Tuesday, May 24, 2005
More Amass Big DebtTo Buy Real Estate
By JAMES R. HAGERTY and RUTH SIMONStaff Reporters of The Wall Street Journal
From The Wall Street Journal Online
A year ago, Ryan Epstein and his wife had whittled down the mortgage on their four-bedroom colonial house in North Beach, Md., to $130,000. Then Mr. Epstein had a chat with a mortgage broker.
The broker helped the Epsteins refinance their home, valued at about $300,000, to take advantage of lower interest rates. He also encouraged the couple to take out extra cash, a popular technique called a cash-out refinancing. The Epsteins used that cash, $25,000, as the down payment to buy a rental property. That purchase swiftly led to others. Today, Mr. Epstein says he has about $1.4 million of equity in nine dwellings -- and $2 million in mortgage debt.
Those rapid profits reflect surging house prices, rising at a double-digit rate in the Epsteins' area near Washington. "It's a wonderful market out there," Mr. Epstein says.
Five years into a housing boom that has boosted U.S. home values an average of 50% and added an estimated $5.5 trillion to the total market value of residential real estate, many Americans no longer think of their home as just a place to live. Instead, it's a cash machine that can be used to rapidly build wealth. To that end, a growing number of people are tapping into their home equity to invest in more real estate.
That's a lot like using a margin account -- a line of credit backed by securities in an investor's portfolio -- to buy stocks. During the 1990s, many investors used such accounts to buy shares in fast-rising tech stocks. When the dot-com bubble burst, the value of the shares bought on credit cratered and investors' borrowing worsened their losses. Economists say today's debt-fueled investment binge in real estate is fanning the flames of an already overheated housing market, and making demand from people who actually need houses to live in seem stronger than it truly is.
In some markets, this buying is adding to a glut of rental housing and causing rents to fall, which will make it more difficult for investors to break even. Already, there are signs that a few investors are starting to get burned.
On Friday, Federal Reserve Chairman Alan Greenspan suggested that house-price inflation in some parts of the country is starting to look excessive. "At a minimum, there's a little froth in the market," Mr. Greenspan said in response to a question at a lunch hosted by the Economic Club of New York. "We don't perceive that there is a national bubble, but it's hard not to see that there are a lot of local bubbles," he added.
He played down the idea that the market could suffer a dramatic crash like the bursting of the dot-com bubble, in part because homes don't sell as quickly as stocks do. Also, most people still have plenty of equity in their homes, he noted, so the prospect of mass bankruptcies in the event of a housing-market decline seems far-fetched.
Others express more anxiety. Dean Baker, co-director of the Center for Economic and Policy Research, a think tank in Washington, says many Americans are being "incredibly reckless" in assuming that real-estate prices will keep rising or, at worst, flatten out. "It's a classic phenomenon you expect to see in a speculative bubble," Mr. Baker says. He is so bearish on housing prices that he sold his own home last year and now rents.
In another sign of growing concern, the Federal Reserve and other bank regulators last week issued guidelines calling for lenders to tighten their criteria for making loans backed by home equity by looking more closely at borrowers' ability to repay under various possible future market conditions. The regulators are starting work on similar guidelines covering mortgage loans used to purchase homes. Among regulators' top concerns: the surge in popularity of interest-only loans, which allow people to pay only interest in the initial years and face the burden of paying back the principal later.
For now, however, so many Americans are racking up such huge paper profits in real estate that herds of new investors are crowding into the market every day. Thanks to rising home values, they have lots of money to spend.
Precisely how much home equity is being used for real-estate speculation and investment is impossible to determine because there are various ways homeowners can tap into their equity, and lenders often don't know how the money is being used.
What economists do know is that Americans are extracting huge sums of money from their homes, and mortgage brokers say more of that money is being funneled into real-estate investments. According to Economy.com, Americans pulled out roughly $705 billion of equity from their homes last year, up from $266 billion in 1999.
The bulk of that money came from capital gains made by people selling houses, and these profits often are used to purchase another residence. Many people also use some of the extracted cash to pay off credit-card debt, which is widely viewed as a sensible way to use equity.
Another large chunk of the equity withdrawn goes into home improvements. Spending on such projects totaled $138.3 billion last year, up 38% from five years before, according to Harvard University's Joint Center for Housing Studies. Many people justify such projects on the assumption, not always correct, that money spent on new kitchens or decks will lead to commensurate increases in the value of their homes -- a mild form of real-estate speculation.
A riskier and more aggressive way to use home equity is to plow it into investment property, as the Epsteins did. A survey by SRI Consulting Business Intelligence, a research firm in Menlo Park, Calif., found that nearly 2.2 million households used their home equity to buy additional real estate in 2004, up from roughly one million a decade earlier. "As long as there isn't a major change in the marketplace or a bubble burst, it will go up again," says Larry Cohen, director of the SRI division that does financial-services research and consulting.
What Americans are generally not doing with their equity is letting it build, as homeowners traditionally did. The huge rise in home values translates into more equity for homeowners. But many of them have extracted those profits from their equity, and many people buying homes now borrow a larger share of the price than they did years ago. So mortgage borrowing has grown even faster than home values have. As a result, homeowners' equity as a percentage of the market value of all homes declined to 56% at the end of 2004 from 57% five years before, according to data from the Federal Reserve.
Financial-services companies promote the idea that home equity is available for spending or investment. "Your home is one of your biggest assets," says a brochure from Merrill Lynch & Co. "It's also a powerful borrowing tool." A Merrill spokesman said the home-equity loans it offers to consumers are "prudent."
Mark Balderston, a chiropractor in Shawnee, Kan., recently refinanced his home to extract money for a down payment of about $50,000 on a new home he and his wife are buying as a rental property. Mr. Balderston says he got the idea from a fellow chiropractor who has built a fortune on such investments in California. Though he's taking on more debt, Mr. Balderston figures that real estate is far less risky than the stock market. "If we can get a 5% or 6% return on our money every year, that's attractive to me," he says.
Why are people like the Balderstons so confident of strong returns from real estate even amid growing warnings about the dangers of a housing bubble? "People form their expectations on a backward-looking basis," says Jan Hatzius, an economist at Goldman Sachs in New York. Based on the experience of recent years, they tend to see real estate as a very promising investment, he says, adding: "That's probably not correct.... You should think pretty hard about whether you want to increase your exposure to real estate at a time when it is trading at historically high valuations."
Like the Epsteins, who used their home equity to buy rental housing in Maryland, many real-estate investors see the stock market as far riskier. "If you buy stocks," Mr. Epstein says, "the next day they can tumble in the toilet." Home prices can't fall nearly as quickly as stocks, he reasons, because people tend to hang on to their real estate when prices are weak and await an upturn.
And unlike those who buy stocks with borrowed funds, home buyers don't face margin calls, or demands from their creditors for additional funds, when prices fall. Besides, many investors believe immigration and baby boomers' demand for second homes will keep the market solid.
Mr. Epstein, 48 years old, wants to continue building up his rental-housing investments, which already account for more than 90% of his net worth. He is keeping his day job as a manager at a home-building company, but his wife, Kelly, plans to leave her sales job to focus full time on managing the couple's rental units and pursue further investments. They rely heavily on advice from their mortgage broker, Bill Deavers of First Metropolitan Mortgage in Prince Frederick, Md., who also invests in rental properties. The Epsteins' favorite technique is to buy houses from people who are on the verge of losing their homes to foreclosure. The sellers then often become tenants of the Epsteins.
Tim Gamber had $35,000 in his retirement account when he used a mortgage on his home to buy a piece of investment real estate nearly seven years ago. Mr. Gamber started buying property as a sideline five years ago and made it a full-time job after he lost his job as a title examiner two years ago. "I started leveraging myself as much as I could," he says. "I was really scrambling to secure my financial independence." Today, he owns about 40 properties that he values at about $25 million; he puts his debt load at $15 million to $16 million.
To make the deals work, Mr. Gamber turned to so-called option adjustable-rate mortgages, or option ARMs, which carry introductory interest rates of less than 2% and give borrowers multiple payment choices. Option ARMs can be particularly risky because the interest rate adjusts as often as once a month. If rates rise, borrowers who elect to make the minimum payment can see their loan balance grow, a plight known as negative amortization.
But for Mr. Gamber, they are a way to maximize his buying power. Buying real estate "wouldn't be as attractive" without the option ARMs, he says. With the low rates, option ARMs increase his cash flow, allow him to "leverage and buy more property and bet on appreciation," Mr. Gamber says.
Some investors are already tripping up. Bruce Drogsvold was desperate to find an investment property last summer when he spotted a five-bedroom, three-bath home in Boulder, Colo. Mr. Drogsvold, a real-estate broker, and a partner had earned $30,000 apiece on a previous real-estate investment. Their plan was to fix up and flip three or four homes a year.
The pair purchased the house in Boulder for $340,000 last June, then spent about $25,000 on improvements. To finance the purchase, each partner took advantage of a home-equity line of credit, tapping the appreciation in his existing home. By July, the refurbished house was back on the market, priced at $410,000.
But selling the house proved more difficult than expected. The pair cut the asking price to $389,000. Meanwhile, the Fed was pushing up short-term interest rates in an effort to hold down inflation. Because home-equity lines are typically tied to the prime rate, the Fed's moves raised the partners' borrowing costs. "We are starting to bleed," Mr. Drogsvold said in February as his outlays rose. By March, the monthly payments on the two credit lines had climbed by a total of roughly $500. They finally sold the home that month for $380,000, for a loss of about $10,000 after calculating their financing and other costs.
The experience hasn't soured Mr. Drogsvold on real estate, though. Next time around, he says, he will figure a year's carrying costs into the equation. "I have a big line of credit on my home," he says. "If something juicy comes along, I want to be able to act on it."
What makes this get-rich-quick formula more dangerous is that many investors are willing to buy properties on which the rent is too low to pay for financing and other monthly costs. Their bet is that rising property prices eventually will make these deals profitable.
Others invest with no immediate prospect of rental income. Jaime Nack, an event producer in Santa Monica, Calif., recently used a home-equity line of credit on her one-bedroom condo to come up with a $27,000 deposit on a Miami condo that will soon begin construction. She's hoping that the Miami condo will be worth more when construction is completed in two years.
When will this frenzy die down? "The way the consumer operates, they usually don't back away from winners until they become losers," says Joseph G. Carson, chief economist at Alliance Capital Management LP in New York.
By JAMES R. HAGERTY and RUTH SIMONStaff Reporters of The Wall Street Journal
From The Wall Street Journal Online
A year ago, Ryan Epstein and his wife had whittled down the mortgage on their four-bedroom colonial house in North Beach, Md., to $130,000. Then Mr. Epstein had a chat with a mortgage broker.
The broker helped the Epsteins refinance their home, valued at about $300,000, to take advantage of lower interest rates. He also encouraged the couple to take out extra cash, a popular technique called a cash-out refinancing. The Epsteins used that cash, $25,000, as the down payment to buy a rental property. That purchase swiftly led to others. Today, Mr. Epstein says he has about $1.4 million of equity in nine dwellings -- and $2 million in mortgage debt.
Those rapid profits reflect surging house prices, rising at a double-digit rate in the Epsteins' area near Washington. "It's a wonderful market out there," Mr. Epstein says.
Five years into a housing boom that has boosted U.S. home values an average of 50% and added an estimated $5.5 trillion to the total market value of residential real estate, many Americans no longer think of their home as just a place to live. Instead, it's a cash machine that can be used to rapidly build wealth. To that end, a growing number of people are tapping into their home equity to invest in more real estate.
That's a lot like using a margin account -- a line of credit backed by securities in an investor's portfolio -- to buy stocks. During the 1990s, many investors used such accounts to buy shares in fast-rising tech stocks. When the dot-com bubble burst, the value of the shares bought on credit cratered and investors' borrowing worsened their losses. Economists say today's debt-fueled investment binge in real estate is fanning the flames of an already overheated housing market, and making demand from people who actually need houses to live in seem stronger than it truly is.
In some markets, this buying is adding to a glut of rental housing and causing rents to fall, which will make it more difficult for investors to break even. Already, there are signs that a few investors are starting to get burned.
On Friday, Federal Reserve Chairman Alan Greenspan suggested that house-price inflation in some parts of the country is starting to look excessive. "At a minimum, there's a little froth in the market," Mr. Greenspan said in response to a question at a lunch hosted by the Economic Club of New York. "We don't perceive that there is a national bubble, but it's hard not to see that there are a lot of local bubbles," he added.
He played down the idea that the market could suffer a dramatic crash like the bursting of the dot-com bubble, in part because homes don't sell as quickly as stocks do. Also, most people still have plenty of equity in their homes, he noted, so the prospect of mass bankruptcies in the event of a housing-market decline seems far-fetched.
Others express more anxiety. Dean Baker, co-director of the Center for Economic and Policy Research, a think tank in Washington, says many Americans are being "incredibly reckless" in assuming that real-estate prices will keep rising or, at worst, flatten out. "It's a classic phenomenon you expect to see in a speculative bubble," Mr. Baker says. He is so bearish on housing prices that he sold his own home last year and now rents.
In another sign of growing concern, the Federal Reserve and other bank regulators last week issued guidelines calling for lenders to tighten their criteria for making loans backed by home equity by looking more closely at borrowers' ability to repay under various possible future market conditions. The regulators are starting work on similar guidelines covering mortgage loans used to purchase homes. Among regulators' top concerns: the surge in popularity of interest-only loans, which allow people to pay only interest in the initial years and face the burden of paying back the principal later.
For now, however, so many Americans are racking up such huge paper profits in real estate that herds of new investors are crowding into the market every day. Thanks to rising home values, they have lots of money to spend.
Precisely how much home equity is being used for real-estate speculation and investment is impossible to determine because there are various ways homeowners can tap into their equity, and lenders often don't know how the money is being used.
What economists do know is that Americans are extracting huge sums of money from their homes, and mortgage brokers say more of that money is being funneled into real-estate investments. According to Economy.com, Americans pulled out roughly $705 billion of equity from their homes last year, up from $266 billion in 1999.
The bulk of that money came from capital gains made by people selling houses, and these profits often are used to purchase another residence. Many people also use some of the extracted cash to pay off credit-card debt, which is widely viewed as a sensible way to use equity.
Another large chunk of the equity withdrawn goes into home improvements. Spending on such projects totaled $138.3 billion last year, up 38% from five years before, according to Harvard University's Joint Center for Housing Studies. Many people justify such projects on the assumption, not always correct, that money spent on new kitchens or decks will lead to commensurate increases in the value of their homes -- a mild form of real-estate speculation.
A riskier and more aggressive way to use home equity is to plow it into investment property, as the Epsteins did. A survey by SRI Consulting Business Intelligence, a research firm in Menlo Park, Calif., found that nearly 2.2 million households used their home equity to buy additional real estate in 2004, up from roughly one million a decade earlier. "As long as there isn't a major change in the marketplace or a bubble burst, it will go up again," says Larry Cohen, director of the SRI division that does financial-services research and consulting.
What Americans are generally not doing with their equity is letting it build, as homeowners traditionally did. The huge rise in home values translates into more equity for homeowners. But many of them have extracted those profits from their equity, and many people buying homes now borrow a larger share of the price than they did years ago. So mortgage borrowing has grown even faster than home values have. As a result, homeowners' equity as a percentage of the market value of all homes declined to 56% at the end of 2004 from 57% five years before, according to data from the Federal Reserve.
Financial-services companies promote the idea that home equity is available for spending or investment. "Your home is one of your biggest assets," says a brochure from Merrill Lynch & Co. "It's also a powerful borrowing tool." A Merrill spokesman said the home-equity loans it offers to consumers are "prudent."
Mark Balderston, a chiropractor in Shawnee, Kan., recently refinanced his home to extract money for a down payment of about $50,000 on a new home he and his wife are buying as a rental property. Mr. Balderston says he got the idea from a fellow chiropractor who has built a fortune on such investments in California. Though he's taking on more debt, Mr. Balderston figures that real estate is far less risky than the stock market. "If we can get a 5% or 6% return on our money every year, that's attractive to me," he says.
Why are people like the Balderstons so confident of strong returns from real estate even amid growing warnings about the dangers of a housing bubble? "People form their expectations on a backward-looking basis," says Jan Hatzius, an economist at Goldman Sachs in New York. Based on the experience of recent years, they tend to see real estate as a very promising investment, he says, adding: "That's probably not correct.... You should think pretty hard about whether you want to increase your exposure to real estate at a time when it is trading at historically high valuations."
Like the Epsteins, who used their home equity to buy rental housing in Maryland, many real-estate investors see the stock market as far riskier. "If you buy stocks," Mr. Epstein says, "the next day they can tumble in the toilet." Home prices can't fall nearly as quickly as stocks, he reasons, because people tend to hang on to their real estate when prices are weak and await an upturn.
And unlike those who buy stocks with borrowed funds, home buyers don't face margin calls, or demands from their creditors for additional funds, when prices fall. Besides, many investors believe immigration and baby boomers' demand for second homes will keep the market solid.
Mr. Epstein, 48 years old, wants to continue building up his rental-housing investments, which already account for more than 90% of his net worth. He is keeping his day job as a manager at a home-building company, but his wife, Kelly, plans to leave her sales job to focus full time on managing the couple's rental units and pursue further investments. They rely heavily on advice from their mortgage broker, Bill Deavers of First Metropolitan Mortgage in Prince Frederick, Md., who also invests in rental properties. The Epsteins' favorite technique is to buy houses from people who are on the verge of losing their homes to foreclosure. The sellers then often become tenants of the Epsteins.
Tim Gamber had $35,000 in his retirement account when he used a mortgage on his home to buy a piece of investment real estate nearly seven years ago. Mr. Gamber started buying property as a sideline five years ago and made it a full-time job after he lost his job as a title examiner two years ago. "I started leveraging myself as much as I could," he says. "I was really scrambling to secure my financial independence." Today, he owns about 40 properties that he values at about $25 million; he puts his debt load at $15 million to $16 million.
To make the deals work, Mr. Gamber turned to so-called option adjustable-rate mortgages, or option ARMs, which carry introductory interest rates of less than 2% and give borrowers multiple payment choices. Option ARMs can be particularly risky because the interest rate adjusts as often as once a month. If rates rise, borrowers who elect to make the minimum payment can see their loan balance grow, a plight known as negative amortization.
But for Mr. Gamber, they are a way to maximize his buying power. Buying real estate "wouldn't be as attractive" without the option ARMs, he says. With the low rates, option ARMs increase his cash flow, allow him to "leverage and buy more property and bet on appreciation," Mr. Gamber says.
Some investors are already tripping up. Bruce Drogsvold was desperate to find an investment property last summer when he spotted a five-bedroom, three-bath home in Boulder, Colo. Mr. Drogsvold, a real-estate broker, and a partner had earned $30,000 apiece on a previous real-estate investment. Their plan was to fix up and flip three or four homes a year.
The pair purchased the house in Boulder for $340,000 last June, then spent about $25,000 on improvements. To finance the purchase, each partner took advantage of a home-equity line of credit, tapping the appreciation in his existing home. By July, the refurbished house was back on the market, priced at $410,000.
But selling the house proved more difficult than expected. The pair cut the asking price to $389,000. Meanwhile, the Fed was pushing up short-term interest rates in an effort to hold down inflation. Because home-equity lines are typically tied to the prime rate, the Fed's moves raised the partners' borrowing costs. "We are starting to bleed," Mr. Drogsvold said in February as his outlays rose. By March, the monthly payments on the two credit lines had climbed by a total of roughly $500. They finally sold the home that month for $380,000, for a loss of about $10,000 after calculating their financing and other costs.
The experience hasn't soured Mr. Drogsvold on real estate, though. Next time around, he says, he will figure a year's carrying costs into the equation. "I have a big line of credit on my home," he says. "If something juicy comes along, I want to be able to act on it."
What makes this get-rich-quick formula more dangerous is that many investors are willing to buy properties on which the rent is too low to pay for financing and other monthly costs. Their bet is that rising property prices eventually will make these deals profitable.
Others invest with no immediate prospect of rental income. Jaime Nack, an event producer in Santa Monica, Calif., recently used a home-equity line of credit on her one-bedroom condo to come up with a $27,000 deposit on a Miami condo that will soon begin construction. She's hoping that the Miami condo will be worth more when construction is completed in two years.
When will this frenzy die down? "The way the consumer operates, they usually don't back away from winners until they become losers," says Joseph G. Carson, chief economist at Alliance Capital Management LP in New York.
Thursday, May 19, 2005
CAPITAL By DAVID WESSEL
The Fed Starts to Show ConcernAt Signs of a Bubble in HousingMay 19, 2005; Page A1
In the debate over whether the housing market is a bubble about to burst, the crowd that argues it isn't has been able to cite reassuring utterances by Federal Reserve officials. But there are proliferating signs that the housing market is looking a bit frothy. And now the U.S. central bank is beginning to worry more about it.
It isn't only that housing prices keep rising faster than almost anything else, up 10% on average nationally in 2004, according to the U.S. Office of Federal Housing Enterprise Oversight, and up 25% or more in the hottest markets in California, Florida and Nevada.
It isn't only that the clever mortgage industry keeps coming up with new ways to lend people money to buy houses that involve ever-more leverage and little -- or sometimes no -- down payment.
It's that more people are buying second and even third homes, expecting that prices will continue to rise so they can sell the houses quickly at a profit -- and that is drawing the Fed's attention. The National Association of Realtors says its surveys find that 23% of all homes purchased in 2004 were for investment, and a further 13% were vacation homes. It's as if Americans got tired of the stock market, and decided to look elsewhere to try to lose money.
For a long time, Federal Reserve Chairman Alan Greenspan dismissed suggestions that the U.S. was in the early stages of a housing bubble. He talked about the extraordinary demand for houses among hard-working immigrants. He emphasized that housing, unlike stocks, is a local market, so it's almost impossible to have a national housing bubble. He explained that it's hard to speculate in a house that you own because to sell it you have to move out.
But there has been a little more concern creeping into his commentary in the past few months. "We do have characteristics of bubbles in certain areas, but not, as best I can judge, nationwide," he told a House committee in February. Mr. Greenspan speaks to the Economic Club of New York at lunchtime tomorrow. If housing comes up in his remarks or if he is questioned on the subject by one of the prominent economists there, look for the Fed chairman to mention -- as Fed Governor Donald Kohn did recently -- the upturn in people buying vacation homes, second homes or other homes on the risky bet that housing prices will continue to rise as they have lately.
Mr. Greenspan hasn't yet hit the "irrational exuberance" gong, the phrase he used to warn about the stock market in December 1996. The Fed and other bank regulators, however, this week warned banks to take more care with home-equity loans, noting that such loans are "subject to increased risk if interest rates rise and home values decline." (Did you say decline? Gulp.) Even a slowing of the pace of increase in housing prices probably would dent consumer spending, which, for the past couple of years, has been helped by Americans tapping their home equity.
Other Fed officials have begun to express some anxiety. In a speech last month, Mr. Kohn said, "A couple of years ago I was fairly confident that the rise in real-estate prices primarily reflected low interest rates, good growth in disposable income and favorable demographics." Mr. Kohn was a longtime adviser to Mr. Greenspan before his appointment to the Fed board.
No longer. "Prices have gone up far enough since then relative to interest rates, rents and incomes to raise questions; recent reports from professionals in the housing market suggest an increasing volume of transactions by investors, who...may be expecting the recent trend of price increases to continue," Mr. Kohn said.
A surge in the number of people buying houses as a speculative investment is the contemporary equivalent of the story about Joseph P. Kennedy, father of the late president. According to the tale, he sold his stocks a week before the 1929 crash because he heard a shoeshine boy named Billy touting U.S. Steel and RCA. When the shoeshine boy starts giving you tips, he is supposed to have said, it's time to get out of the market.
The Fed, which contributed to the housing boom by keeping short-term interest rates so low for so long -- and encouraging the bond market to do the same with the long-term rates that determine mortgage rates -- doesn't expect a collapse of housing prices or an economic calamity. Mr. Kohn's worst case is "an erosion of real house prices" -- translation: an increase in house prices that falls short of the overall inflation rate -- "rather than a sudden crash."
Americans who have owned their homes for the past few years have a lot of equity in their homes: $9.62 trillion worth at the end of last year, up 13% from a year earlier, according to the Fed's tally. Even if house prices fall a bit, homeowners still will have significant equity -- except for those who have hocked nearly all the increase in home values with frequent refinancing or large home-equity loans.
But if house prices stop climbing, it won't be pleasant. Americans will feel poorer -- and they'll spend less as a result.
Write to David Wessel at capital@wsj.com
The Fed Starts to Show ConcernAt Signs of a Bubble in HousingMay 19, 2005; Page A1
In the debate over whether the housing market is a bubble about to burst, the crowd that argues it isn't has been able to cite reassuring utterances by Federal Reserve officials. But there are proliferating signs that the housing market is looking a bit frothy. And now the U.S. central bank is beginning to worry more about it.
It isn't only that housing prices keep rising faster than almost anything else, up 10% on average nationally in 2004, according to the U.S. Office of Federal Housing Enterprise Oversight, and up 25% or more in the hottest markets in California, Florida and Nevada.
It isn't only that the clever mortgage industry keeps coming up with new ways to lend people money to buy houses that involve ever-more leverage and little -- or sometimes no -- down payment.
It's that more people are buying second and even third homes, expecting that prices will continue to rise so they can sell the houses quickly at a profit -- and that is drawing the Fed's attention. The National Association of Realtors says its surveys find that 23% of all homes purchased in 2004 were for investment, and a further 13% were vacation homes. It's as if Americans got tired of the stock market, and decided to look elsewhere to try to lose money.
For a long time, Federal Reserve Chairman Alan Greenspan dismissed suggestions that the U.S. was in the early stages of a housing bubble. He talked about the extraordinary demand for houses among hard-working immigrants. He emphasized that housing, unlike stocks, is a local market, so it's almost impossible to have a national housing bubble. He explained that it's hard to speculate in a house that you own because to sell it you have to move out.
But there has been a little more concern creeping into his commentary in the past few months. "We do have characteristics of bubbles in certain areas, but not, as best I can judge, nationwide," he told a House committee in February. Mr. Greenspan speaks to the Economic Club of New York at lunchtime tomorrow. If housing comes up in his remarks or if he is questioned on the subject by one of the prominent economists there, look for the Fed chairman to mention -- as Fed Governor Donald Kohn did recently -- the upturn in people buying vacation homes, second homes or other homes on the risky bet that housing prices will continue to rise as they have lately.
Mr. Greenspan hasn't yet hit the "irrational exuberance" gong, the phrase he used to warn about the stock market in December 1996. The Fed and other bank regulators, however, this week warned banks to take more care with home-equity loans, noting that such loans are "subject to increased risk if interest rates rise and home values decline." (Did you say decline? Gulp.) Even a slowing of the pace of increase in housing prices probably would dent consumer spending, which, for the past couple of years, has been helped by Americans tapping their home equity.
Other Fed officials have begun to express some anxiety. In a speech last month, Mr. Kohn said, "A couple of years ago I was fairly confident that the rise in real-estate prices primarily reflected low interest rates, good growth in disposable income and favorable demographics." Mr. Kohn was a longtime adviser to Mr. Greenspan before his appointment to the Fed board.
No longer. "Prices have gone up far enough since then relative to interest rates, rents and incomes to raise questions; recent reports from professionals in the housing market suggest an increasing volume of transactions by investors, who...may be expecting the recent trend of price increases to continue," Mr. Kohn said.
A surge in the number of people buying houses as a speculative investment is the contemporary equivalent of the story about Joseph P. Kennedy, father of the late president. According to the tale, he sold his stocks a week before the 1929 crash because he heard a shoeshine boy named Billy touting U.S. Steel and RCA. When the shoeshine boy starts giving you tips, he is supposed to have said, it's time to get out of the market.
The Fed, which contributed to the housing boom by keeping short-term interest rates so low for so long -- and encouraging the bond market to do the same with the long-term rates that determine mortgage rates -- doesn't expect a collapse of housing prices or an economic calamity. Mr. Kohn's worst case is "an erosion of real house prices" -- translation: an increase in house prices that falls short of the overall inflation rate -- "rather than a sudden crash."
Americans who have owned their homes for the past few years have a lot of equity in their homes: $9.62 trillion worth at the end of last year, up 13% from a year earlier, according to the Fed's tally. Even if house prices fall a bit, homeowners still will have significant equity -- except for those who have hocked nearly all the increase in home values with frequent refinancing or large home-equity loans.
But if house prices stop climbing, it won't be pleasant. Americans will feel poorer -- and they'll spend less as a result.
Write to David Wessel at capital@wsj.com
Wednesday, April 20, 2005
Spring Home Sales Start Strong
Key Forecast Is Revised Upward,Despite Pockets of Weakness; Rebounds in the O.C. and Boston
By RUTH SIMON Staff Reporter of THE WALL STREET JOURNAL
April 19, 2005; Page D1
After a multiyear real-estate boom that has raised concerns about a housing bubble in a number of markets, economists and homeowners are closely watching this year's spring selling season for any signs of a slowdown.
So far, there aren't many of them.
Spring tends to be the hottest selling season, with families looking to move well before the start of the next school year. And sales are getting off to a strong start in many parts of the country.
SPILLOVER EFFECT
See an interactive map of some cities experiencing an influx of home buyers who are being priced out of hot markets, and read about what to do when it's a seller's market and your home won't sell. Plus, the sly tactics buyers and realtors are using to win bidding wars.
VITAL SIGNS
Evidence that home sales remain strong in many parts of the country:
*In hot markets such as New York City and Long Beach, Calif., well-priced homes are commanding multiple offers.
*In markets such as Phoenix and Newport News, Va., real-estate brokers say sales are actually stronger this year than last.
*Brokers in other places say the spring selling season began earlier this year.
In a revised forecast, the National Association of Realtors now says it expects sales of existing single-family homes to fall 2.4% to 6.62 million for the full year, which still would be the second-highest level on record. That is better than the 5% slide the Realtors group predicted at the start of the year.
One reason: The much-anticipated increase in long-term mortgage rates has yet to materialize. Weak economic news has helped push rates on 30-year fixed-rate mortgages below 6%, from a recent high of 6.17%, according to HSH Associates, providing a nudge to buyers fearful that rates will shoot up again.
The brisk start to the season comes as concerns about the housing market have been escalating. In a speech yesterday, Federal Reserve Governor Susan Bies said, "We are beginning to see signs that housing prices may be reaching a peak in some markets." She cited the growing share of homes purchased by investors, and the large number of borrowers using adjustable-rate, interest-only mortgages in an effort to make high-priced homes more affordable.
Additionally, there is evidence of a weakening in certain corners of the market. In the luxury market, for instance, "what we're finding is that properties that sold...in the first quarter of 2005 seem to be on the market longer" in a number of locales, says Stuart Siegel, president of Sotheby's International Realty, a unit of Cendant Corp., blaming the "net impact of sticker shock."
There were signs last fall that the housing market, at long last, was beginning to soften in such places as Orange County, Calif., and Boston. Real-estate brokers say business picked up in many markets after a brief slowdown, helped along by declining mortgage rates. In some local markets, improving economic conditions have played a role. In Atlanta, corporate relocations plus a sense of increased job security have helped boost sales of homes priced at more than $1 million, says Chris Ballard, broker-owner of Century 21 Gold Medal Realty.
In some markets, such as Phoenix and Newport News, Va., real-estate brokers say sales are stronger this year than last. In some cases, homes are flying off the market within days or even hours of being listed. Brokers in some markets say the rise in sales that normally arrives with spring began earlier this year.
The likelihood of yet another frenzied spring comes on top of record sales last year. Fueled by low mortgage rates, sales of existing homes hit 6.78 million, topping a record of 6.18 million in 2003, according to the National Association of Realtors. Home prices climbed more than 20% last year in Miami, Las Vegas, Phoenix, Los Angeles and Washington, D.C., among other markets.
Economists generally agree that price gains will slow to more normal levels, though just when this will happen -- and how deep the slowdown will be -- remains an open question. Home-price research company Fiserv CSW Inc. expects some slowing this year. It forecasts that home prices will rise an average of 7% to 9% this year, following last year's 14.3% rise, in the 90 major metropolitan areas it tracks.
Slowdown In Second Half?
NAR chief economist David Lereah expects a slowdown in the second half. So far this year, he says, the number of homes sold is running about flat compared with last year's strong showing.
The strong housing market "will continue as long as interest rates remain relatively low and credit remains relatively easy," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California at Berkeley. But, he adds, "the longer the boom goes on, the bigger the correction will be."
In Newport News, Va., "it's even more frenzied than it was last year," says Liz Moore, president of Liz Moore & Associates, where sales rose 43% in the first quarter from the year-earlier period. "If we have a reasonable listing, we have multiple offers in the first couple of days -- five to seven isn't unusual," she says.
The supply of properties for sale is so thin in Manhattan, meanwhile, that more buyers this year are offering $100,000 or more above the listed price. Arlyne Blitz, a vice president with Corcoran Group, says one of her clients recently made an all-cash offer that was $155,000 over the asking price for a two-bedroom, 1,500 square-foot condo priced at $1.35 million in an arrangement that required would-be buyers to submit one "best and final" offer.
"We were No. 7 of 17," Ms. Blitz says. "The winning bid was for over $1.6 million." Some brokers there are deliberately underpricing property to elicit greater bidding and a higher final selling price, she notes.
Properties also are flying off the market in Phoenix and Tucson, where an influx of refugees from Southern California and Las Vegas -- looking for lower-cost housing or better investment opportunities -- is helping to propel prices skyward. Last year, the average home in the Phoenix area stayed on the market for 50 to 60 days, says Bill Jilbert, president of Coldwell Banker Success Realty. Now, he says, "the pendulum is so far to one side that it's not even fun."
Six Hours, Eight Offers
Broker Tom Weiskopf put his own 3,000-square-foot four-bedroom home in Scottsdale, Ariz., on the market in late February. Within six hours he had eight offers, with most buyers waiving the standard contingencies for financing, appraisal and inspection. Mr. Weiskopf cut off the bidding at 7 p.m. and accepted an offer for $645,500, $4,500 above the listed price.
The competition among buyers is especially fierce for entry-level homes. In Long Beach, Calif., "anything under $500,000 in a decent neighborhood is going to produce multiple offers," says Richard F. Gaylord, a broker with Re/Max Real Estate Specialists. Mr. Gaylord last month received 29 offers on a 1,084-square-foot, three-bedroom starter home that sold for $510,000, $60,500 more than the asking price.
Russell Garron, a pharmaceuticals salesman, initially offered $455,000 this month for a 1,200-square foot, three-bedroom condo in Irvine, Calif., listed at $449,000. Mr. Garron upped his offer to $465,000 because there were multiple bids. When his broker, Tamzi Richardson of First Team Real Estate, called at 10:30 p.m. that night with the seller's response, Mr. Garron immediately dashed to Kinko's to fax in his paperwork. While searching for a home, "I slept with my cellphone," says Mr. Garron, who lost out on two other properties.
New Construction
Not every market is as heated. In Kansas City, the average time on the market climbed to 57 days in the first quarter from 49 days during the same period last year. "We're not seeing the rush of multiple offers...[or] sales coming in well over the list price like we were seeing last year or the year before," says Jerry Reece, president of Reece & Nichols there.
In the bellwether market of San Diego, home prices rose at an annualized rate of 12.5% in March, down from as much as 26.4% in October, according to DataQuick Information Systems, which tracks U.S. real-estate sales.
Houston broker Julius F. Zatopek III, of Re/Max on the Brazos, says sales have softened in that city in recent weeks after spiking during the first quarter as buyers dived into the market, nervous about rising interest rates.
In Miami, where sales remain strong, resale prices of existing condos in the $500,000 to $900,000 price range could fall by as much as $200,000 later this year, predicts broker Mark Zilbert. With so many new units coming onto the market, "the motivation is to be in a hip new property," Mr. Zilbert says. With existing units, "the value isn't there."
Key Forecast Is Revised Upward,Despite Pockets of Weakness; Rebounds in the O.C. and Boston
By RUTH SIMON Staff Reporter of THE WALL STREET JOURNAL
April 19, 2005; Page D1
After a multiyear real-estate boom that has raised concerns about a housing bubble in a number of markets, economists and homeowners are closely watching this year's spring selling season for any signs of a slowdown.
So far, there aren't many of them.
Spring tends to be the hottest selling season, with families looking to move well before the start of the next school year. And sales are getting off to a strong start in many parts of the country.
SPILLOVER EFFECT
See an interactive map of some cities experiencing an influx of home buyers who are being priced out of hot markets, and read about what to do when it's a seller's market and your home won't sell. Plus, the sly tactics buyers and realtors are using to win bidding wars.
VITAL SIGNS
Evidence that home sales remain strong in many parts of the country:
*In hot markets such as New York City and Long Beach, Calif., well-priced homes are commanding multiple offers.
*In markets such as Phoenix and Newport News, Va., real-estate brokers say sales are actually stronger this year than last.
*Brokers in other places say the spring selling season began earlier this year.
In a revised forecast, the National Association of Realtors now says it expects sales of existing single-family homes to fall 2.4% to 6.62 million for the full year, which still would be the second-highest level on record. That is better than the 5% slide the Realtors group predicted at the start of the year.
One reason: The much-anticipated increase in long-term mortgage rates has yet to materialize. Weak economic news has helped push rates on 30-year fixed-rate mortgages below 6%, from a recent high of 6.17%, according to HSH Associates, providing a nudge to buyers fearful that rates will shoot up again.
The brisk start to the season comes as concerns about the housing market have been escalating. In a speech yesterday, Federal Reserve Governor Susan Bies said, "We are beginning to see signs that housing prices may be reaching a peak in some markets." She cited the growing share of homes purchased by investors, and the large number of borrowers using adjustable-rate, interest-only mortgages in an effort to make high-priced homes more affordable.
Additionally, there is evidence of a weakening in certain corners of the market. In the luxury market, for instance, "what we're finding is that properties that sold...in the first quarter of 2005 seem to be on the market longer" in a number of locales, says Stuart Siegel, president of Sotheby's International Realty, a unit of Cendant Corp., blaming the "net impact of sticker shock."
There were signs last fall that the housing market, at long last, was beginning to soften in such places as Orange County, Calif., and Boston. Real-estate brokers say business picked up in many markets after a brief slowdown, helped along by declining mortgage rates. In some local markets, improving economic conditions have played a role. In Atlanta, corporate relocations plus a sense of increased job security have helped boost sales of homes priced at more than $1 million, says Chris Ballard, broker-owner of Century 21 Gold Medal Realty.
In some markets, such as Phoenix and Newport News, Va., real-estate brokers say sales are stronger this year than last. In some cases, homes are flying off the market within days or even hours of being listed. Brokers in some markets say the rise in sales that normally arrives with spring began earlier this year.
The likelihood of yet another frenzied spring comes on top of record sales last year. Fueled by low mortgage rates, sales of existing homes hit 6.78 million, topping a record of 6.18 million in 2003, according to the National Association of Realtors. Home prices climbed more than 20% last year in Miami, Las Vegas, Phoenix, Los Angeles and Washington, D.C., among other markets.
Economists generally agree that price gains will slow to more normal levels, though just when this will happen -- and how deep the slowdown will be -- remains an open question. Home-price research company Fiserv CSW Inc. expects some slowing this year. It forecasts that home prices will rise an average of 7% to 9% this year, following last year's 14.3% rise, in the 90 major metropolitan areas it tracks.
Slowdown In Second Half?
NAR chief economist David Lereah expects a slowdown in the second half. So far this year, he says, the number of homes sold is running about flat compared with last year's strong showing.
The strong housing market "will continue as long as interest rates remain relatively low and credit remains relatively easy," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California at Berkeley. But, he adds, "the longer the boom goes on, the bigger the correction will be."
In Newport News, Va., "it's even more frenzied than it was last year," says Liz Moore, president of Liz Moore & Associates, where sales rose 43% in the first quarter from the year-earlier period. "If we have a reasonable listing, we have multiple offers in the first couple of days -- five to seven isn't unusual," she says.
The supply of properties for sale is so thin in Manhattan, meanwhile, that more buyers this year are offering $100,000 or more above the listed price. Arlyne Blitz, a vice president with Corcoran Group, says one of her clients recently made an all-cash offer that was $155,000 over the asking price for a two-bedroom, 1,500 square-foot condo priced at $1.35 million in an arrangement that required would-be buyers to submit one "best and final" offer.
"We were No. 7 of 17," Ms. Blitz says. "The winning bid was for over $1.6 million." Some brokers there are deliberately underpricing property to elicit greater bidding and a higher final selling price, she notes.
Properties also are flying off the market in Phoenix and Tucson, where an influx of refugees from Southern California and Las Vegas -- looking for lower-cost housing or better investment opportunities -- is helping to propel prices skyward. Last year, the average home in the Phoenix area stayed on the market for 50 to 60 days, says Bill Jilbert, president of Coldwell Banker Success Realty. Now, he says, "the pendulum is so far to one side that it's not even fun."
Six Hours, Eight Offers
Broker Tom Weiskopf put his own 3,000-square-foot four-bedroom home in Scottsdale, Ariz., on the market in late February. Within six hours he had eight offers, with most buyers waiving the standard contingencies for financing, appraisal and inspection. Mr. Weiskopf cut off the bidding at 7 p.m. and accepted an offer for $645,500, $4,500 above the listed price.
The competition among buyers is especially fierce for entry-level homes. In Long Beach, Calif., "anything under $500,000 in a decent neighborhood is going to produce multiple offers," says Richard F. Gaylord, a broker with Re/Max Real Estate Specialists. Mr. Gaylord last month received 29 offers on a 1,084-square-foot, three-bedroom starter home that sold for $510,000, $60,500 more than the asking price.
Russell Garron, a pharmaceuticals salesman, initially offered $455,000 this month for a 1,200-square foot, three-bedroom condo in Irvine, Calif., listed at $449,000. Mr. Garron upped his offer to $465,000 because there were multiple bids. When his broker, Tamzi Richardson of First Team Real Estate, called at 10:30 p.m. that night with the seller's response, Mr. Garron immediately dashed to Kinko's to fax in his paperwork. While searching for a home, "I slept with my cellphone," says Mr. Garron, who lost out on two other properties.
New Construction
Not every market is as heated. In Kansas City, the average time on the market climbed to 57 days in the first quarter from 49 days during the same period last year. "We're not seeing the rush of multiple offers...[or] sales coming in well over the list price like we were seeing last year or the year before," says Jerry Reece, president of Reece & Nichols there.
In the bellwether market of San Diego, home prices rose at an annualized rate of 12.5% in March, down from as much as 26.4% in October, according to DataQuick Information Systems, which tracks U.S. real-estate sales.
Houston broker Julius F. Zatopek III, of Re/Max on the Brazos, says sales have softened in that city in recent weeks after spiking during the first quarter as buyers dived into the market, nervous about rising interest rates.
In Miami, where sales remain strong, resale prices of existing condos in the $500,000 to $900,000 price range could fall by as much as $200,000 later this year, predicts broker Mark Zilbert. With so many new units coming onto the market, "the motivation is to be in a hip new property," Mr. Zilbert says. With existing units, "the value isn't there."
Wednesday, April 13, 2005
Real Estate Is an OptionFor Self-Employed Pros
By RAY A. SMITHStaff Reporter of The Wall Street Journal
From The Wall Street Journal Online
Self-employed investors who have wished they could buy real estate as a tax-protected retirement investment may now have a good opportunity: Accountants have come up with a way to put real estate into some 401(k) plans under new tax laws.
With the advent of the single-participant 401(k) in the 2002 tax code, self-employed workers finally have an investment program similar to the ones employees have had for years.
The process involves opening up a single-participant 401(k) at a brokerage firm that allows investors to put 401(k) money into real estate. Salomon Smith Barney is one firm that allows this in its accounts, as does Entrust Administration Inc. of Oakland, Calif. Self-employed investors can put up to $41,000 a year into one-person 401(k) accounts.
"It's pretty neat if you're not comfortable with the stock market," says Frank Boutillette, a partner with Mendlowitz Weitsen LLP, an accounting firm in East Brunswick, N.J. "For real-estate people, they know real estate, but they don't really know the stock market, and they might know a property that is undervalued a little bit."
Salomon Smith Barney allows individuals to invest in real estate in their single-participant 401(k) accounts, but doesn't recommend the option because of the potentially high administrative costs tacked on to the relatively low amount of money to be invested.
Mr. Boutillette says the firms that allow real-estate investments in one-person 401(k) accounts aren't promoting the option because it doesn't benefit them. "They really don't make any money on it, because they're not really managing it," he says. Indeed, real-estate investments normally aren't included in regular 401(k) accounts because of the administrative hassles and costs. Because one-person 401(k) plans are self-run, the administration falls on the investor. "It would be a nightmare to administer for a company," Mr. Boutillette says. "I haven't heard of anybody doing that in a regular business."
Self-employed investors can roll the nest eggs they've already accumulated in other investment plans -- whether they are corporate 401(k) accounts or other one-person plans -- into the single-participant 401(k). The one investment that can't be included in the new accounts is a Roth IRA.
Mr. Boutillette paints a scenario of an investor with $200,000 in a one-person 401(k), who sees a property listed for $200,000, which he or she deems undervalued. With $10,000 of rental income, the annual return would be 5%, and any appreciation of the property's value would stay in the 401(k) when the investor sells the property.
If an investor buys the property with cash, then the rental income isn't subject to income taxes in the 401(k). If the property is mortgaged, income taxes apply to any rental income and are paid out of the one-person 401(k).
There are some sticking points to buying real estate for your 401(k). Neither the investor nor any of the investor's relatives can live in the building, and a separate checking account in the name of the 401(k) plan is required for a rental property. Upkeep costs and property taxes on the real estate are paid out of the account.
The owner must get an appraisal of the property's value every year and report it to the Internal Revenue Service, and if the assets exceed $100,000, the owner must file a Form 5500EZ to the IRS.
Also, if you're not looking to be a property manager, this option probably isn't for you. Because the firms that allow real-estate investment in one-person 401(k) accounts are not managing the investments, Mr. Boutillette notes, investors must either manage the property themselves or pay someone else to do it. "You probably want to consult your tax adviser before you do any of this," he adds.
Gary Pokrant, a CPA with the accounting firm of Reznick Fedder & Silverman of Bethesda, Md., says there are "a couple of impediments" to including real estate in the new one-person 401(k) accounts. "It's complicated, and you need a certain level of assets in the plan," he says. "It's not like you can take your $10,000 contribution and buy real estate with it. That's a pretty low number." Still, for those who know what they are getting into, it can provide good returns, he says.
While there aren't many firms offering this setup right now, Mr. Boutillette says he thinks that will change as more people become aware that it is legal to buy real estate with their 401(k) funds. "There has been a lot of excitement going on as we started telling people about this," he says.
By RAY A. SMITHStaff Reporter of The Wall Street Journal
From The Wall Street Journal Online
Self-employed investors who have wished they could buy real estate as a tax-protected retirement investment may now have a good opportunity: Accountants have come up with a way to put real estate into some 401(k) plans under new tax laws.
With the advent of the single-participant 401(k) in the 2002 tax code, self-employed workers finally have an investment program similar to the ones employees have had for years.
The process involves opening up a single-participant 401(k) at a brokerage firm that allows investors to put 401(k) money into real estate. Salomon Smith Barney is one firm that allows this in its accounts, as does Entrust Administration Inc. of Oakland, Calif. Self-employed investors can put up to $41,000 a year into one-person 401(k) accounts.
"It's pretty neat if you're not comfortable with the stock market," says Frank Boutillette, a partner with Mendlowitz Weitsen LLP, an accounting firm in East Brunswick, N.J. "For real-estate people, they know real estate, but they don't really know the stock market, and they might know a property that is undervalued a little bit."
Salomon Smith Barney allows individuals to invest in real estate in their single-participant 401(k) accounts, but doesn't recommend the option because of the potentially high administrative costs tacked on to the relatively low amount of money to be invested.
Mr. Boutillette says the firms that allow real-estate investments in one-person 401(k) accounts aren't promoting the option because it doesn't benefit them. "They really don't make any money on it, because they're not really managing it," he says. Indeed, real-estate investments normally aren't included in regular 401(k) accounts because of the administrative hassles and costs. Because one-person 401(k) plans are self-run, the administration falls on the investor. "It would be a nightmare to administer for a company," Mr. Boutillette says. "I haven't heard of anybody doing that in a regular business."
Self-employed investors can roll the nest eggs they've already accumulated in other investment plans -- whether they are corporate 401(k) accounts or other one-person plans -- into the single-participant 401(k). The one investment that can't be included in the new accounts is a Roth IRA.
Mr. Boutillette paints a scenario of an investor with $200,000 in a one-person 401(k), who sees a property listed for $200,000, which he or she deems undervalued. With $10,000 of rental income, the annual return would be 5%, and any appreciation of the property's value would stay in the 401(k) when the investor sells the property.
If an investor buys the property with cash, then the rental income isn't subject to income taxes in the 401(k). If the property is mortgaged, income taxes apply to any rental income and are paid out of the one-person 401(k).
There are some sticking points to buying real estate for your 401(k). Neither the investor nor any of the investor's relatives can live in the building, and a separate checking account in the name of the 401(k) plan is required for a rental property. Upkeep costs and property taxes on the real estate are paid out of the account.
The owner must get an appraisal of the property's value every year and report it to the Internal Revenue Service, and if the assets exceed $100,000, the owner must file a Form 5500EZ to the IRS.
Also, if you're not looking to be a property manager, this option probably isn't for you. Because the firms that allow real-estate investment in one-person 401(k) accounts are not managing the investments, Mr. Boutillette notes, investors must either manage the property themselves or pay someone else to do it. "You probably want to consult your tax adviser before you do any of this," he adds.
Gary Pokrant, a CPA with the accounting firm of Reznick Fedder & Silverman of Bethesda, Md., says there are "a couple of impediments" to including real estate in the new one-person 401(k) accounts. "It's complicated, and you need a certain level of assets in the plan," he says. "It's not like you can take your $10,000 contribution and buy real estate with it. That's a pretty low number." Still, for those who know what they are getting into, it can provide good returns, he says.
While there aren't many firms offering this setup right now, Mr. Boutillette says he thinks that will change as more people become aware that it is legal to buy real estate with their 401(k) funds. "There has been a lot of excitement going on as we started telling people about this," he says.
Monday, April 04, 2005
Looking for a new house? Anthem has a glut
Glen Creno
The Arizona Republic
Apr. 4, 2005 12:00 AM
Unprecedented demand has nearly dried up house listings in many Valley neighborhoods, but there are hundreds of homes for sale in the Anthem community north of Phoenix.
Real estate agents have various explanations for what appears to be a market anomaly. Some say investors are trying to unload properties while others attribute the numerous listings to people moving up in the resort-style community near New River. Still others say listings routinely soar every year at this time.
A glut of homes for sale in Anthem wouldn't have caused a ripple of concern five years ago. But these days, anyone with even a mild interest in Phoenix's housing market is on alert for the first sign of investor selling.
Investors have been a key driver behind record home sales and prices in the Phoenix area. A wave of investor selling could puncture property values, not just in Anthem but across the metropolitan area.
"I think it's a lot of investors putting their houses on the market at the same time," said Brett Barry, a Realty Executives agent who specializes in the northeast Valley. "That area right from the get-go has attracted a large number of investors.
"There's disagreement about what is motivating Anthem's sellers and there's no evidence that freewheeling selling has spread to other Valley neighborhoods. The opposite is true. Agents say listings are tight across metropolitan Phoenix.
But many of the Anthem listings fit the profile of investor-owned homes. They are newer, not occupied and have few frills. Investors may be less inclined to pay for upgrades that will reduce their profit when they sell.
"There are quite a few vacant, on lockbox," said Doreen Drew, owner of Daisy Mountain Real Estate and an Anthem specialist. "There are quite a few with no landscaping, no window coverings, no ceiling fans, on the rental and for-sale markets. That tells me they are investor homes."
Jay Butler, head of the Arizona Real Estate Center at Arizona State University, said it was unclear if Anthem selling could signal a larger Phoenix-area trend. He said Anthem merely may be an "oddball" area that doesn't always reflect the rest of the Valley's market. But Butler also said many who have money in Phoenix housing are on alert for a market turn.
"I think a lot of investors will move in the next several months because prices are high," he said. "I think a lot of them will say: 'We've made pretty good money. We don't want to hang on any longer and watch the market turn on us.' Also, it's been difficult renting them."
Anthem has been one of the hottest selling communities in metro Phoenix. The median home price in the combined new and resale market hit $268,725 last year, according to the latest figures from The Republic's Valley Home Values analysis. The median Anthem price rose more than 46 percent in the past five years.
Some agents who work in Anthem don't believe the surge of listings is due to investor selling. They say it's a seasonal trend driven by families with children who need to move but won't do so until the school year is nearing its end. They also say there's churn from people who already live in Anthem buying new homes and waiting for them to be built.
Jeff Wallen of Hot Realty said there were 275 Anthem houses on the market at the beginning of last week, with 25 them speculative homes from builders. He estimated that there are about 8,000 houses in Anthem.
Compare that with Tatum Ranch, Barry's specialty area. He said the north Phoenix area had 15 houses for sale from $200,000 to $600,000 at the start of last week. Tatum Ranch has about 3,300 homes.
Wallen and Brack Jaskey, an agent who is buying into Wallen's business, say that Anthem's resale market gets strong competition from home builders delivering new houses. They also say Anthem doesn't show up in typical Internet searches by out-of-town buyers, something that could lengthen the time houses sit on the market.
Wallen believes in Anthem so much he owns eight homes there. He said buyers are sold once they discover Anthem's small-town vibe.
"I am convinced it's the biggest secret in Phoenix," he said.
Drew said the number of listings in Anthem isn't unusual or worrisome and noted that most of her listings come from job relocations. She said investors are getting rid of Anthem houses because the demand for rental homes there is weak.
"There are a ton of rentals because the investors came in and bought properties," she said. "They put them on the rental market, they're not renting and now they are selling them. End of story."
And she's not worried that investor homes will hurt Anthem long term.
"You just work through that inventory," she said. "Overall this is going to be a fine market."
Barry said the overall market can draw a lesson from Anthem selling.
"It's but indicative over time what can happen when too many investors come in and want to sell," he said. "When the market is hot, if everybody puts their homes up on the market at the same time, things can change. But the market is still rocking.
"ASU's Butler also wonders what investors will do.
"I think people are sitting on edge saying, 'The first negative news we have, we're going to bail.' . . . A lot of people who bought into the housing market are amateurs, and they don't want to lose anything they had."
Glen Creno
The Arizona Republic
Apr. 4, 2005 12:00 AM
Unprecedented demand has nearly dried up house listings in many Valley neighborhoods, but there are hundreds of homes for sale in the Anthem community north of Phoenix.
Real estate agents have various explanations for what appears to be a market anomaly. Some say investors are trying to unload properties while others attribute the numerous listings to people moving up in the resort-style community near New River. Still others say listings routinely soar every year at this time.
A glut of homes for sale in Anthem wouldn't have caused a ripple of concern five years ago. But these days, anyone with even a mild interest in Phoenix's housing market is on alert for the first sign of investor selling.
Investors have been a key driver behind record home sales and prices in the Phoenix area. A wave of investor selling could puncture property values, not just in Anthem but across the metropolitan area.
"I think it's a lot of investors putting their houses on the market at the same time," said Brett Barry, a Realty Executives agent who specializes in the northeast Valley. "That area right from the get-go has attracted a large number of investors.
"There's disagreement about what is motivating Anthem's sellers and there's no evidence that freewheeling selling has spread to other Valley neighborhoods. The opposite is true. Agents say listings are tight across metropolitan Phoenix.
But many of the Anthem listings fit the profile of investor-owned homes. They are newer, not occupied and have few frills. Investors may be less inclined to pay for upgrades that will reduce their profit when they sell.
"There are quite a few vacant, on lockbox," said Doreen Drew, owner of Daisy Mountain Real Estate and an Anthem specialist. "There are quite a few with no landscaping, no window coverings, no ceiling fans, on the rental and for-sale markets. That tells me they are investor homes."
Jay Butler, head of the Arizona Real Estate Center at Arizona State University, said it was unclear if Anthem selling could signal a larger Phoenix-area trend. He said Anthem merely may be an "oddball" area that doesn't always reflect the rest of the Valley's market. But Butler also said many who have money in Phoenix housing are on alert for a market turn.
"I think a lot of investors will move in the next several months because prices are high," he said. "I think a lot of them will say: 'We've made pretty good money. We don't want to hang on any longer and watch the market turn on us.' Also, it's been difficult renting them."
Anthem has been one of the hottest selling communities in metro Phoenix. The median home price in the combined new and resale market hit $268,725 last year, according to the latest figures from The Republic's Valley Home Values analysis. The median Anthem price rose more than 46 percent in the past five years.
Some agents who work in Anthem don't believe the surge of listings is due to investor selling. They say it's a seasonal trend driven by families with children who need to move but won't do so until the school year is nearing its end. They also say there's churn from people who already live in Anthem buying new homes and waiting for them to be built.
Jeff Wallen of Hot Realty said there were 275 Anthem houses on the market at the beginning of last week, with 25 them speculative homes from builders. He estimated that there are about 8,000 houses in Anthem.
Compare that with Tatum Ranch, Barry's specialty area. He said the north Phoenix area had 15 houses for sale from $200,000 to $600,000 at the start of last week. Tatum Ranch has about 3,300 homes.
Wallen and Brack Jaskey, an agent who is buying into Wallen's business, say that Anthem's resale market gets strong competition from home builders delivering new houses. They also say Anthem doesn't show up in typical Internet searches by out-of-town buyers, something that could lengthen the time houses sit on the market.
Wallen believes in Anthem so much he owns eight homes there. He said buyers are sold once they discover Anthem's small-town vibe.
"I am convinced it's the biggest secret in Phoenix," he said.
Drew said the number of listings in Anthem isn't unusual or worrisome and noted that most of her listings come from job relocations. She said investors are getting rid of Anthem houses because the demand for rental homes there is weak.
"There are a ton of rentals because the investors came in and bought properties," she said. "They put them on the rental market, they're not renting and now they are selling them. End of story."
And she's not worried that investor homes will hurt Anthem long term.
"You just work through that inventory," she said. "Overall this is going to be a fine market."
Barry said the overall market can draw a lesson from Anthem selling.
"It's but indicative over time what can happen when too many investors come in and want to sell," he said. "When the market is hot, if everybody puts their homes up on the market at the same time, things can change. But the market is still rocking.
"ASU's Butler also wonders what investors will do.
"I think people are sitting on edge saying, 'The first negative news we have, we're going to bail.' . . . A lot of people who bought into the housing market are amateurs, and they don't want to lose anything they had."
Tuesday, October 28, 2003
Housing drives economy's rise
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Sales at or near record pace in Sept.
Jeannine Aversa
Associated Press
Oct. 28, 2003 12:00 AM
WASHINGTON - New-home sales edged down in September but nevertheless registered their third-highest level on record. Sales of previously owned homes scored their best month ever, fresh evidence that the housing market continues to help spur an economic recovery.
The Commerce Department reported Monday that new-home sales came in at a seasonally adjusted annual rate of 1.145 million in September, a 0.2 percent dip from August.
Even with the drop, the level of sales was stronger than the 1.125 million pace that analysts were forecasting. New-home sales posted their best month ever in June, when they racked up a 1.200 million-unit pace. They turned in their second-best month on record in August, when sales came in at a 1.147 million rate.
Sales of new homes in the Phoenix area rolled on at a torrid pace. Housing analyst R.L. Brown said single-family permits hit 4,450 in September compared with 3,002 in September 2002, a 48 percent jump.
Permits were up more than 22 percent through September, on track to set an annual record, Brown said. Closings were up 20 percent from last September and 12 percent year to date.
In a second report, the National Association of Realtors said that existing-home sales nationwide rose by 3.6 percent in September to a seasonally adjusted annual rate of 6.69 million units, the third month in a row that a record-high sales pace was reached.
Brown said Valley resales were strong. He tracked 7,688 in September, up more than 34 percent from 5,725 in September 2002. Resales were up 15.3 percent for the year.
"These housing results bode extremely well for the economy's year-end finish and the early months of 2004," said economist Ken Mayland, president of ClearView Economics. "This recovery now rests on strong foundations."
On Wall Street, stocks moved higher. The Dow Jones industrials gained 42 points and the Nasdaq was up 12.
Low mortgage rates have helped keep the housing market healthy throughout the economy's struggle to get back to full strength following the 2001 recession.
The average rate on a 30-year, fixed-rate mortgage in September was 6.15 percent, down from 6.26 percent in August.
Home sales in 2003 are on track to set annual records, economists said.
By region, sales of new homes in September soared by 26 percent in the Northeast to an annual rate of 97,000, and in the West, they jumped by 12.4 percent to a pace of 335,000.
But in the Midwest, sales fell 18 percent to a pace of 209,000 and in the South they dipped by 2.5 percent to a rate of 504,000.
For previously owned homes, sales rose 7 percent in the Northeast to a rate of 760,000 units. In the West, sales rose 5.1 percent to a pace of 1.85 million units
Sales in the Midwest went up 4.4 percent to a pace of 1.43 million units, and in the South they rose by 0.8 percent to a pace of 2.64 million units.
"These are terrific numbers. We have excellent mortgage rates and house prices are moving up smartly, keeping the incentive alive to own a home," said David Seiders, chief economist at the National Association of Home Builders.
The Federal Reserve is expected to hold a main short-term interest rate at 1 percent, a 45-year low, when it meets today, economists say.
advertisement
Sales at or near record pace in Sept.
Jeannine Aversa
Associated Press
Oct. 28, 2003 12:00 AM
WASHINGTON - New-home sales edged down in September but nevertheless registered their third-highest level on record. Sales of previously owned homes scored their best month ever, fresh evidence that the housing market continues to help spur an economic recovery.
The Commerce Department reported Monday that new-home sales came in at a seasonally adjusted annual rate of 1.145 million in September, a 0.2 percent dip from August.
Even with the drop, the level of sales was stronger than the 1.125 million pace that analysts were forecasting. New-home sales posted their best month ever in June, when they racked up a 1.200 million-unit pace. They turned in their second-best month on record in August, when sales came in at a 1.147 million rate.
Sales of new homes in the Phoenix area rolled on at a torrid pace. Housing analyst R.L. Brown said single-family permits hit 4,450 in September compared with 3,002 in September 2002, a 48 percent jump.
Permits were up more than 22 percent through September, on track to set an annual record, Brown said. Closings were up 20 percent from last September and 12 percent year to date.
In a second report, the National Association of Realtors said that existing-home sales nationwide rose by 3.6 percent in September to a seasonally adjusted annual rate of 6.69 million units, the third month in a row that a record-high sales pace was reached.
Brown said Valley resales were strong. He tracked 7,688 in September, up more than 34 percent from 5,725 in September 2002. Resales were up 15.3 percent for the year.
"These housing results bode extremely well for the economy's year-end finish and the early months of 2004," said economist Ken Mayland, president of ClearView Economics. "This recovery now rests on strong foundations."
On Wall Street, stocks moved higher. The Dow Jones industrials gained 42 points and the Nasdaq was up 12.
Low mortgage rates have helped keep the housing market healthy throughout the economy's struggle to get back to full strength following the 2001 recession.
The average rate on a 30-year, fixed-rate mortgage in September was 6.15 percent, down from 6.26 percent in August.
Home sales in 2003 are on track to set annual records, economists said.
By region, sales of new homes in September soared by 26 percent in the Northeast to an annual rate of 97,000, and in the West, they jumped by 12.4 percent to a pace of 335,000.
But in the Midwest, sales fell 18 percent to a pace of 209,000 and in the South they dipped by 2.5 percent to a rate of 504,000.
For previously owned homes, sales rose 7 percent in the Northeast to a rate of 760,000 units. In the West, sales rose 5.1 percent to a pace of 1.85 million units
Sales in the Midwest went up 4.4 percent to a pace of 1.43 million units, and in the South they rose by 0.8 percent to a pace of 2.64 million units.
"These are terrific numbers. We have excellent mortgage rates and house prices are moving up smartly, keeping the incentive alive to own a home," said David Seiders, chief economist at the National Association of Home Builders.
The Federal Reserve is expected to hold a main short-term interest rate at 1 percent, a 45-year low, when it meets today, economists say.
Eclectic mix of new buyers fueling Valley's record housing market
Catherine Burrough and Glen Creno
The Arizona Republic
Oct. 26, 2003 12:00 AM
It's not the usual cast of buyers propelling Greater Phoenix's housing market to another record-breaking year.
A burgeoning collection of 20-somethings, single parents, fringe pioneers, out-of-state transplants, optimistic investors, deep-pocketed golfers and luxury life-stylers are pushing sales and prices to all-time highs.
A rare combination of factors - the lowest interest rates in 40 years, looser lending guidelines and home prices that remain relatively low - is attracting all these buyers despite early predictions of a slowdown.
"Every year, every one of us is dumbfounded," Arizona housing analyst R.L. Brown said. "The market goes bonkers again."
A record 94,243 new and used homes from Pinal County to Lake Pleasant sold through September, according to Brown's Phoenix Housing Market Letter. That's a 14 percent leap from 2002's record pace for the same period.
Still, several economists are wary that the market is flying too high and fear that any significant uptick in mortgage or unemployment rates could bring it to a sudden halt.
Other analysts fret that higher prices will nudge buyers out of the market, dilute its affordability and ultimately knock the steam out of the Valley's main economic engine.
Housing prices aren't climbing at the same rate but are up from 2002. The typical used home in Maricopa County sold for $157,500 in September, according to the Arizona Real Estate Center. A year ago, the price was $146,000.
Although Valley home prices continue to rise steadily, buyers from states such as Colorado, Illinois, New York and California feel like they are getting bargains in Arizona.
"I can't believe what I am getting for my money," said Nancy Marcella, who is moving from Aspen, Colo., to Cave Creek.
Marcella, an anesthesiologist nurse, is buying a luxury home for less than half of what her Colorado house is selling for so she can work less. Getting a job was less of a concern than finding a new lifestyle. She also wanted to spend less time on her home's upkeep and spend less money on its mortgage so she could travel more.
Jobs vs. people
Marcella and other transplants are driving the housing market, not the state's anemic job growth, economists say.
People flocking to Arizona looking for more house for their money are self-employed, travel for jobs, are retired or are making it on one income, and count on the Valley's economy to bounce back.
Bob McCord, chief executive of Coldwell Banker Success Realty, said that the 70,000 to 80,000 people moving to the Valley every year are creating a strong demand for housing even as job growth sputters.
"I still can't figure out where all the money is coming from," said Eileen Harris of ZIP Realty. "But the buyers are coming, and they are locking in on the low interest rates."
Phoenix's unemployment rate did drop to 5 percent in September, from 5.5 percent a year ago. There's still a disconnect between the robust housing market and the tepid gains in jobs and incomes.
Professional hockey player Dallas Eakins, 36, isn't thinking about employment. He can't wait to retire so he can spend his winters in the Valley.
The former Phoenix Coyote found a home in north Scottsdale's Grayhawk community in the mid-1990s. He sold it and bought another one, which he's keeping for now. Meanwhile, he and his wife are building a million-dollar custom home in the golf development.
"I just fell in love with that place," Eakins said.
Location
Some people moving to the area are getting a double bang for their buck and choosing houses farther out, where prices are cheapest. They are getting some of the few jobs created in this economy.
In August, Patti and Bob Bleeker moved to Phoenix for a job and a bigger home with a smaller monthly payment.
Bob, a health care manager, was transferred to CIGNA's Valley operations from California. After checking houses in pricier north Scottsdale, the couple purchased a home in far north Anthem.
"Our home is bigger, and we can now afford for Patti to stay home with the kids," said Bleeker, whose commute is down to 20 minutes from an hour in California.
Brad Zupp of Coldwell Banker Success Realty said better schools, bigger homes and shorter commutes drive move-up buyers' decisions.
"People continue to pick where they want to buy first and then dog the area until they find the right property," he said.
Devin Rankin sold his central Phoenix home, and girlfriend Shannon Perez sold hers to buy a bigger home together in a better school district for her daughter.
"With our combined incomes and low interest rates, we could get a much nicer home close to a good school," said Rankin, a retired police officer.
He said the couple likely would have bought the bigger home even if interest rates and prices had been a little higher.
Stretched
Some recent buyers may be struggling to afford homes. Families that bought with two incomes may have lost one. Other people may have purchased a house thinking they would get a raise or bonus this year that never materialized.
Rates of residential foreclosures are climbing Valley-wide because some people are stretched too thin. One of the biggest issues looming for the housing market now is whether these homeowners can hold on, according to Harvard University's Joint Center for Housing Studies. It found that the number of people spending more than half their income on their home has shot up.
That will slow the market because those buyers aren't going to move up anytime soon. The big question for the Valley's housing market is now that so many non-traditional buyers have gotten into homes, who will be the next wave of buyers?
"Anyone who can buy has," said Jay Butler, director of the Arizona Real Estate Center.
He now questions whether this spurt of sales is the final wave of buyers "satisfying their dreams."
"A lot of people got into their dream homes and aren't going anywhere for a while," he said.
Any rise in interest rates will knock out many first-time buyers. Prices that jump too high will deter all types of buyers, and home price increases across Greater Phoenix have far outpaced inflation. Then there's the possibility that the steady flow of new buyers from costly housing markets outside the state could ratchet up prices, too.
Hefty increases in housing prices in California, the nation's most populous state, have a ripple effect. Californians flush with cash from the sale of their expensive homes can experience a sort of reverse sticker shock in places like Arizona. They eagerly shell out the asking price without bargaining because it's stunningly less than what they'd pay for a similar house back home.
Despite the pressure on prices, the dip in September's average used-home price from August's $160,500 price is attributed to the growing number of less-expensive houses selling in once-fringe areas like Buckeye and Pinal County. Housing prices in Phoenix, Scottsdale, Mesa, Glendale and Tempe were all up.
Housing won't collapse if sales slow, but prices definitely could flatten out.
Speculating about a housing "bubble" has become a favorite pastime among housing analysts. When housing prices are bid up purely under the expectation that they will continue to appreciate, that creates a price bubble. When prices fall precipitously and houses sell for below what an owner paid, that's a burst bubble.
Some national markets are perilously close to bubble status. But housing market watchers say the Valley is not one of them because the area's home prices haven't shot up 20 percent a year like they have in parts of California and the East.
"As long as people can hold onto their home and jobs, and others continue to move here, the economy and housing market will hold it together," Butler said.
Catherine Burrough and Glen Creno
The Arizona Republic
Oct. 26, 2003 12:00 AM
It's not the usual cast of buyers propelling Greater Phoenix's housing market to another record-breaking year.
A burgeoning collection of 20-somethings, single parents, fringe pioneers, out-of-state transplants, optimistic investors, deep-pocketed golfers and luxury life-stylers are pushing sales and prices to all-time highs.
A rare combination of factors - the lowest interest rates in 40 years, looser lending guidelines and home prices that remain relatively low - is attracting all these buyers despite early predictions of a slowdown.
"Every year, every one of us is dumbfounded," Arizona housing analyst R.L. Brown said. "The market goes bonkers again."
A record 94,243 new and used homes from Pinal County to Lake Pleasant sold through September, according to Brown's Phoenix Housing Market Letter. That's a 14 percent leap from 2002's record pace for the same period.
Still, several economists are wary that the market is flying too high and fear that any significant uptick in mortgage or unemployment rates could bring it to a sudden halt.
Other analysts fret that higher prices will nudge buyers out of the market, dilute its affordability and ultimately knock the steam out of the Valley's main economic engine.
Housing prices aren't climbing at the same rate but are up from 2002. The typical used home in Maricopa County sold for $157,500 in September, according to the Arizona Real Estate Center. A year ago, the price was $146,000.
Although Valley home prices continue to rise steadily, buyers from states such as Colorado, Illinois, New York and California feel like they are getting bargains in Arizona.
"I can't believe what I am getting for my money," said Nancy Marcella, who is moving from Aspen, Colo., to Cave Creek.
Marcella, an anesthesiologist nurse, is buying a luxury home for less than half of what her Colorado house is selling for so she can work less. Getting a job was less of a concern than finding a new lifestyle. She also wanted to spend less time on her home's upkeep and spend less money on its mortgage so she could travel more.
Jobs vs. people
Marcella and other transplants are driving the housing market, not the state's anemic job growth, economists say.
People flocking to Arizona looking for more house for their money are self-employed, travel for jobs, are retired or are making it on one income, and count on the Valley's economy to bounce back.
Bob McCord, chief executive of Coldwell Banker Success Realty, said that the 70,000 to 80,000 people moving to the Valley every year are creating a strong demand for housing even as job growth sputters.
"I still can't figure out where all the money is coming from," said Eileen Harris of ZIP Realty. "But the buyers are coming, and they are locking in on the low interest rates."
Phoenix's unemployment rate did drop to 5 percent in September, from 5.5 percent a year ago. There's still a disconnect between the robust housing market and the tepid gains in jobs and incomes.
Professional hockey player Dallas Eakins, 36, isn't thinking about employment. He can't wait to retire so he can spend his winters in the Valley.
The former Phoenix Coyote found a home in north Scottsdale's Grayhawk community in the mid-1990s. He sold it and bought another one, which he's keeping for now. Meanwhile, he and his wife are building a million-dollar custom home in the golf development.
"I just fell in love with that place," Eakins said.
Location
Some people moving to the area are getting a double bang for their buck and choosing houses farther out, where prices are cheapest. They are getting some of the few jobs created in this economy.
In August, Patti and Bob Bleeker moved to Phoenix for a job and a bigger home with a smaller monthly payment.
Bob, a health care manager, was transferred to CIGNA's Valley operations from California. After checking houses in pricier north Scottsdale, the couple purchased a home in far north Anthem.
"Our home is bigger, and we can now afford for Patti to stay home with the kids," said Bleeker, whose commute is down to 20 minutes from an hour in California.
Brad Zupp of Coldwell Banker Success Realty said better schools, bigger homes and shorter commutes drive move-up buyers' decisions.
"People continue to pick where they want to buy first and then dog the area until they find the right property," he said.
Devin Rankin sold his central Phoenix home, and girlfriend Shannon Perez sold hers to buy a bigger home together in a better school district for her daughter.
"With our combined incomes and low interest rates, we could get a much nicer home close to a good school," said Rankin, a retired police officer.
He said the couple likely would have bought the bigger home even if interest rates and prices had been a little higher.
Stretched
Some recent buyers may be struggling to afford homes. Families that bought with two incomes may have lost one. Other people may have purchased a house thinking they would get a raise or bonus this year that never materialized.
Rates of residential foreclosures are climbing Valley-wide because some people are stretched too thin. One of the biggest issues looming for the housing market now is whether these homeowners can hold on, according to Harvard University's Joint Center for Housing Studies. It found that the number of people spending more than half their income on their home has shot up.
That will slow the market because those buyers aren't going to move up anytime soon. The big question for the Valley's housing market is now that so many non-traditional buyers have gotten into homes, who will be the next wave of buyers?
"Anyone who can buy has," said Jay Butler, director of the Arizona Real Estate Center.
He now questions whether this spurt of sales is the final wave of buyers "satisfying their dreams."
"A lot of people got into their dream homes and aren't going anywhere for a while," he said.
Any rise in interest rates will knock out many first-time buyers. Prices that jump too high will deter all types of buyers, and home price increases across Greater Phoenix have far outpaced inflation. Then there's the possibility that the steady flow of new buyers from costly housing markets outside the state could ratchet up prices, too.
Hefty increases in housing prices in California, the nation's most populous state, have a ripple effect. Californians flush with cash from the sale of their expensive homes can experience a sort of reverse sticker shock in places like Arizona. They eagerly shell out the asking price without bargaining because it's stunningly less than what they'd pay for a similar house back home.
Despite the pressure on prices, the dip in September's average used-home price from August's $160,500 price is attributed to the growing number of less-expensive houses selling in once-fringe areas like Buckeye and Pinal County. Housing prices in Phoenix, Scottsdale, Mesa, Glendale and Tempe were all up.
Housing won't collapse if sales slow, but prices definitely could flatten out.
Speculating about a housing "bubble" has become a favorite pastime among housing analysts. When housing prices are bid up purely under the expectation that they will continue to appreciate, that creates a price bubble. When prices fall precipitously and houses sell for below what an owner paid, that's a burst bubble.
Some national markets are perilously close to bubble status. But housing market watchers say the Valley is not one of them because the area's home prices haven't shot up 20 percent a year like they have in parts of California and the East.
"As long as people can hold onto their home and jobs, and others continue to move here, the economy and housing market will hold it together," Butler said.
