordability have raised concerns about a repeat of the last time L.A.'s real estate market went from hot to cold. After a boom in the late 1980s, local home prices fell nearly 20% between 1991 and 1996 — among only a handful of regional markets to see prices fall in the decade.

But a lot has changed since then, economists assert. The region is less dependent on any single industry, such as aerospace, where a sharp loss of jobs due to defense cutbacks sparked the early-1990s real estate collapse.

There also has been much less home building here than 15 years ago, so vast tracts of unsold homes are hard to find. Mortgage rates are much lower. And local homeowners may have learned a few things from the last go-around. Namely, that a slowing market is not cause for panic. When the market slows, many just won't sell.

Still, naysayers contend, history is starting to repeat itself. Sales volumes are slowing while more homes are coming on the market. In March, 9,755 homes changed hands in L.A. County, a 10.3% decline from a year earlier, and the fifth straight month of falling sales.

Also, the rate of price appreciation throughout Southern California has slowed from its peak in mid-2004. Prices haven't risen more than 4% from one month to the next since last summer. In some cases, sellers are dropping their asking prices.

Today's combination of prices rising more slowly, fewer sales and growing supply are typical of the first phase of a slowdown, UCLA economist Christopher Thornberg says.

"Prices are still going up, because they always go up even when the market starts to cool," he says. "It will take six to nine months for a cooling market to start to see lower prices. It happens time after time."

But while more homes are on the market, it's not necessarily a bad sign, other analysts say.

If anything, these analysts say, a large percentage of homeowners may be testing the waters to see what price they can fetch. If they like it, they will sell. If they don't, they will pull the house off the market.

Such seller psychology is translating into more homes on the market for longer periods — but not widespread price reductions.

"Inventory is definitely up, but it's not swamping the market," says Leslie Appleton-Young, chief economist for the California Assn. of Realtors.

Back at the start of the last real estate downturn, in February 1991, there were so many homes for sale in Los Angeles County it would have taken 28 months to sell them all, Appleton-Young recalls. Defense-industry layoffs forced many to sell. No job, no big mortgage.

"Homeowners had to get out at any price," she says.

That's in stark contrast to this past February, when there was a 7.2-month supply of homes for sale. "People are loath to sell if the market is softening," Appleton-Young says. "And they don't sell if they don't have to."

The region's affordability issues work to the benefit of Mark Gilbert. The Lancaster-based real estate agent sees firsthand the vitality of the county's housing market. In his area of the Antelope Valley, most homes are valued at or below the countywide median price.

"Every listing I've had this year has sold within two weeks — and over the asking price," he says. "If the house is priced right, it will be competitive."

Gilbert expects prices in his area to rise about 10% this year, not as fast as their 25% peak rate of appreciation, but still moving up, not down.

Even UCLA economist Thornberg — among the most pessimistic of analysts — concedes that local home prices aren't likely to fall this time around.

"We're not due for that kind of collapse," he says. Prices will probably flatten by year's end, he predicts.

That's a relief to West Los Angeles homeowner Kite.

"I'm always going to be a little nervous that prices could go down because I took a big step to get this house," Kite says. "But I'm happy with my decision and the best part is I have a great place to live."
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Selling an Investment Property In a Cooling Real-Estate Market

Is it best for investors to wait out slowing housing sales and rent their homes, or unload them, possibly at a loss? Here's a look at whether you should sell, and if so, when.
By: Jonathan Clements: The Wall Street Journal Online
It's time to skip town.

As many real-estate markets soften, speculators are finding they can't flip their investment properties for a quick gain. That leaves them with a tough decision: Should they hang on and rent or should they bail out, possibly at a loss?

Here's a look at that agonizing choice - and why selling your investment property is likely the best strategy.

Cutting losses

Got caught up in the real-estate fever? Let's start with the painfully obvious: If you have no choice but to sell, then you ought to sell - and you should probably sell quickly.

To find out if you're in the "no choice" camp, simply run the numbers. Take the rental income on your investment property and subtract your costs, including the mortgage, property taxes, insurance and maintenance. If the house or condominium is a sizable cash drain and there's no way you can keep covering the shortfall, you've clearly got a problem.

"I'm not selling anything," says John Schaub, author of "Building Wealth One House at a Time" and a real-estate investor in Sarasota, Fla. "But you have to be able to afford to hold your properties. Most of these people ought to sell, because they don't have the aptitude to be a landlord and they don't have the cash flow."

And don't kid yourself: If you have a cash-flow problem now, it could get a lot worse. What if you have trouble finding tenants, or your tenants stiff you on the rent? If the property is already a cash drain, imagine how grim things could get without any rental income coming in.

To make matters worse, you could be hit with rising borrowing costs, as the rate adjusts upward on your mortgage or as principal becomes due on your interest-only loan. "A lot of the people who bought investment properties are using these exotic loans," says Karl Case, an economics professor at Wellesley College in Massachusetts. "You could have the double whammy of falling prices and rising carrying costs."

True, the property market could perk up again, allowing you to unload at a profit. But that doesn't look likely. Chris Mayer, a real-estate professor at Columbia University's business school, notes that home sales are slowing. That usually foretells a period of stagnant or falling house prices.

"I still don't believe that we are at the beginning of a crash," he says. "But people shouldn't count on big appreciation in the future."

Even if real-estate prices simply stagnate, many property speculators will be reluctant to sell their homes and condominiums, because they will be under water once they figure in the 5% or 6% selling commission.

Indeed, this reluctance to sell at a loss helps explain why a slowdown in home sales typically precedes a price decline. Homeowners have a target selling price - it might be the price they paid, or the price they could have got at the market peak - and they initially refuse to accept anything less.

But waiting to "get even, then get out" could be a huge mistake. Not only will you have to cope with the property's monthly cash drain, but also you could be hit with leveraged losses. If you bought that Florida condo with 5% down, all it takes is a 5% price decline to wipe out your equity.

"When prices start to fall, they usually continue to fall for a while," Prof. Mayer warns. "You want to be aggressive in setting a price that allows the property to sell, rather than slowly lowering your asking price and following the market down."

Gauging returns

On the other hand, maybe your situation isn't quite so precarious. Maybe you are collecting a healthy amount of rent or you have a small mortgage, so the property's income is covering your costs.

Even then, you may want to sell. The key question: Could you earn a higher return by investing your money elsewhere?

Over the past 30 years, home prices have outpaced inflation by two percentage points a year. But over the past five years, that inflation-beating margin has jumped to seven percentage points a year. The implication: Recent returns are unsustainable - and modest gains may lie ahead.

Indeed, for today's property investors, rental income is likely to be the biggest source of profit. Suppose you're collecting rent equal to 5% of your property's likely selling price. Meanwhile, assume your investment property's price merely matches the 3% inflation rate.

Put it together, and you have a respectable 8% annual total return. Problem is, that 8% is before costs.

How much are those costs likely to be? Let's ignore all taxes, which you should be able to minimize by depreciating the property and by deducting your various expenses. Let's also ignore the mortgage. While that's clearly a big cost, it doesn't affect the underlying property's investment gain.

Instead, take your 8% total return and knock off the annual amount you spend on homeowner's insurance and maintenance, including occasional big expenses like replacing the roof or replacing the furnace. Those expenses might amount to 2% a year or more.

"That gets your return down to 6% or below," says Columbia's Prof. Mayer. "Remember, you can get 5% on bonds. If you're south of 6% on a risky, idiosyncratic investment, I don't think that's a smart investment, especially when the downside risk appears to be a lot greater than the upside potential."

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It's naptime in Florida real estate

Part 3: Southeast sales ease as speculators grow wary of future price gains
By: Dave Myers: Inman News
Editor's note: Though experts are divided over what the next 90 days may bring for the housing market as a whole, they all agree on one point: Each region of the nation has its own unique set of circumstances, and how those factors shape the attitudes of home buyers and sellers over the next several weeks will also help to decide how local home sales and prices will fare through the rest of this year and beyond. This four-part series looks at regional trends that are emerging as the peak spring home-buying season gets under way. (See Part 1 and Part 2.)

With mortgage rates rising and home sales slowing across most parts of the country, sellers and buyers in a market where economists say that prices should rise about 10 percent this year would seemingly be ready to shout for joy and thank the real estate gods for their good fortune.

But that's not the case in Florida and a handful of other areas in the Southeast, where millions of homeowners have enjoyed a long string of annual price gains that have topped 15 percent, 20 percent, or even sometimes more than 25 percent.

"Prices have doubled in some Florida markets over the past four or five years, so the 10 percent increase we're forecasting for the state this year might seem kind of small compared to recent trends," says Lawrence Yun, an economist and managing director for the National Association of Realtors.

Yun stops short of saying that homeowners in the Sunshine State and other parts of the Southeast may have become spoiled by their years of even heftier price gains.

But, he admits, the mere suggestion that the pace of price inflation may slow "might be a little hard to swallow" by homeowners in the region who have grown accustomed to even sharper annual increases.

Though no one predicts that housing markets in the Southeast will soon come crashing to the ground, it's clear that the region's long run-up in both sales and prices is starting to ease.

Statewide sales in February tumbled 24 percent from a year earlier, the Florida Association of Realtors says, with declines of more than 40 percent in such market stalwarts as Naples and the Sarasota-Bradenton area.

Perhaps more worrisome, there are growing signs that many of the same speculators who have helped to fuel Florida's long price-run-up are now getting jittery about the prospects for future gains.

Cendant Corp., the New York-based parent of such household names as Century 21 and Coldwell Banker, recently reported that its company-owned offices across Florida saw a remarkable 30 percent increase in cancelled sales: It placed most of the blame on speculators who backed out of deals, apparently because they think that prices may be topping out.

If speculators continue bailing, Florida's condo market could be the first to feel the pain. The number of condos for sale in the Miami area is already double what it was a year ago, according to the state's realty group. The foreclosure rate is also twice the national level, says California-based research firm RealtyTrac.

Despite such dire statistics, many developers just keep on building. Roughly 25,000 condominiums are under construction in the Miami-Dade area today, an amount that exceeds the total number of condo sales in the area that have been completed in the last nine years combined.

"It's a scary situation," sums up Jack F. McCabe, a Miami-based consultant to several big Southeast builders. "We are going to see severe downward pricing pressures on condos in the next few years."

The market's recent softness is also being felt by developers of single-family homes.

Florida-based building giant Lennar Corp. said in March that its first-quarter profits soared 34 percent from a year earlier, but it also warned Wall Street analysts that its future income could be hurt because it is offering more incentives to lure buyers.

Builder concessions are also popping up in other parts of the East.

In Virginia, Brookfield Homes Corp. recently launched a "FastMove" special on about 60 homes that are already finished or about to be completed: Discounts on some of its more expensive houses approach $100,000.

And in Washington, D.C., developer MDC Holdings Inc. is offering thousands of dollars in free upgrades to some potential buyers in an effort to offset a sharp 60 percent drop in local sales. "We're certainly not in a 'panic mode,' but we're doing what we can to sell more houses," an MDC sales rep says.

Price cuts and other concessions are also spreading among new housing tracts in the key building markets of Atlanta and Dallas, though NAR economist Yun and other analysts agree that sales in the two cities should advance about 5 percent this year as both areas reap the benefits of a job-creation rate that's more than twice the national average.

Though some buyers and sellers in the Southeast may be losing sleep over the market's softening, builders who've been active in the region for decades are taking it all in stride.

"We've been around for 52 years," Lennar Corp. CFO Bruce Gross said at a recent home builder's conference. "So, we know that housing has a downside scenario."

Tomorrow: A closer look at housing markets in California and the West.
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NAR: Housing Market to Stay on High Plateau

NAR: REALTOR® Magazine Online
Home sales should generally level out and remain at historically high levels, according to the NATIONAL ASSOCIATION OF REALTORS®.

David Lereah, NAR’s chief economist, says mortgage interest rates are trending up but will remain favorable. “Economic growth and job creation are providing a favorable backdrop for the housing market, but rising interest rates have an offsetting effect,” Lereah says. “Home sales will move up and down somewhat over the remainder of the year but stay at a high plateau, meaning this will be the third strongest year on record.”

Lereah expects the 30-year fixed-rate mortgage to rise to 6.9 percent by the end of the year.

Growth in the U.S. gross domestic product is forecast at 3.7 percent in 2006, while the unemployment rate should average 4.8 percent.

Existing-home sales are projected to drop 6.0 percent to 6.65 million this year from a record 7.08 million in 2005. New-home sales are likely fall 10.9 percent to 1.14 million from the record 1.28 million last year — both sectors would see the third best year following 2005 and 2004. Housing starts are forecast at 2.00 million in 2006, which is 3.2 percent below the 2.07 million in total starts last year.

NAR President Thomas M. Stevens from Vienna, Va., says home prices are expected to cool, but not as much as in earlier projections. “Although housing inventories have been improving, the balance is still a bit more favorable for sellers and annual appreciation remains in double-digit territory,” says Stevens, senior vice president of NRT Inc. “Even so, the market is in a process of normalization — appreciation will return to normal single-digit patterns, providing solid investment returns into the future.”

The national median existing-home price for all housing types is likely to increase 6.4 percent this year to $221,700, while the median new-home price is expected to rise 2.3 percent to $242,700.

Inflation as measured by the Consumer Price Index is seen at 3.4 percent in 2006. Inflation-adjusted disposable personal income should grow 3.8 percent this year.
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Housing Bubble? The Market Won't Pop, Expert Predicts

Speculative buying has driven prices to nosebleed levels, but the fundamentals for residential sales remain strong, according to a prominent portfolio manager. Learn when he expects to see signs of a recovery.
By: Christopher C. Williams: The Wall Street Journal Online
From his perch as president of Purchase, N.Y.- based Alpine Woods Capital Investors, Samuel Lieber sees slivers of sunshine stealing through the gloom enveloping the U.S. housing market.

Speculative buying has driven housing prices to nosebleed levels - giving rise to fears that there's a bubble and that rising interest rates will be the pin that makes it explode.

But housing's fundamentals remain strong, argues Lieber, who directly manages or helps oversee some $3 billion of assets through nine mutual funds, including chart-topping Alpine U.S. Real Estate Equity, Alpine International Real Estate and Alpine Realty Income & Growth. The portfolio manager says that he won't retract his horns unless the job market tanks, and he sees little chance of that happening soon.

Based on his record, his opinion is worth heeding.

Eschewing pricey real-estate investment trusts for the most part, Lieber has guided the U.S. fund to an annualized 29% return in the past five years, through April 4, beating 99% of his rivals, according to Morningstar. His International offering was up 26% over five years, while Realty Income, managed by Robert Gadsden, is up 23% for that span.

Late last month, Lieber visited Barron's offices in New York, where condo prices are flattening. Drawing on 25 years of real-estate experience, including stints as a broker and urban planner, he discussed many topics, including the U.S. property market, what he views as blossoming investment opportunities in Hong Kong, Germany and Sweden, and some stocks to avoid.

Barron's: Thirty-year mortgages are still pretty low, interest rates aren't spiking; the economy is still relatively robust, and the job market remains solid. Yet we have this doom and gloom over housing. Is it that folks are just tired of a good thing after years of crazy growth?

Lieber: We've seen a number of [housing] cycles globally, and this one is not that different. We've just gone through a 14-year up cycle for housing, and prices were up because of supply-demand considerations. But, fundamentally, we'll get to a point where, all of a sudden, the market will say: "The Fed is basically done. They will go from a tightening mode to neutral." When that happens, the bond market will do well, and housing will start to take off again. That is going to happen, in all likelihood, within the next nine months.

How many more rate hikes will the Fed do?

At most, we're going to get two more moves. So rates get up to the 6 3/4% to 7% range on mortgages and, as a result, we think the market stabilizes. We do not expect to see a robust recovery, as we saw in 1995. But home-building stocks are trading at just 6 1/4; times earnings multiples, in spite of having had 35% annualized compounded earnings growth over the past seven years. We're going to go through a transition in which the market will look forward to sustainable earnings growth in the mid-teens over the next three to five years. The stocks will be revalued higher by 50% to 100%, in terms of their multiples, in 18 to 20 months.

So there's no housing bubble bursting?

We don't see a bubble. Historically, home prices just don't go down nationwide unless we are in a significant recession. The last time home prices fell nationwide was in 1990. It's employment that really counts. The underlying fundamentals of real estate are still very positive. Job creation and household formation drive housing.

How high can rates go before you'd consider them dangerous for housing?

An 8% mortgage rate would be a problem. My guess is that the Fed will stop short of crippling the housing market. They simply want to slow it down.

What does all this mean for the home-building stocks?

The next six months are going to be a little volatile, because we don't know exactly how they are going to come through this cycle. But after that, I expect the stocks to be up 20% to 30% from here by year end. Going into the second quarter of 2007, it is quite possible we are going to see these stocks trading at significantly higher multiples. My worst-case scenario is that they are basically dead money, that the earnings growth doesn't come through.

What is the hot trend in real-estate investing now?

Interest in international property. Many investors are a little cautious about putting more money into real estate and trying to get to their target allocation because of the high cost of property in the U.S. So, many are looking abroad. Not only can they get added diversification, but many of the real-estate markets abroad are enjoying prices and rents well below historical highs.

Since 2003, many foreign economies have been strengthening. From 1997 through '02, for example, home and office prices in Hong Kong were declining. They finally started to improve a little in 2003, and 2005 was a very good year. There are opportunities in Europe, as companies are restructuring, improving operating fundamentals across the board as vacancy rates are coming down. Vacancy rates in Paris are 5% now. Add to that the potential that the dollar will weaken. The currency winds could be at your back, too.

Retail is probably still a very strong place to be internationally, irrespective of country, as long as the economies continue to grow and add jobs. We've made tremendous money in Europe and in Asia on residential builders. We're seeing a gradual strengthening in the office markets.

The other area abroad that has lagged the U.S. is hotels. Hotels are going to be a very interesting play, particularly in Asia, but also, to a lesser degree, in Europe, over the next couple of years. In fact, hotels are still a great place to be in the U.S. They are actually among the cheapest sectors in commercial real estate right now.

So, what's next?

More money managers want to participate in the international property. So, over the next three years, we expect to see an initial-public-offering boom the likes of which transformed the U.S. REIT industry between 1992 and 1995. Everybody is racing around, trying to find somebody who has experience in the international area.

And since you run one of the oldest international funds around, you see yourself in the catbird seat here.

Yes, of course, but it is a brave new world. There will be great opportunities, but there will also be heightened risks.

OK, let's get to specifics about stocks you like and don't like.

Well, again, one has to appreciate that we have three distinct mutual funds, and they are really run in different ways. Let's start with U.S. Real Estate Equity, which could be characterized as an opportunistic value-oriented fund, focused on long-term capital appreciation. There are times when this fund has been 50% in real-estate investment trusts. But our REIT exposure is only about 12% now.

That sounds very low.

It is historically low. But REITs are trading at 18 to 24 times Ebitda [earnings before interest, taxes, depreciation and amortization]; they're priced to perfection. We have over 50% in home builders, where there is an opportunistic purchase opportunity available. And we have over 35% in hotels, where we perceive a once-in-a-decade supply-demand imbalance.

What's your REIT outlook?

REITs will be flat at best over the next 12 to 15 months. Total return over two years could be in the single-digits.

U.S. Real Estate Equity has about $472 million in assets and your top five holdings are Lennar, Hilton Hotels, Starwood Hotels & Resorts, Hovnanian Enterprises and Standard Pacific.

Lennar is a great balance-sheet company that happens to be in the home-building business. It's also a great buyer of land. This company is effectively trading at about 6 1/2 times earnings for this year, and those earnings are pretty much in the bag in terms of new orders already achieved. We think the earnings will grow moderately next year, about 10%.

Is the valuation still reasonable? The stock is at 62 now.

This stock has always been one of the group's moderate performers, in part because they've allowed the balance sheet to strengthen; they didn't leverage the company. So the stock didn't get as high as some other companies on the upside. It's also why, on the downside, it hasn't gotten as low as others have. It's a much less volatile stock. We want to own companies that get acquired. We also want to own the companies that can grow through consolidation; that's where Lennar fits in. I would be surprised if this stock in 18 months is not somewhere between 75 and 80 bucks. I think that's conservative.

Let's talk about Toll Brothers, a company Barron's has written about favorably.

Toll has a unique market niche: The average price of its homes is around $700,000. Plus, they've also been very active land developers. Like Lennar, they have fabulous land positions. Toll has developed a strong brand reputation. That in itself is valuable to any company that wants to get into the business. Eventually, Bob Toll will sell the company. I'm not suggesting that it will happen this year, but over the next few years, it is quite possible.

Who might be a likely buyer?

Lennar, in part because of its balance-sheet strength but also because there is a natural fit in terms of the land position. Lennar does a few homes at the price levels at which Toll operates.

What would be a reasonable price?

Lennar wouldn't pay a big premium. Right now, they would use their shares, but their shares are trading at just 6 1/2 times earnings.

As we speak, Toll is at 35, well off its 52-week high. Why wouldn't now be a good time to buy it?

Because Toll wouldn't sell. There has to be a friendly deal. It is too difficult to integrate these sorts of companies without a friendly deal.

Are you buying Toll stock now?

This is one you should load up on. We've got almost a 5% position. We've been buying selectively in the downturn, yeah. We were active buyers in October; the group bottomed on Oct. 27. We bought more shares this year, especially when we were getting into mid-March, when the shares were getting very depressed.

Absent an acquisition, if an investor gets in at 35, what's the upside?

You could easily see the stock at $50 over 18 months to 24 months, when I think the group again will be trading at a premium.

You have a number of hotels in your top holdings. Why do you like the group?

Hilton and Starwood are well-positioned for the long term. However, short term, we have been very keen on DiamondRock Hospitality, a hotel REIT. It was partially created by entrepreneurs from Marriott, who are also still tied into Marriott. They have historically bought very nice hotels that have had problems. Then, they'd reposition them or plug them into the Marriott system. They buy the hotels, and Marriott gets long-term franchise agreements.

What is particularly appealing here is that this is a company that trades at a dividend yield of about 5 1/2%. And we think they are going to be in a position to start growing that dividend over the next six to nine months. They've had very strong double-digit revenue growth over the past year in their portfolio, and we think that is going to continue this year.

The hotel industry is benefiting from a supply-demand imbalance. Effectively, from the onset of the 2001 recession through 9/11 through the effect of SARS [a respiratory ailment prevalent in Asia a few years ago], no one wanted to travel.

We've seen the impact on airlines. But it also hurt the hotel business, which fell from a record year in 2000 to a very, very difficult recession level in 2003. As a result, no one built new hotels. Growth in the number of hotel rooms coming online each year went from 3.5% in 2000 to less than 1% in 2004. It will gradually start to ramp up and approach the 2 12% that's been the U.S. average since 1945.

Diamond, at 13.58, is near a 52-week high. How much upside do you see?

A lot of these companies trade on Ebitda multiples. These guys should move from the 12-times range up toward around 14. We could very well see this stock trade roughly up in the $16 range.
In 12 to 18 months?

Or even a little more. They also will be increasing the dividend. This stock could really put up very significant total returns.

Any other picks, Sam?

Orient-Express Hotel. This stock is trading around 38, near its high.

And its forward P/E is around 31.

Yeah, the price-earnings ratio is high, but the price-to-Ebitda is around 14 times -- the company's historical average. The whole hotel group is undervalued. And it's easier to generate growth with individual acquisitions for smaller companies, such as DiamondRock and Orient. The unique aspect of Orient-Express is that 70% of its income comes from abroad. Some of its income is depressed, because they have assets in New Orleans. They have a big hotel there.

Are you putting new money in this one?

I have not paid this price. But it's a great long-term story. I think there is a potential to see this over time in the high-40s-to-50 range. It's not inconceivable that this company could trade over 50 within 18 months, especially if someone takes them out. If they sell out, it'd be a number with a six in front of it.

What's the likelihood of that?

You should call Prince Alwaleed [owner of the George V in Paris, among other posh hotels]. He's the most likely sort of buyer for truly high-end, unique assets like this company.

Hilton is in all three of your major real-estate funds' portfolios. Why?

Management is taking their company in the direction of Marriott's business model, being a brand and distribution company. They get 30% of business overseas. Hilton could easily get to the mid-30s [from the mid-20s now] in the next 18 months.

What do you like overseas?

The largest holding in the international fund is a Swedish company called JM. It trades in its local market. JM is around 526 Swedish krona [about $69]. We started buying this one back in '03. They are the predominant builder of high-end condos in Stockholm. They have 50% market share in Stockholm, 30% of the high-end housing market in Sweden. They also build offices in other countries, but primarily they are a housing developer of mid- to high-rise buildings.

We were able to buy it under 100 because the market in Sweden was very depressed after 2000, when the high-tech bubble burst. We've been selling. I don't want to eliminate my position because this is an excellent company, but more than the easy money has been made here.

What's the geographical breakdown of the international fund, which has assets of around $550 million?

We have been over 40% to 45% in Europe, and we are bringing that down. We think there are opportunities in Eastern Europe, and there are still companies that we like in Western Europe as well as the U.K. But Asia, of course, is where the growth is. So we are gradually shifting a higher proportion to Asia; we have about 35% there now. The balance would be in the Americas, both Latin America and Mexico. We do keep some in the U.S., about 12%. From our perspective, Hong Kong is still very attractive.

We've built a pretty good-sized position, including some recent purchases in a company called Far East Consortium [35 HK]. They are in Hong Kong and are a play on everything from China, where they have housing developments outside of Shanghai, to hotels in Hong Kong, where they have a lot of business-class hotels.

They also are a play on Macau. They are developing much of the Cotai Strip on behalf of and in conjunction with Las Vegas Sands. Macau is where there's legal gambling, and Wynn Resorts and Las Vegas Sands are trying to effectively recreate a Las Vegas adjacent to China. Macau is near Hong Kong, on the other side of the Pearl River Delta.

How well has this stock done for you?

It's up 32%, year to date. We've been buying this since back in 2004 - I think in the high $1.80 to $1.90 [Hong Kong dollar] range. We bought much more after it spiked in 2004, and we have been buying it ever since, on dips. It is now 3.73.

In the U.S., what sectors would you be cautious about?

Rental-housing companies have good fundamentals for the next three to four years, but they are very, very expensive. We'd be cautious on the higher-end companies, like AvalonBay Communities and Archstone-Smith. They are two of the best companies in the group; we just don't want to pay 24 times cash flow for them.

Let's talk a bit about your third major fund, Alpine Realty Income & Growth. What have you added to that lately?

Sure. But, first, let me give you one more international story, one in Europe, Dawnay, Day Treveria. This is listed on the U.K. exchanges, but it's basically a company set up to buy German retail property. Its prospects are very good, with Germany [launching REIT-friendly legislation]. It will reach a certain scale and will either be acquired over the next three years or will gradually benefit from rising rents in Germany.

OK, in the income fund, one stock that maybe offers a little more yield is iStar Financial, which is trading around 38. Its dividend yield is 8.1%, and we think it will start increasing the dividend growth rate over the next couple of years. They specialize in mortgages through commercial-property companies, and are the largest player in the sector.

It has underperformed dramatically, year to date. The markets have been concerned about mortgage REITs in general. And they felt that iStar was actually giving up market share to more aggressive companies. But frankly, I think that the stock should be easily 15% higher.

Thanks, Sam.
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