Tax Implications Of Selling Your Home

By TOM HERMAN
Staff Reporter of The Wall Street Journal

From The Wall Street Journal Online

While the Internal Revenue Service and Congress have declared war on tax shelters, nobody is threatening to touch America's most popular shelter: home, sweet home.

Tax laws long have offered favorable treatment to homeowners. But that treatment became even more favorable because of a 1997 tax law and Treasury Department regulations interpreting that law. As a result of those changes, millions of people who sell their primary residence don't owe a penny in capital-gains taxes.

The changes add up to an "extraordinarily generous tax break," says Bob Trinz, senior tax analyst at RIA, a New York-based tax information and software company and a unit of Thomson Corp.

Linda Goold, tax counsel at the National Association of Realtors in Washington, calls it "the most taxpayer-friendly provision I've seen during my career, which is almost 30 years now."

Surging home prices in recent years have made these rules even more important for growing numbers of homeowners, says Rob Hanson, a partner at Ernst & Young in Washington and a former Treasury tax legislative counsel who helped write the regulations. The national median existing-home price for all housing types was $206,000 in April, up 15% from $179,000 in April 2004, according to the National Association of Realtors.

But not everyone benefits from the 1997 tax-law changes. In some cases, homeowners may even have to pay more in capital-gains taxes than they did under the old regime.

Here is a primer on the rules and the latest regulations, who wins and who loses, and advice from tax lawyers, accountants and advisers on how to take advantage of the changes.

THE BASICS

The general rule of thumb is that if you sell your primary residence, you typically can exclude a gain of as much as $500,000 if you're married and filing a joint return with your spouse (or $250,000 if you're single or married filing separately) and meet certain conditions.

To be eligible for the full exclusion, you typically must have owned the home -- and lived in it as your principal residence -- for at least two of the five years prior to the sale. These exclusion amounts aren't indexed for inflation. (When calculating your cost basis, don't forget to include additions and other "improvements," such as a new roof, deck or heating system. However, this subject -- and other adjustments you may need to make -- can be tricky. For details, see IRS Publication 523.)

Real-estate agents say there is considerable confusion about the exclusion. Some people, for example, think this is a once-in-a-lifetime offer. It isn't. Homeowners can take advantage of the full exclusion every two years.

Some people also think the $500,000 exclusion is for everyone. It isn't. It's only for married couples filing jointly. Another point to bear in mind: This break applies only to your primary residence, not vacation homes.

Here's an example: Suppose you're married and file jointly. You bought your first home in the mid-1990s, have lived in it ever since, and your cost basis is $100,000. This year, you sell it for $600,000, giving you a $500,000 profit. Because of the 1997 law, you typically wouldn't owe any capital-gains taxes to Uncle Sam because your profit didn't exceed the maximum exclusion of $500,000.

What if you make a profit of more than the exclusion? If you sell your home this year for, say, $1.1 million, you wouldn't owe any capital-gains tax on $500,000 of your $1 million gain -- but the other $500,000 would be included in your taxable income.

Even if you have to sell your home in less than two years, you may be able to avoid Uncle Sam's grasp. The law allows a reduced maximum exclusion if the sale occurred because of a change in your place of employment, health reasons or "unforeseen circumstances."

Let's assume you're married and file a joint return, and you move from New York to California to take a new job. And so you have to sell your home after having owned it and lived in it for only one year. In that case, you typically would qualify for half of the maximum exclusion of $500,000, which means as much as $250,000 of your home-sale profit could be tax-free.

And what are "unforeseen circumstances"? Congress didn't define them in the 1997 law. But Treasury officials later issued detailed regulations offering numerous examples. Among them: divorce or a legal separation, multiple births from the same pregnancy, or the loss of your job. You may even qualify for a reduced exclusion if you or your spouse changes jobs and takes a pay cut that results in an inability to pay housing costs and reasonable basic living expenses.

WHO WINS -- AND LOSES

Most homeowners who sell are likely to benefit handsomely from the 1997 rules. But some people got hurt by the changes. That's because when Congress changed the law, it erased an old law often referred to as the "rollover" provision.

That provision generally allowed homeowners to defer the capital-gains tax on their gain if they sold their home and bought a new one that cost as much as, or more than, they got for the old one. The change simplified life for most home sellers and also greatly helped those who wanted to downsize. But it could hurt some people in real-estate markets where prices have risen especially rapidly and where owners have built up very large gains. Some of those people now would owe capital-gains taxes that they could have deferred under the old law by buying another residence.

Suppose you are single, sell your home for $500,000, netting a gain of $400,000, and buy a new home right away for $600,000. Under the old law, you could defer the capital-gains tax because you had rolled over your proceeds into the new home. Now, however, you would owe capital-gains tax on $150,000, the amount above the maximum $250,000 exclusion for a single person.

The 1997 law also replaced an old law that allowed a once-in-a-lifetime exclusion of as much as $125,000 for someone age 55 or older.

Ken Kies, a former chief of staff of Congress's Joint Committee on Taxation, recalls getting peppered with questions in 1997 from concerned tax lawyers in New York City. Those lawyers didn't think the exclusion amount was large enough for people living in hot real-estate markets such as New York City or Los Angeles.

"They suggested the exclusion should be bigger if you were in places in the country like New York or Los Angeles than if you were in less-active real-estate markets like Des Moines, Iowa," says Mr. Kies, now managing director of Clark Consulting's Federal Policy Group in Washington. "They were saying $500,000 wasn't enough for them. I told them I felt their pain but I didn't think anyone else would."

Some tax-policy wonks think the exclusions should be indexed to reflect inflation. But that hasn't happened yet and isn't likely to anytime soon, given growing congressional concerns about huge budget deficits.

MAKING THE MOST OF IT

Because home prices have surged in so many places, more homeowners may be bumping against the exclusion, or may even have bigger gains. What to do?

Some homeowners with king-size gains should consider holding onto the home and leaving it to their heirs, says Mr. Trinz. Under current law, all built-up capital gains typically disappear when the owner dies. The cost basis of the home to the heirs generally will be its fair-market value as of the person's date of death, not what he or she originally paid for it.

Another idea: Suppose you have a gain that's larger than the exclusion and you're thinking about selling your home this year. Consider also selling stocks or other capital assets that have tumbled in value, says Martin Nissenbaum, national director of personal income-tax planning at Ernst & Young in New York. Those losses can then be used to offset some or all of the gain on the sale of your home, which would otherwise be taxable, he says. "You can also use any capital-loss carryovers for that purpose."

First, capital losses can be deducted against capital gains. Second, if the taxpayer's losses exceed the gains, that person can deduct up to $3,000 ($1,500 if married and filing separately) of net losses each year against wages and other ordinary income. Excess losses are carried over to future years.

P.S. You can't deduct the loss on the sale of your primary residence.

WHEN TO GET HELP

Part of knowing how to take full advantage of tax laws involves knowing when to give up trying to understand them and seek professional help.

Who needs help? Mr. Trinz of RIA says the rules can get especially complicated if you marry someone who has recently used the exclusion, if the home is part of a divorce settlement, if you inherit the home from your spouse, sell a remainder interest in the home or took depreciation deductions on the home.

Also, questions have been raised about how to define your "principal" residence. The short answer is that it's typically where you spend a majority of your time during the year, but the issue can be considerably more complex.

For further information about this and other nuances, check out the IRS Web site (www.irs.gov) and search for Publication 523, "Selling Your Home." For the do-it-yourself crowd, RIA (ria.thomson.com/homesale) sells a publication called "Making the Most of the Home-Sale Exclusion."

There also may be tricky state-tax considerations, so check with your state tax department. An easy way to get general details is to check out the Web site of the Federation of Tax Administrators (www.taxadmin.org) and click on "Links."

Email your comments to rjeditor@dowjones.com.

--June 15, 2005

Get in early! Get out fast! Sound familiar? Everyone knows how the dotcom party ended. Right? Right?

August 18, 2005: 1:33 PM EDT
By Stephen Gandel, MONEY Magazine



NEW YORK (MONEY Magazine) - Late May, early evening. Chris Cowen cools his heels in a Minneapolis restaurant, waiting for a table. His buddy Keith is 15 minutes late.

Cell phone rings. It's Keith. Got a proposition for you, Chris: a one-bedroom condo under construction in Scottsdale, Ariz. -- 1,800 miles away -- for $135,000. The catch: Only 60 seconds to decide. Sight unseen. Over the cell.

"It was a no-brainer," recalls Cowen, 32, who owns 28 condos (solo or with partners) in various stages of completion. Two months after his impulse buy, Cowen figures the unit's ultrafast appreciation has covered his $3,500 cash down payment 10 times over.

"I've already made $35,000," he crows.

Know this guy? If you don't, you probably will soon, because condos are to the real estate boom what Internet stocks were to the 1990s bull market. And like the Internet day-traders before them, the new condo flippers, with their talk of instant riches and easy money, are about to become the life of every cocktail party.

And why not? Condo prices have soared 80 percent in the past five years, making the same period's 40 percent rise for single-family homes look almost pokey. Developers are constructing new condo units at nearly twice the pace they were in 1999, and investors are literally lining up to buy one, two, three or more. In Miami, as much as 75 percent of some condo towers are investor-owned.

No cash? No problem. Banks, with their loosened lending standards, no-money-down loans and teaser mortgage rates, are making it easier than ever to be a mogul-in-training.

Chris Cowen is betting his retirement that the wonder years won't stop soon. He cashed out his 401(k) to put $246,000 into a highly leveraged condo portfolio that he thinks could sell for $6.2 million. Estimated equity so far: $868,000. Cowen is so bullish, he quit his corporate job at Siemens to develop his empire full time.

"Even if you make six figures, you still work for someone else, paying 40 percent taxes and putting in 60 hours a week. What do you get for that?" he scoffs.

A volatile mix
Mix it all together -- rising prices, record levels of construction, fast-and-loose mortgages and swelling ranks of new investors -- and you get a market more volatile than Tom Cruise.

"To some degree, what's driving condo prices is sheer greed," says economist Gleb Nachayev of Torto Wheaton Research, which forecasts a relatively mild drop of as much as 3 percent for U.S. housing prices overall in the next year. "Condo prices have increased faster than single-family homes -- and they will fall faster."

As they did little more than a decade ago. Overbuilt and over-concentrated in city centers, the condo market collapsed in the early '90s, smashing overstretched owners in the process.

No one knows when history will repeat itself. But c'mon: The easy money has been made. The right time to invest is not after a record five-year run-up in prices. It's not when the supply of new product is set to nearly double.

If you're really drawn to the market, you need a deeper understanding of what's driving prices up -- and what can drive them down. Above all, don't confuse what's worked in the recent past with what will work over the long haul.

The case for boom
Condos still have plenty going for them -- namely, 76 million baby boomers. You know the demographic drill by now: As they become empty-nesters and retirees, they'll sell their rambling homes in the burbs and move into yard work-free condos (or at least purchase them as second homes).

They're expected to continue flooding into aging-friendly locales like Arizona, Florida and Nevada, but they'll also be flocking to traditional city centers as downtowns become safer.

Don't forget the children of boomers, adds veteran condo investor and National Association of Realtors chief economist David Lareah. They'll need affordable places to get started, and many already see entry-level-priced condos and townhouses as a great way to build equity so that they can trade up.

"It's hard to concoct a scenario where condo prices collapse in most markets," Lareah argues.

A good condo pick that's soundly financed can be about as hassle-free as real estate investing gets. Gary Eldred, author of "Make Money with Condominiums," notes that association fees typically cover the standard repairs you'd have to oversee on a traditional house.

"Condos," Eldred says, "are perfect for people who want a passive investment."

The case for doom
Even the best investments can get overvalued, however. Condo fans cheer the 15 percent average annual spike in prices these past four years, but fail to remember that number was about 2 percent in the '90s. Last year, for the first time, the median condo cost more than the median home -- $9,500 more.

Prices in some parts of the country look even more ridiculous when you compare them to the low rents that condos currently generate.

In Minneapolis, for instance, the average downtown condo sells for just over $256,000, up 77 percent from mid-2000. But area apartments rent for a measly $915 average a month, down from $918 four years ago, according to Torto Wheaton Research.

Even with a 20 percent down payment, a 30-year fixed-rate mortgage would cost $1,150 a month. This condo investor is $235 a month in the hole -- even before paying association fees and taxes.

Growing fears of overbuilding are also cause for pause. With so many condos being built today, one has to wonder: Who's gonna rent them? Apartment vacancy rates have been rising.

"My guess is construction is growing faster than demand in some markets," says Raphael Bostic of the University of Southern California's Lusk Center for Real Estate.

Perhaps most worrisome: The growth in condo-investing mythology. Here are three whoppers that need reality checks.

MYTH: Get in early and you'll be guaranteed a profit.
Remember the lust for Internet IPOs? Ordinary investors bid up the stocks of hot little companies that hadn't even registered their first sale yet. Today's version is a preconstruction condo, where investors jockey to get into a project not yet built, certain the units will jump in value when completed.

But getting in early doesn't guarantee riches anymore. That's because developers have caught on to the demand and are now selling preconstruction properties at market prices, says Kimberly Kirschner, a Miami agent who specializes in new condos.

Also, developers are requiring buyers to reserve their units earlier -- as much as three years in advance. That's an awfully long time to assume a hot condo market will continue to boil.

So when it comes to preconstruction, skip that line. Instead, buy an existing unit. While preconstruction purchasers can wait up to three years with very little to show for it at the end, you can collect 36 months of rent to put toward paying off your mortgage and building equity. If prices continue to appreciate, great. But that's a cherry, not the whole sundae.

MYTH: Creative mortgages lower your payments and guarantee positive cash flow.
New twists on adjustable-rate mortgages and interest-only loans can make condo investing seem like a lark. But some of these things could slaughter you if prices fall when you have to sell.

The riskiest is called an option ARM, which features several payment choices each month, including a standard interest-and-principal payment, an interest-only payment and an interest-only minimum payment that's so low it doesn't cover the month's interest charge. The unpaid interest is rolled into the principal, meaning that -- yes -- you're charged interest on your unpaid interest.

Fort Lauderdale resident Bruce Palmer, 50, recently signed up for an option ARM that cuts his monthly payment on a $417,000 investment condo by $500. As a result, his two-bedroom in Fort Lauderdale should generate a profit of $350 a month.

Palmer, a commercial pilot, says he sees the risk. Paying the interest-only bare minimum means his mortgage is growing, not shrinking. If local prices were to drop, his loan balance could exceed the condo's value.

But Palmer is confident, building a war chest to snap up properties. "If I could leverage more," he says wistfully, "I would."

Author Gary Eldred worries about such sunny thinking. Most condo investors should avoid option ARMs, he says, and either put down more money to lower the monthly payment or consider buying -- gasp -- a less expensive unit.

Whatever your choice, Eldred says your expected rent should cover at least 70 percent of your total monthly costs. Tax write-offs on condo losses can help close some of that gap, he notes. (Up to $25,000 in losses, excluding mortgage-principal payments, can be charged against total income of less than $150,000.)

And he argues that rising rents should, over time, cover the rest. (With condo prices soaring, Eldred predicts that condo rents will follow as would-be buyers get priced out and rent.) More cautious investors would want their rent to cover 100 percent of carrying costs or more.

MYTH: You should buy in your backyard, where you know the landscape.
Too few condo investors recognize one of the best reasons to buy: It can help diversify your real estate holdings so that your portfolio doesn't rise and fall solely on hometown economics and events. (Even if property is a relative bargain in your area, buying wisely elsewhere can make more sense than buying too much property locally.)

New York City attorney Richard Savitt, 40, never thought about all this 18 months ago, when he abandoned hopes of investing in Big Apple condos and bought in Philadelphia instead.

"We just thought New York prices were crazy," he explains.

But it sure looks wise now. Savitt and four partners bought four one-bedroom condos, each around $300,000. Similar units now list for as much as $450,000.

To help you determine where to invest, take the average price at which units are selling in a city and divide it by the annual rent the average apartment there generates. That will produce a price-to-rent ratio. The lower the better. Houston, Atlanta and Philadelphia, for instance, still look relatively good, while New York City and San Francisco do not.

In Minneapolis, Cowen and four other investors who've become pals gather at a bar for their fortnightly meeting. Jahn Dyvik, a 42-year-old engineer who sold his Porsche Boxster to help fund more condo buys, says lower prices in neighboring St. Paul make that city the better bet.

The rest of the group is sticking with Minneapolis, where they think prices will rise faster. Two others have also sold their cars. All have home-equity loans.

Where are prices headed? Cowen's not sure. The long-term case for condos looks good, but all the building out there makes him nervous. "People have unrealistic profit expectations."

Not him, of course. "No one has a crystal ball. But the condos I've bought are going to go up."

Tags:
fsbo, real estate, realestate, home, homes, for sale by owner

Behind Zooming Condo Prices: New Demographics or a Bubble?

By KEMBA J. DUNHAM and RAY A. SMITH
Staff Reporters of THE WALL STREET JOURNAL
August 18, 2005; Page A1

As condominium prices reach never-before-seen heights, a debate is brewing over whether a fundamental demographic shift is driving the trend or whether this is simply the latest speculative bubble in a corner of the real-estate market that has seen plenty of them.

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

Gourmet Kitchens

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


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

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

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

Miami-based Zilbert Realty Group, one of the city's largest brokers of preconstruction condos, has launched a Web site, Condoflip.com8, catering to these speculators. Mark Zilbert, president of Zilbert Realty and creator of the site, says he's received thousands of emails from condo owners who want to gauge the market, but he doesn't yet see many interested buyers.

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

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

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

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

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

'Doing Nothing'

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

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

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

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

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

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

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

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

Housing Market Still
Hot in Los Angeles

By MAURA WEBBER SADOVI
Special to 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.

This three-bedroom home in Covina, east of downtown Los Angeles, has an asking price of $635,000.

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.

>rjeditor@dowjones.com.

--August 17, 2005

Do Try This at Home: Assess Your Area's Real Estate Bubb

Do Try This at Home: Assess Your Area's Real Estate Bubble


August 13, 2005


By DAMON DARLIN

For the first time since the residential real estate marathon began 13 years ago, parts of the country are showing signs of exhaustion. But if you rely on the experts to declare that a particular area's bubble has popped, you may have waited too long.

So how can a homeowner tell if a market is about to go bust? This may be one of those rare occasions when professionals parsing data are at a disadvantage to regular people watching the market. That's because the main driver of today's market is consumer psychology. Home prices go up as long as people expect them to go up.

When they stop believing, prices fall - and no economist in Washington can get wind of that faster than someone chatting over knockwurst at a neighborhood block party. "Economists looking at the macrodata will be the last to know," said Richard A. Brown, chief economist at the Federal Deposit Insurance Corporation.

What you will learn from the professionals who are dutifully crunching numbers is that prices are not falling significantly in any of the hot markets, but in a dozen or so cities in the Northeast and in California, they are near the peak. In Boston, for example, the time that homes are sitting on the market has stretched to 46 days from 39 days a year ago.

An analysis of price appreciation, done for The New York Times by the Joint Center for Housing Studies at Harvard, shows that the price appreciation in cities including New York City; Austin, Tex.; Philadelphia; and Providence, R.I., are decelerating. Appreciation in Detroit and Denver has already slowed to a crawl.

"It's taking a lot longer to sell a home," says Karl A. Martone, a Re/Max Properties agent in Providence, where homes now sit on the market an average of 65 days, up from 14 days a year ago. The region has almost six months of inventory, which is up 35 percent from a year ago.

Vicki Doran, a real estate agent with Coldwell Banker in Providence, says: "It's switching to a buyer's market. Last year buyers had to snap things up. Now they can shop around."

Even a few markets in hard-charging California - San Diego, Orange County and Santa Cruz - are part of the trend, according to data from the first three months of the year. Data for the second quarter to be released by the government on Sept. 1 may confirm the trend. But already Christopher Thornberg, senior forecaster at UCLA Anderson Forecast, a service of the University of California, Los Angeles, says California has "peaked and is already coming down the back side."

On Tuesday, David A. Lereah, the chief economist at the National Association of Realtors, said that the housing market was "probably close to a peak right now."

Take a look at the hot San Diego condo market. In Park Place, one of the many sleek towers of condominiums recently slung up around Petco Park, a one-bedroom condo is offered for $719,000. Someone buying it would expect to make mortgage payments of about $3,775 a month, plus monthly maintenance fees.

But someone really wanting to live in the high-rise, with hardwood floors, granite countertops and city views for a lot less, could rent a nearly identical unit in the same building for $2,400 a month. That is clear evidence prices have to move down. You are more apt to see that the price of residential property no longer is connected to its underlying value than a person looking only at spreadsheets of sales data.

Prices in overheated markets must, by definition, come back down to the mean. Knowing which way the market is headed before buying or selling is extremely important to anyone who wants to protect the wealth tied up in a house. And it certainly matters to anyone who is thinking of buying because it never makes much sense to buy at the top of the market. "The turning point is pretty important," Mr. Brown said, "because the trend will play out for years."

The trouble is, economists have been wrong before when they try to call the market. Three years ago, Dean Baker, co-director of the Center for Economic and Policy Research in Washington, said that it would be only a matter of months before prices began to fall. Prognosticators at the research firm Economy.com declared that the peak was last summer. Celia Chen, the firm's director for housing economics, is now saying that it will come this year.

"The timing is always difficult with these things," admits Ian Morris, chief United States economist at HSBC Securities U.S.A., who made the same call, repeatedly.

John Karevoll, an analyst with DataQuick Information Systems, which provides real estate data to lenders, said: "We've been told for years that the peak is just around the corner. The economists have so much egg on their faces."

Don't be too hard on them. It's the nature of their science. N. Gregory Mankiw, the Harvard University professor and former head of the White House Council of Economic Advisers, made one of the most famous miscalls. In 1989 he wrote a paper arguing that the aging of the baby boomers was going to undermine the housing market in the 1990's and 2000's. Whoops.

Though it appears the shift is now at hand, the end of the bubble will not look anything like the crash in the stock market after the technology bubble. The stock market turns frenetic when investors scramble to get out and prices fall sharply. In housing, however, a collapse is signaled by a sharp drop in activity as people hold off buying. Houses stay on the market longer. Inventories grow. Only then will prices fall, slowly. Economists say prices will lag a slowdown in the market by four to six months.

Some of the data on where a local market is headed is available on the Internet (links are at nytimes.com/business). In other cases, your real estate agent is your best friend. He or she has access to a storehouse of raw data from the local Multiple Listing Service. Here are some indicators to look at:

Market Activity

How many homes are sold compared with the month before is the earliest indicator, but it is notorious for false positives. But if the number of homes sold starts to drop, perk up. Every county tracks this and makes it available to the public.

Inventory

Some of the most crucial pieces of information are held closely by real estate agents. The number of houses on the market is one of them. The national average is 4.3 months; 6 months is closer to normal, the National Association of Realtors says. When it grows, there is trouble coming. Time on the market Agents control access to this information, and be warned: they know how to manipulate it. A house that has been languishing can be taken off and put back to look like a fresh listing. But you'll still be able to see the average time stretching as a clear signal of cooling.

Prices

It's what you care about most. But month-to-month comparisons are nearly useless as an indicator because sales of a few houses on either end of the market can skew the figures. DataQuick at www.dqnews.com has some data and the Office of Federal Housing Enterprise Oversight issues quarterly reports.

Failed to Sell

The super-secret indicator among agents is the number of houses that are quietly taken off the market - usually because they are priced too high. Wheedle the number out of them and you'll have a strong indicator of market health.

Price-to-Rent Ratio

This is a wonderful measure that gets at the intrinsic value of a property, but it's a tricky tool for the layman. Rent data include everything from studios to four-bedroom penthouses, making a comparison with single-family homes difficult. Some of the rent data can be found at www.realfacts.com.

Loan quality

The popularity of interest-only mortgages could become one of the best indicators of a fragile market, several economists say. Mr. Thornberg of UCLA Anderson says it's a sign that lenders are scraping the bottom of the barrel. "We are close to running out of shills," he says.

Risk The PMI Group of Walnut Creek, Calif., a provider of data to the mortgage industry, estimates how much prices could drop using an econometric model. It publishes the list of at-risk cities at www.pmigroup.com.

Popular sentiment

To judge from the media, the housing bubble may have peaked in June. According to a Nexis search of magazines and newspapers, that month was the peak, with 312 references to "housing bubble," almost six times that of a year earlier. It fell 24 percent in July.

Of course, there is one constant: real estate agent sentiment. Most of them will never tire of saying it's a great time to buy. Despite the signs of a slowdown, Mr. Martone, the Providence real estate agent, says prices are holding and he still does not have enough properties to sell. He says, "I am the eternal optimist."


Copyright 2005 The New York Times Company

Steering Clear Of Bubble Trouble

In a relentlessly inscrutable housing market, there are ways to minimize risk


AUGUST 15, 2005

By Peter Coy in New York, with Rich Miller in Washington, Dean Foust in Atlanta, and Christopher Palmeri in Los Angeles


Lots of people think they see bubbles in real estate, but few react as strongly as Michael Stambaugh, an investment officer for a private endowment. Last summer he and his wife, Dana, sold their small one-bedroom Manhattan apartment for $380,000 and moved into a rental unit, figuring they would stash their real estate windfall in a money-market mutual fund, then buy again when prices fell and they could get a bigger place. Unfortunately for them, Manhattan prices, already sky-high, have risen 30% in the year since they sold. Now the Stambaughs couldn't even afford to buy back their old 650-square-foot apartment. Waiting for the bubble to pop is getting old fast. "I'm not here to lobby for a destruction of wealth," says Stambaugh. "But it's kind of frustrating -- actually, very frustrating."

This is the U.S. real estate market today: Cautious sellers are left behind; devil-may-care buyers appear to be geniuses. When prices keep going up, it's easy to laugh at the Jeremiahs who began warning years ago that the end was near. The national debate has even taken on moralistic tones -- dour bears vs. sunny bulls. "Something is going to happen, it's just a matter of when," growled one bear recently on BusinessWeek Online's Hot Property blog. At backyard barbecues and in office cubicles, housing is all anyone can talk about: How much longer can this go on? And what's the smartest way to play this crazy market?

The good news: Even if house prices do tumble, most people should come out O.K. -- if they're prepared to sit tight for a few years until the market recovers. If you worry that prices could fall, try to arrange things so you won't be forced to move and sell at a loss when the market's down. Refinance into a conservative mortgage. Consider selling a second home or rental property. If you're retired, think about a reverse mortgage that lets you borrow against your new housing wealth.

Naturally, everyone wants to ride the housing market to the very top, but it's impossible to get a clear read on where that top is. On the bullish side, price gains from Miami to San Diego show no signs of overall slackening. The National Association of Realtors says the national median sales price for existing homes rose 14.7% in the year through June -- the biggest gain since 1980. On the bearish side, though, there are hints of softness in sizzling markets such as Las Vegas, Boston, and elsewhere. In Los Angeles, homes that stay on the market for a few weeks are starting to sell below asking prices. In Orlando and West Palm Beach, prices are way up, but sales volumes are down around 15% from a year ago.

MIXED SIGNALS
Still, that's hardly proof positive that the market has peaked. "Almost by definition, you don't know how big [bubbles] are going to get because you've departed from fundamentals," says John P. Calverley, the London-based chief economist of New York-based American Express Bank Ltd. (AMX ), and author of the recent book Bubbles and How to Survive Them.

In the absence of solid information, the most sound advice is to hope for the best and prepare for the worst. Simply put: "Don't buy property that you can't afford," says David Stiff, chief economist of Fiserv CSW Inc. of Cambridge, Mass., which forecasts house prices.

What do you do if you really think the market is heading down? The most bearish option is to do what the Stambaughs did -- sell and rent, planning to buy again after prices have fallen. But that could leave you dangerously exposed if you're wrong. Moreover, transaction costs of buying and selling homes are so high that they tend to swallow any gains from jumping in and out of the market, especially since house prices -- when they decline at all -- usually go down less than high-flying stocks.

Other financial strategies are risky as well. Some analysts argue that you should short-sell the stocks of lenders and builders; in a housing slump, they believe, the profit earned on your short positions would offset any losses on your house. But it's expensive to short stocks for a long time, and there's always a risk that they won't ever fall. Beyond that, people have been trying for years to create securities that allow owners to hedge against declines in their local markets. But no housing derivatives have attracted enough trading to make them a go.

If you need to buy because you're moving or your family has grown, settle for a place you can pay for without resorting to a zero-down, interest-only mortgage. Many people are buying houses they can't afford using mortgages with low initial payments, figuring they'll sell or refinance when higher payments kick in. But if rates rise and real estate slumps, those escape routes will be cut off. If you already own and were thinking of moving to a smaller house or a cheaper city in the next few years, think about doing it now to lock in your gains. Also, consider selling rental properties or vacation homes that have appreciated a lot. A reverse mortgage is good for people in their sixties or older who are house-rich and cash-poor. You can borrow against the equity in your house and never repay the loan as long as you live in it.

In today's boom market, such precautions seem excessive. But they're mild compared with dumping real estate completely. Says Richard Laermer, another Manhattanite who sold his apartment and is biding his time till the market falls: "I'm in total sour-grapes mode right now." The only question is how long he'll stay that way.


By Peter Coy in New York, with Rich Miller in Washington, Dean Foust in Atlanta, and Christopher Palmeri in Los Angeles

Website brings condo boom online

Capitalizing on South Florida's surging condo market, a new website launching this week will allow potential buyers to shop for and even purchase a condominium online.


BY ELAINE WALKER
ewalker@herald.com

Tue, Jun. 14, 2005

The Internet has become a viable shopping tool for pretty much everything -- music, stocks, even airplane tickets. Now add another category to the mix: South Florida condominiums.

Launching on Wednesday is www.uscondex.com, a website that aims to capitalize on the area's already booming condo market. More than a listing service, an entire deal can be completed online.

The founders of U.S. Condo Exchange, which include the principals of Coconut Grove developer Swerdlow Group, believe they can revolutionize the market.

''We want to create the eBay for condos,'' said James Haft, chief financial officer for the business.

The site will launch with $5 billion in property listings largely from South Florida, ranging from entire buildings now under construction to individual units. Over time, the plan is to expand throughout Florida, to other key urban markets in the United States and internationally.

It's a market that the principals of U.S. Condo Exchange already know well. The firm's chief executive, Richard Swerdlow, is also chief operating officer of Swerdlow Group, which is owned by his father, Michael Swerdlow. Their company is developing Biscayne Landing in North Miami, as well as other condo projects in Riviera Beach and Daytona Beach.

They see a changing marketplace with a growing number of buyers looking at South Florida condos as investments or second homes.

''Condos are not single-family homes; they are in many cases a commodity purchase,'' Richard Swerdlow said. ``There are an increasing number of people buying condos without seeing them.''

While there are dozens of real estate websites already on the market, U.S. Condo Exchange bills its site as the first to offer real-time transactions and a focus on solely the condominium market.

ANTICIPATED IMPACT

The site marks the latest in what is a growing controversy over the integration of the Internet as a key tool in the real estate process -- a tool that threatens to put a dent in the business of traditional real estate agents.

One of the main ways uscondex.com expects to make its money is by earning brokerage fees through the transactions that are consummated on or off its site.

Some experts don't think that will go over well with Realtors.

''I would bet this is going to brew a war,'' said Michael Cannon, a Miami real estate analyst. ``Some people are trying to computerize real estate like they did for the stock market, and it will never happen.''

For potential buyers, the free site offers one-stop shopping. At uscondex.com, they can research and compare features on different condominiums and prequalify for a mortgage with Bank of America. Once they're ready to buy, they can negotiate the purchase or put down a reservation. If the buyer comes from another country, the site offers a currency converter.

Eventually, the plan is also to launch an online auction feature, as well as databases for condo rentals and condo hotels.

Visitors to uscondex.com will find listings that come from a variety of sources, including traditional real estate listings. Developers of new condos pay $2,500 per month to list an entire building; individual condo owners pay $149 per month for a listing. Introductory discounts are also being offered.

Developer Bruce Goldstein has already listed his newest project, Mei, a 132-unit condo on Miami Beach with prices starting at $1 million per unit.

''It's just an additional way to get our project noticed,'' Goldstein said. ``We think there's a big future with this as a marketing tool.''

SEIZING THE MOMENT

If ever there was a time for a vehicle like the U.S. Condo Exchange, it is now.

In Miami alone, more than 61,000 residential units are planned or under construction, more than eight times the number built during the past decade. Downtown Fort Lauderdale has 3,904 new residential units recently built or in the pipeline and another 1,750 units awaiting city approval, according to the Downtown Development Authority.

But distinguishing between those condominiums can be difficult. They're all pitching the same upscale lifestyle, complete with glitzy parties and seductive ads featuring models enjoying the good life.

''It's become very much a numbers game of how many people can we reach,'' said Philip J. Spiegelman, owner of International Sales Group, a broker for new condos like Marina Blue and 360(s0). ``This is a way for us to reach a broad audience. There's no question it will help us find potential buyers.''

U.S. Condo Exchange allows a condo buyer to look at a host of detailed, side-by-side comparisons of projects -- such as the number of parking spaces and whether they allow pets. There's also an opportunity to compare amenity packages so you can weigh the options of imported porcelain tile floors vs. marble.

''Most condominium ads feature a girl by the pool, and you can't really adequately identify what the product is,'' Swerdlow said. ``We wanted to create a transparent marketplace, where buyers are empowered.''

While many real estate experts and brokers see the merit of a site like uscondex.com for research purposes, they doubt that many people are going to buy property online, sight unseen.

''People want to do a lot of armchair research, but you've got to be a real estate speculator to buy something without seeing it,'' said Lewis Goodkin, a Miami real estate analyst. ``Most people will want to touch and feel it.''

For those not comfortable with an online deal, uscondex.com offers a phone number buyers can call for assistance. There is also an option for the buyer and seller to complete the deal offline.

`AN EMOTIONAL BUY'

Either way, traditional real estate brokers say uscondex.com can't compete. They argue that an online buyer, especially one not buying solely as an investment, will lose out on the personal service of a broker who can offer insight on anything from the reputation of the architect designing the building to how to choose the best views.

''This is an emotional buy,'' said Mike Pappas, president of Keyes Realty. ``We still believe that with any high-priced, emotional purchase, you need coaching and counseling from somebody knowledgeable.''

Second Wind

Chris Palmeri
August 09, 2005



Second homes are hot right now with lots of folks plunking down spare
cash on weekend retreats to give themselves an escape and a nice
return in their investment. Michael Maynard, a principal at Quechee
Lake, a private home community in Vermont, has these words of advice
for buyers. Avoid cookie-cutter properties that look like all the
others around them. Stay away from properties in buildings or
developments that are rarely occuppied by owners. Look for areas with
natural beauty and natural boundaries--protected lands for example--
that will guard against overbuilding. And pick places with amenities
that match your lifestyle interests, be they golf, skiing or boating.
"It's rarely a smart move to invest in second residence just to get
in on a real estate frenzy," he says. "People should really want the
home and want to use it." Maynard's got an interest in this--he sells
second homes. Still his words of caution are worth noting.

Real estate's outsized contribution to economy

Dean Foust
August 15, 2005


Kathleen Bostjancic, an economist with Merrill Lynch, just produced a
sobering look at housing's outsized contributions to the economy.
While I can't provide a link to the full report, I can provide
Bostjancic's thesis and conclusion -- namely, that housing represents
a disproportionate share of economic growth, and that even a mere
slowdown could have negative implications for the economy...

Bostjancic notes that the housing sector, which typically represents
just 5% of the total economy, accounted for a whopping 50% of the
overall growth in the U.S. economy in the first half of 2005, and
notes that more than half of the private payroll jobs created since
the fall of 2001 were in housing-related sectors.

Concludes Bostjancic: "The over-reliance on residential investment
leaves the economy very vulnerable if housing demand and prices cool--
prices do not need to even fall, just a slowing in the pace of home
price appreciation would have a noticeable negative impact on
economic growth. Not unlike the fallout following the frenzied tech
over-investment in the late 1990s."

She notes that residential investment has averaged 4.5% of GDP over
the past 40 years. However with the recent housing boom, its share
has moved up sharply to 6%--the highest level since 1978. "And in
terms of its contribution to GDP growth, this sector has been doing
some heavy lifting, pressing more than twice its weight as it has
accounted for 12% of GDP growth."

Forget about the impact that a housing crash would have. Bostjancic
persuasively notes that even a mere stalling -- home prices going
sideways -- could have implications for the economy. For one, it
would cause "cash out refis" to dry up, and could crimp new home
construction as well. I think the Federal Reserve has been hoping
that businesses pick up the slack, using the record profits they've
been banking away to fund a new wave of investment and hiring. But
that hasn't happened yet. So if businesses doing pick up the slack, a
slowdown of the housing market could by itself cause the economy to
stall out.

CAR Report Shows Increased Use Of Internet By Homebuyers

by Blanche Evans

The California Association of Realtors has been tracking the behavior of homebuyers online since 2000, when it issued its first ground-breaking report, "Internet VS Traditional Buyers." What's changed? They're using the Internet more than ever.

 

Realtors should be marketing-alert to the fact that traditional buyers are declining from 72 percent in 2000 to 44 percent in 2004.

 

More than half (56 percent) of all consumers now use the Internet when buying a home, according to C.A.R's "2004 Internet Versus Traditional Buyer Study," which is up from 28 percent in 2000. It's no surprise, considering the National Association of Realtors is tracking similar Internet adoption rates nationally.

 

Like previous surveys, the 2004 edition also found that, compared to traditional buyers, Internet buyers spent more than twice as much time gathering information prior to contacting a REALTOR®. However, they moved much more quickly once they began to work with a Realtor, spending significantly less time with their Realtor and previewing far fewer homes than traditional buyers.

With one out of six homes sold in the U.S. located in California, consumer homebuying behavior is important to know.

 

"The Internet has complemented rather than diminished Realtors' role in the homebuying transaction," said C.A.R. President Ann Pettijohn. "While Internet buyers considered online information to be valuable, they ultimately turned to Realtors both for their interpretation of that information, and for their expertise and judgment throughout the homebuying process. The expertise and professional advice provided by Realtors creates value over and above the market and property information itself, even when the buyers obtain that information on their own.

 

Internet buyers were more inclined to view Realtors as partners, suggests Pettijohn.  "They looked for speed and efficiency, and they valued timely communications. Traditional buyers, on the other hand, looked for more personal interaction and relied on their Realtors to lead them through the process."

 

The average number of homes previewed by Internet homebuyers has decreased steadily in the past four years, while that of traditional buyers has changed very little over the same period. The up-front research conducted by Internet buyers has given them a better sense of market conditions compared to traditional buyers, suggests the survey, enabling them to act more quickly to find, bid on, and close escrow on the home of their choice.

 

Other highlights of the survey include:

Internet buyers spent an average of 5.9 weeks considering the purchase of a home before contacting a Realtor, compared to 2.1 weeks for traditional buyers.

Internet buyers spent an average of 4.8 weeks investigating homes and neighborhoods prior to contacting a Realtor, compared to 1.6 weeks for traditional buyers.

Better researched than their traditional buyer counterparts, Internet buyers spent less time looking for a home once they began working with a Realtor, spending just 1.9 weeks on average, compared to 7.1 weeks for a traditional buyer.

The typical Internet buyer also visited fewer homes with their Realtor than the typical traditional buyer. Internet buyers visited an average of 6.1 homes with their Realtor, whereas a typical traditional buyer visited 15.4 homes with their Realtor.

Internet buyers tended to be younger than traditional buyers with a mean age of 38.5 years, compared to 43.5 years for traditional buyers.

Internet buyers had higher incomes and were better educated than traditional buyers. The median income of an Internet buyer in 2004 was $168,540 while that of a traditional buyer was $142,470. Moreover, while most homebuyers in both groups had at least a four-year college degree, 14 percent of Internet buyers had completed post-graduate work compared to 5 percent of traditional buyers.
Internet buyers were three times more likely to be first-time buyers than traditional buyers, with 23 percent of Internet respondents reporting that they were first-time buyers compared to 7 percent of traditional buyers.

Internet buyers often conducted their home searches from afar, with a median distance of 100 miles between the homes they purchased and their previous residences, compared to 12 miles for the traditional buyer. More than four out of five traditional buyers purchased homes within 25 miles of their prior residence.

As pointed out in previous surveys, Realtors who want to reach Internet buyers and are willing to nurture them through their investigative period while they search the Internet for information are more likely to capture the buyer as a client when he or she is ready to buy a home.

 

Published: June 30, 2004

The Sorry State Of Internet Listings

by Blanche Evans

According to the National Association of Realtors 2003 Profile of Home
Buyers and Sellers, it is the first time in real estate marketing
history that more buyers have turned to the Internet than their local
newspapers to find a home. Two-thirds of homebuyers in the first half of
2003 used the Internet to search for a home while only 49 percent of
buyers reported using newspapers. What does that mean to Realtors and
their marketing strategies?

It means it is time to take Internet marketing of listings more
seriously. Homebuyers are turning to the Internet to look at homes (93
percent) and to get neighborhood information (22 percent.) In 2003, 41
percent of home buyers found the home they purchased through a real
estate agent. Sixteen percent found their homes through a yard sign, and
eleven percent found their homes through the Internet. These are
important changes from 1997 when 50 percent of homebuyers found their
homes through agents, seventeen percent through yard signs and two
percent through the Internet.

While it appears that the Internet is stealing thunder from the agent,
consider this - nearly 90 percent of Internet searchers also used an
agent to find a home, and 18 percent found their agent online.

It's obvious that homebuyers are using the Internet to preview homes.
Buyers told the NAR that the two features they look for in a real estate
Web site are photos and property information. Seventy-eight percent
found photos useful, and 77 percent found property information useful.
Forty-seven percent of buyers found virtual tours to be useful. So
useful in fact, that the buyers took action - 72 percent actually drove
by or looked at a home they found online, 46 percent walked through the
home, and 18 percent found an agent online. While it isn't spelled out
in the survey, it is safe to say that most or at least a large
percentage of those lucky agents were found because of online listings.

And how is the real estate industry responding? By putting up
lousy-looking listings with as little information to move the sale along
as possible.

While this is an unscientific assessment, a perusal of sites as diverse
as Realtor.com, the local MLS public view Website, and a selection of
Realtor Websites in Dallas, the ninth largest metro area in the nation,
shows that as many as one third of listings don't have basic photos, and
less than ten percent have virtual tours or multiple photos.

With the availability and expediency of digital photography, there is
simply no excuse for this. If a broker can put a listing on his/her
Website as soon as the listing agreement is signed, a photo of some kind
should be there, too.

This contrast is made all the more obvious by the sharp-looking
presentations done by some online Realtors, where there are plenty of
photos, the listing remarks are well-phrased and correctly spelled, and
there is plenty of property and neighborhood information for the buyer.
It's understandable if the agent wants to give some time to the
homeowner to clean up, but there's bound to be a view of something that
could go online right away. The homeowner should be told that once the
listing agreement is in place, that MLS rules state that the marketing
to other MLS members must begin within a certain time frame - usually
about three days. In three days, can't the homeowner cut the grass,
clear off the porch and at least let the front-door view of the home get
photographed?

Marketing without photographs isn't marketing. In fact, according to
Realtor.com, Internet shoppers pass over listings without photos, so the
longer the homeseller and listing agent delay, the worse for the seller.

There's also a time-lag in many communities to get virtual tours
completed. In some areas, due to lack of service providers, it can be
days or weeks before a virtual tour is ordered, completed, and posted to
the Web. Well, that's unavoidable if a professional service is the only
way to get a virtual tour ordered, but that doesn't mean the listing
agent can't go to plan B. Can't the listing agent, an assistant, the
broker or somebody get out to the house with a digital camera, and take
some shots?

The lack of photo enhancements wouldn't be so bad if the problem didn't
go on and on. Most of the listings that didn't have photos weeks ago,
still don't have photos. Does the listing agent have something better to
do than to market the listing s/he already has under listing agreement?

The marketing of single-family homes is deplorable, but heaven help the
customer who wants to look at townhomes or condominiums. The same
building view pops up over and over. What in the world makes any agent
think that is helpful to the buyer? Can't Realtors take a hint from
apartment listing sites and include a floor plan or at least multiple
photos of the interior, community pool and grounds?

And speaking of property information, is there any reason why HOA fees
and what they cover are seldom included? Aren't community fees that can
impact a monthly payment by as much as several hundred dollars important
to a buyer? Most agents leave them off because they don't want to
startle the buyer - like it's better to startle them later?

Explaining what the HOA fees cover doesn't have to be bad news - it can
help make the sale. A several hundred dollar per month fee doesn't sound
so bad when it is explained that it includes all exterior maintenance,
water bills, and insurance, for example.

And that "no room to put more information" excuse doesn't fly,
particularly in areas with a high concentration of multi-family housing
stock. Any MLS software can be modified to allow the expansion of
listing features. That is what it is for. If you want a field that
provides a space about what the HOA fees cover, it is possible to have
it. Just make the request of your MLS.

Either a broker and agent are part of the problem or part of the
solution. If you want to be the agent that 18 percent of 75 percent of
homebuyers in the U.S. finds online, you'll have a much better chance if
you take the time to enhance your listings with photos, property and
neighborhood information.

In fact, you can use your prowess on the Net to knock your competition
out of the running. The next listing presentation you go on, be sure to
show your seller how you present listings online, and how quickly you
get them to the marketplace. Then go to your browser and show your
seller some of your competition's listings - how they've been on the
market for four weeks with no photos, no enhancements, and no interest
from buyers.

There's a reason why many agents are so neglectful of Internet marketing
- they still see it as secondary advertising, when all the new NAR data
says they are wrong.

Judging by the number of agents who still heavily invest in newspaper
marketing of listings, it stands to reason that they are still
convincing sellers that newspapers help sell listings. They do, but by
quite a bit less than the Internet. In fact, less than 7 percent of
homebuyers bought the home they found in the newspaper, while 11 percent
bought the home they found on the Internet, and that figure is doubling
every two years, according to the NAR.

Blow your competition away by showing the seller how listings should be
handled on the Internet. Brokers, don't settle for any excuses when it
comes to why your company's listings don't have photos. If the agent had
time to get the listing, s/he had time to snap a pic while at the
seller's home.

Don't let your competition show the next seller what a lousy job your
company does with Internet listings.

Published: August 5, 2003
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Condo Conversion Craze

By Joe Gose

Jun 1, 2004 12:00 PM

The low interest rate affliction that has crippled apartment fundamentals for several quarters is driving the biggest condominium conversion boom in two decades. Condo developers are swarming markets across the country, paying a premium to acquire and transform rental properties into condos.

While the successful sale of condos can generate cash-on-cash returns of between 15% and 30% or more in a matter of months for converters, the trend also enables apartment owners to cash out at the top of the market. In addition, conversions create more affordable housing in areas famous for steep single-family home prices.

How hot is the conversion trade? Through mid-May of this year, condo converters paid $1.6 billion, or $155,400 a unit, according to New York-based Real Capital Analytics. If that pace continues for the balance of the year, the dollar amount paid by converters to acquire apartments will easily surpass last year's total of nearly $2 billion, or $123,575 per unit.

“There's hardly any major or quasi-major market where condo conversions — even downtown loft-type of conversions — haven't caught on,” says Arthur Nevid, managing director of investment and lending for Charlotte, N.C.-based Mountain Funding. The firm provides senior and mezzanine debt, as well as preferred equity, to opportunistic developers for condo conversions and other property types. “Everybody's jumping on the bandwagon to get into the conversion business because it seems so exciting and so robust,” says Nevid. “It's a fever, and it's all over.”

But a rising interest-rate environment historically has signaled the end of rampant conversion activity, and condo experts are fully aware of what's happening in the bond markets. Since bottoming out this year at 3.65% on March 17, the 10-Year Treasury yield climbed more than 100 basis points to 4.8% in mid-May, and the Federal Reserve Board continues to signal that it will raise its short-term Fed Funds Rate as the economy heats up.

A Double-Edged Sword

What's the net effect of the conversion craze on the apartment industry? While the impact will differ from city to city, conversions likely will hurt most rental markets, concludes Herb Chase, a managing director in the multifamily investment sales group with Los Angeles-based Colliers Seeley International.

While condo conversions benefit multifamily owners by shrinking the supply of apartments, condo buyers are typically renters, so conversions won't necessarily lead to a jump in occupancy rates. As Chase says, “It's a two-edged sword.”

In fact, some conversions ultimately end up as rentals and compete with apartments, say both Chase and Linwood Thompson, managing director of Marcus & Millichap's national multifamily group. Speculators may buy condo units, intending to sell them at a higher price a short time later, for example.

But if the condo price fails to rise, the investor will try to find renters for the unit. “Depending on the market, 30%, 40% or 50% of condo buyers are speculators,” Thompson says. “So that could be a problem down the road.”

The propensity for condos to revert to rentals grows as the condo conversion trend matures, and residential experts have good reason to believe the latest condo boom is peaking. The interest on a 30-year, fixed-rate mortgage hovered between 5% and 6% over the last several years, helping to propel homeownership and the condo craze.

The more recent trend has been for mortgage rates to climb slowly but steadily. As of May 13, 30-year mortgage rates were 6.34%, or nearly 100 basis points higher than the 2004 low of 5.38% on March 18, according to Freddie Mac. Once interest rates hit 7.5% or 8%, experts say, condo conversions will cool.

“We've been busier than ever, and I think people realize that it's the last chance to buy at low interest rates,” says Russell Galbut, a principal of Miami-based Crescent Heights, a condo developer and converter that has sold some 20,000 units valued at $3 billion in major markets across the country. “[Rising interest rates] are not something that's going to have a chilling effect on the conversion business in the next few months, but eventually the activity is going to slow down.”

The Strategy Behind Conversions

Converters typically search for apartment-to-condo conversions in desirable locations where they won't directly compete with affordable entry-level homes. Rather, converters want to offer an alternative to pricier single-family homes or to costlier condos in new developments nearby.

Developers figure out how much units will fetch and then determine how much they need to spend to improve the property and units. Upgrades are typically made to the property's exterior and common areas. Amenities such as granite counter tops and wood floors are often added to individual units, for example. The upgrades are built into the condo prices. Armed with that information, converters tabulate how much they can pay for a property and still generate desired returns.

Once converters acquire an apartment property, they generally convince about 10% to 15% of the existing renters to buy — usually at a discount to the price outside buyers will pay — before marketing the remaining condos. One key to selling condos is to convince buyers that they are better off owning versus renting, which is done by pointing out the benefits of the current low interest rates, the mortgage interest tax deduction and how property appreciation increases equity, says Robert Kaplan, managing director in Holliday Fenoglio Fowler's Miami office.

“You only need to look at the end-user financing to determine how feasible a project is, and the capital for residential is extremely liquid,” says Kaplan. His office made $650 million in loans to condo converters in Florida last year, up from $200 million in 2001. “People don't want to rent, they want to own, and low interest rates have provided the opportunity.”

Converters Pay a Hefty Premium

Fortunately for apartment owners, investor demand for multifamily product has remained strong even as prospective renters have purchased homes instead. The billions of dollars of debt and equity pouring into the apartment market enable sellers to fetch record prices for their projects: Nationally, capitalization rates are averaging 6.6%, according to Real Capital Analytics.

But capitalization rates mean nothing to converters because they aren't concerned with operating the apartments for a steady stream of income. Instead, their focus is on trying to maximize their returns by liquidating the units at the highest price possible. Converters are willing to pay a premium for properties over what conventional apartment investors are willing to spend — in some cases up to 40% more. That is providing an enticing exit strategy to apartment owners of all stripes — whether they're struggling to fill older Class-B properties or are operating new but stabilized Class-A properties.

Converters acknowledge that they are paying a premium, but are quick to add that the cost of acquiring and upgrading multifamily properties is far less expensive than new development. Plus, in densely populated urban markets, vacant ground simply doesn't exist for new development in prime locations, and converters anticipate those real estate values will continue to appreciate.

“The bottom line is that you can buy something for one-third of the cost that it would take to buy the vacant land and build something on it,” says Crescent Height's Galbut. “As time goes on and the world wakes up, that apartment isn't going to be selling for one-third of what it would cost brand new, it's going to be selling for 60% to 80% of what it costs brand new.”

Rates and Risk

Once cheap mortgages vanish, however, condo conversions will become riskier: home sales will slow, and converters may be unable to sell their condos. In a worst-case scenario, converters who pay a premium for struggling apartment projects will be forced to rent unsold condos in a project for which they paid too much — and in an apartment market that likely already is soft, says Nevid of Mountain Funding.

Converters downplay the risks. They contend that the affordability of conversions will become even more attractive to homebuyers in a rising interest-rate environment. Plus, longtime condo players say they never stopped turning apartments into condos, even when interest rates hovered around 17% to 18% in the early 1980s.

And even if slowing home sales force converters to rent their units, it's still less risky than embarking on new condo construction only to see the market crash, says Louis Birdman, a managing member of SunVest Resort Communities in Hollywood, Fla., who has converted more than 6,000 units in Florida since the 1980s.

“The downside risks in the conversion business are a lot less in our opinion because, unlike new development, we already have a physical building,” says Birdman, who claims that he's had no problem selling condos in some 70 previous conversion projects. “We don't find that condos suffer from the same cycles as other businesses — people always need housing in one form or another.”

Searing Sales in the Sunshine State

Nowhere is the conversion craze hotter than in Florida, which is enjoying an influx of young, educated workers and second-home buyers from South America and Europe along with the northern snow birds that routinely flock to the state in winter. Combined, the Miami/Dade, Broward/Palm and Tampa markets in that state represented 30% of the $2.6 billion of apartment acquisitions targeted for conversion between early 2003 and early 2004 in the U.S., according to Real Capital Analytics. Northern Virginia ($341 million), San Diego ($175 million), Chicago ($135 million) and Atlanta ($99 million) followed.

The velocity of condo sales, particularly in Florida, gives converters confidence that plenty of time exists before the market will turn. In fact, Florida developers have yet to find the top of the market. While converters continue to pay higher prices for properties, home buyers continue to spend more for condos, says John Goldsworthy, director of marketing for Equity Marketing Services in Miami, a firm that has handled the sales and marketing of 130 condominium developments since 1980.

“I think apartment owners realize that we're nearing the top of the market right now and that it's the best time to sell,” he says. “A lot of them are putting their properties on the market unpriced and are having a 15-to-20 day call for bids. And converters are snapping them up left and right.”

Earlier this year, DK/Equity, a joint venture between Equity Marketing and Chicago-based Draper & Kramer, acquired the 7-year-old, 334-unit Floridian in Miami Beach for $98 million. The $293,500 price per unit is the highest ever paid in Florida. DK/Equity, which was backed financially by The Carlyle Group, LaSalle Bank and Boston Capital, made a further undisclosed investment to upgrade the Floridian's exterior, lobby and other areas of the 33-story building as part of the conversion process.

As of mid-May, the partnership had sold 180 condos in about 12 weeks, Goldsworthy says. Depending upon the upgrades buyers want in their condos, prices start at $266,000 for a one-bedroom unit without a Biscayne Bay view to more than $625,000 for a three-bedroom unit with a bay view.

On the other end of the affordability scale, SunVest earlier this year acquired the Fairways at Grand Harbor in Vero Beach for $24 million, or $93,000 a unit, with its joint venture partner, Hamilton Investment Group, a condo developer in Coral Gables, Fla., that has built 8,000 units in Puerto Rico and Florida.

The 257-unit gated Mediterranean-style community, which was built in the late 1990s, required little additional investment, says SunVest's Birdman. Condo prices range from $90,000 to $140,000, and only five months after its conversion, SunVest/Hamilton has sold all but 20 of the condos, he adds.

Diverse Buyer Pool

Condo buyers fall into all categories. Buyers of the Floridian condos are shelling out big bucks for a lifestyle upgrade, for example. But in San Diego, condos offer an affordable alternative to single-family home prices, which have climbed 25% to nearly $480,000 over the past year, according to CB Richard Ellis. Potential homebuyers unable to pay those prices can purchase a condo for some $300,000.

That kind of price discount has made San Diego ground zero for condo conversions in California. In 2003, developers converted some 3,000 apartment units to condos, nearly five times the 619 units converted in 2002, according to a report compiled by CB Richard Ellis and L.J. Melody. Developers will convert 4,000 units this year, says Gary London, president of the London Group in San Diego, a real estate strategy and analysis firm that focuses on Southern California.

“The phenomenon started with higher-quality units in the better neighborhoods, but now conversions are everywhere there is inventory — even down into the Class-B properties,” says London. “Condo conversions are almost the last bastion of truly affordable housing in San Diego.”

REITs Follow Suit

Traditional condo converters most closely resemble the value-add players in real estate: entrepreneurs who try to buy, improve and sell properties in a short time period to avoid operating them. But the condo conversion trend is so hot that it is enticing real estate investment trusts (REITs), which are scrutinized as much for their operating talents as their development abilities.

Executives at Atlanta-based Post Properties, for example, are considering converting properties within the company's portfolio into condos and developing new condo projects, says David Stockert, CEO of Post Properties. While the company is still just exploring the condo idea — one that it would likely undertake with a joint-venture partner — Stockert says the concept is appealing within submarkets where condos and apartments are the prevailing property type.

He identifies Atlanta's Midtown district, a commercial urban area that's attracting dwellers, as an ideal location for a conversion. Post operates two of its newer properties — the 188-unit Post Parkside and 276-unit Post Biltmore — in Midtown. The REIT also owns the luxury 121-unit, 20-story Post Peachtree in nearby Buckhead, which it built in 2001 with the possibility of someday converting it to condos.

“Midtown is becoming a real population center, and the only housing you're going to build there is multifamily or condo — if you want to live there you're not going to have a single-family option,” he says. “In that kind of submarket, I think condos can make some sense.”

Timing, much like location, is everything in real estate. Converters who fail to recognize the cycle's peak risk exposing themselves to financial disaster, especially as apartment owners keep upping the ante. In fact, some converters have spotted rotten deals just waiting to happen.

“There are properties in certain areas we looked at three or four years ago that we decided we didn't like priced at $60,000 or $70,000 a unit,” says Birdman of SunVest. “Today, those same properties are $120,000 a unit.”

Investing in Condos

Condominium investments have become extremely popular in the past few years as investors are experiencing unprecedented returns in real estate.

The U.S. condo market has been fueled by a decreasing supply of land in urban areas, low interest rates and relatively low prices per square foot when compared with other markets around the world.

Exceptional appreciation has also been experienced by domestic and international investors who have purchased one or more pre-construction condo units and then subsequentially sold the units prior to taking occupancy. In order to guide you through the process, USCONDEX has provided you with a variety of condo investor resources.

U.S. Condo Sales Price

The graph above illustrates the steady increase in the median sales price
of condominium properties from 1989-2004. The median condo price in 1989
was $86,000 compared to $197,000 in the third quarter of 2004. This figure
represents a 114% increase in 14 years. Most of the increase has occurred
within the last 5 years, with an average increase in median condo sales price
of 11% per year.

Quick Condo Facts

	More than 5 million American households live in condominiums
	One half of all condos are purchased by first-time homebuyers
	Appoximately 1/3 of condo buyers are single women
	Condo prices continue to experience strong appreciation, rising at double the rate of single family homes
	Over 70% of homebuyers initiates their sales search online