By David Crook

From The Wall Street Journal Online

The real-estate bubble has burst. Get over it. In areas that saw big home-price run-ups in the first half of the decade, prices are stagnant, or worse. New-home inventories are up; new-home builder stocks are down.

A kind of real-estate weariness has set in. Who’s the cocktail-party boor? The guy still talking about making a killing on Miami Beach condos.

Smells like a buying opportunity. Probably not right away, because there’s still plenty of froth in the markets that saw the biggest price increases. But soon, you’ll see the real-estate investors — property vultures who buy when prices are low and then ride property manias to their crest — toeing the market again.

Even in today’s uncertain climate, novice real-estate investors can make money, especially in smaller properties that are easy to acquire and manage.

Let’s explore some options.

In-Law Units

The most basic form of property investment is a so-called in-law unit or guesthouse on the site of your home itself, sometimes attached to the main house, sometimes not. No one has ever gotten rich renting out such properties, but they can significantly reduce the cost of homeownership. Renting out an in-law unit for $400 a month and using that money every month to pay down principal on a $350,000 30-year mortgage will shave 10 years from the mortgage term and reduce total payments by more than $165,000. And you will be able to write off all your costs on your income taxes — including depreciation on the unit — up to your actual rental income.

Weekend or Vacation Homes

Just as with an in-law unit, renting out your weekend house is not a way to get rich. Many of the same numbers that applied to in-law units can be applied to your weekend home, although the tax situation is decidedly different.

First, the IRS gives second-home landlords a very nice little present in that it allows two weeks of tax-free rental income a year. Beyond that, however, the accounting can be irksome. The IRS doesn’t want people buying second homes and disguising them as rental properties. It has two criteria to determine whether the property is a second home (bad) or a rental (good). It’s a second home if you don’t rent it out at all or if you personally use it at least two weeks a year or 10% of the number of days the place is available for rental, whichever is longer.

Single-Family Homes

Throughout much of the country, the market for single-family homes is seriously out of whack. As prices fall and inventories rise, that’s changing. But, compared with rents, prices are still quite high, outstripping the ability of such properties to cover their mortgage and operating costs.

Avoid this segment of the market unless you have a chance to buy a property at a 30% or 40% discount from its previous price. Don’t think this is out of the question. In the late 1980s and early 1990s, when the government liquidated the real-estate loan portfolios of bankrupt savings-and-loans, speculators picked up properties for just dimes on the dollar.

Managing a house that pays for itself is what it’s all about. You can do it in one of two ways: Renting or “flipping.” Renting is a “buy-and-hold” strategy, while flipping calls for quick turnarounds of fixer-uppers that can be spruced up and sold quickly.

But in the current environment renting is probably the more prudent path, although it can be very difficult to make a house pay for itself at today’s prices. That’s because if your house carries an 80% or 90% loan, the renter will have to pay more per month to rent the house than he would to buy it.

Look at it this way: There’s a handsome three-bedroom, two-bath house in Tampa, Fla., for sale at an asking price of $199,900. If you bought it with 10% down and a 90% loan at 6%, your monthly payment will be about $1,550 (that’s PITI — principal, interest, taxes and insurance). As a landlord, at a minimum, you’ll want to budget at least $200 a month in additional expenses. That puts your break-even point at almost $1,800 a month. That’s far more than you can reasonably expect to earn where comparable properties in the same neighborhood can be rented for less than $1,300.

But it turns out that there’s a similar house available less than a mile away. This other house is roughly the same size. The difference is this one’s being taken over by its lender, and the house has a mortgage loan of $110,000.

A buyer with cash can drive a hard bargain and make out very well. And the worse the market, the better for the buyer. But don’t get carried away. If you simply take over an existing 90% or 95% note, you won’t make any money. Let the lender foreclose and take over the place. Then lowball the lender.

Multiple Units

A housing market that saw the price of single-family homes skyrocket was not quite so generous to smaller two-family or multifamily properties. Because the universe of home buyers expanded so much in the past 10 years, the universe of renters contracted, and the market for smaller rental properties contracted with them.

In Memphis, where two-bedroom apartments in better neighborhoods rent from $500 up to $800 a month, good two-family properties can still be bought for far less than a one bedroom condo on either of the coasts. Recent prices for 40-year-old two-family homes near the University of Memphis main campus ranged from $70,000 to $110,000. Monthly payments, including insurance and maintenance, on an $88,000 mortgage (20% down on the $110,000 property) come to only about $750 a month. So renting both units at the low end of the market would result in a positive after-tax cash flow of more than $100 a month. Upgrade the units, and you can charge top-of-the-market rents of $800 a month.

Good deals on smaller buildings can be found throughout the country, even in some of the hottest markets. In trendy Pasadena, Calif., where even modest homes can sell for $400 to $600 a square foot, two-, three- or four-unit rental buildings can be bought in the $250 to $350 range.

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By Amy Hoak
From MarketWatch

An English-style, Alpine, N.J., residence with guest cottages, pool and tennis courts was the most expensive home sold in the United States in 2006, the Institute for Luxury Home Marketing said Monday.

The 63-acre estate, located five miles from Manhattan, sold for $58 million and was bought by Advanced Photonix CEO Richard Kurtz, according to a news release. Henry Clay Frick II was the seller. The property included a 10,000-square-foot mansion. The price was substantially lower than 2005’s biggest sale, the record-setting $70 million sale of financier Ron Perelman’s Palm Beach, Fla., oceanfront estate, according to the institute.

That said, sales of homes priced at $5 million and greater were on the rise in 2006, the group reported. And at least 10 buyers throughout the country were willing to shell out $28 million or more for high-end residences last year.

“Strong corporate profits, good news on Wall Street and a global commodities boom helped grow fortunes and sparked a surge of demand for trophy homes in 2006,” said Waco Moore, vice president of The Institute for Luxury Home Marketing, in the release. The group trains real-estate sales agents who work in the luxury market.

“Final numbers aren’t in, but estimates are that the U.S.’s 2006 sales of homes priced at $5 million and above were up about 11% over 2005,” he said.

Moore went on to predict that recent Wall Street bonuses would provide a “jump start” to luxury sales in New York in 2007, and that other markets would follow.

The priciest home currently for sale is the $139 million Updown Court in Windlesham, England. The home, near Windsor Castle, boasts 103 rooms, five pools and a heated marble driveway, according to the release.

Also on the market: A Saudi Prince’s Aspen, Colo., retreat priced at $135 million and Donald Trump’s “decorator-ready” Palm Beach, Fla., property priced at $125 million, the group said. A waterfront home in Istanbul is available for $100 million. Domestically, a $100 million waterfront estate with views of Lake Tahoe is also on the market.

According to the institute, the most expensive home ever sold was a London mansion, bought by steel magnate Lakshmi Mittal in 2004. The home sold for $125 million.

http://www.realestatejournal.com/

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By Ben Casselman

From The Wall Street Journal Online

Last year proved to be a tough one to sell a house. In many parts of the country, sales were down, inventories were up and homes lingered longer on the market. In August, the median price of an existing single-family home fell 1.7% compared with a year earlier, the first year-to-year price decline in more than a decade, and prices continued to fall for the remainder of 2006, according to the National Association of Realtors.

The high end of the market wasn’t immune, either, as evidenced by the lackluster sales of the homes highlighted in Weekend Journal’s “House of the Week.” Of the 46 houses featured between October 2005 and September 2006, only 14 have sold, most at steep discounts — an average of 16% below the asking price published in our column; another four are in contract. Timing was also critical: Only one house featured since June has found a buyer. (None of those featured in the fourth quarter of 2006 have sold, but they aren’t included in this survey because most have only recently come on the market.)

Homes featured in House of the Week aren’t representative of the national housing market. For one thing, they tend to be high-end properties: the average asking price for the homes in our sample was nearly $10 million, while only one asked less than $1 million. They are also selected for other qualities — noteworthy architecture, colorful histories or singular locations — that set them apart even from other luxury homes.

Still, their sales performance has generally followed national patterns. Overall sales volume peaked in mid 2005 and then declined steadily throughout most of 2006, according to the National Association of Realtors, and existing home sales in November 2006 were down 11% compared with the previous year. The same held true for the Houses of the Week. Of the 23 properties featured from October 2005 through March 2006 — when the overall market was relatively strong — 12 have sold or are in contract, compared with just six of those featured during the following six months.

The properties that were most likely to find a buyer were those with the highest price tags. Half of the Houses of the Week with asking prices of $15 million or more have sold, versus just over a quarter of those asking less than $15 million. That, too, follows a national trend, according to Jonathan Miller, president of the New York appraisal firm Miller Samuel. “Super luxury” homes have continued to sell in high numbers, he says, though not necessarily close to their asking prices. In fact, one reason they tend to sell, Mr. Miller says, is because their owners can be more flexible; these deals don’t live or die over a $5 million difference. And unlike the general housing market, which is strongly affected by interest-rate fluctuations, upscale home sales tend to be more sensitive to the stock market and the overall economy because buyers are more likely to pay in cash.

San Lee, the owner of a 10,000-square-foot waterfront mansion in Palm Beach, where the market remains healthy, actually raised her asking price recently, to $22 million from $18.5 million. That builds in room to negotiate, says listing agent Wallace Turner of Sotheby’s International Realty. At the same time, “the buyers feel that they’re getting a value, even though we’re settling it at about the same price in the end,” Mr. Turner says.

Most sellers, however, moved in the opposite direction. About half of the House of the Week properties still on the market have had a price cut since they appeared in the column, in one case by 35%. Others have been taken off the market entirely, although many sellers say they will try again when the market improves. It may be a while, according to Mark Zandi, chief economist for Moody’s Economy.com. “There’s still a lot of oversupply,” even at the high end, he says. “I think the correction really has a year left to run.”

Here’s a sampling of four Houses of the Week in different parts of the country.

SOLD: Southern California oceanfront contemporary, for $27 million.

This 3,544-square-foot home in Carpinteria, about 12 miles south of Santa Barbara, sold for 77% of its $35 million asking price, but Charlene and Sherrill Broudy say that’s still far more than they expected before they put it on the market in the spring. The asking price was “a shot in the dark,” Ms. Broudy says. The value in the 1.7-acre property lay primarily in its seaside location — with 150 feet of beachfront — rather than the house itself — a four-bedroom home built in 1980 (which Ms. Broudy says needed work). Listing agent Kathleen St. James of Sotheby’s International Realty moved into the house while the owners were away in Costa Rica and cleaned it up, a project that included pressure-washing and oiling its redwood exterior. The May 5 “House of the Week” sold in 60 days. The buyer, local venture capitalist Brian Kelly, saw the property in its first week on the market, before Ms. St. James’s cleaning job, and submitted the only serious bid. “You don’t have that many people calling you up to spend that kind of money,” Ms. St. James says. “Sometimes you get lucky.”

AVAILABLE: 319-acre Montana ranch on the Yellowstone River. Asking $13.5 million.

Dan and Barbara Todd recently cut 10% off the $15 million price of their ranch in Livingston, about 26 miles southeast of Bozeman, after it had been listed for about a year. Mr. Todd says the price cut was a response to a softening market — Montana ranch sales volume is down from last year, though prices have continued to rise — and to signal that he is ready to make a deal. The property includes a recently built six-bedroom, 6,400-square-foot main house, a guest cottage and a one-bedroom barn/artist studio.

This is the eighth ranch that the Todds have bought and sold, but the first that is primarily recreational, not agricultural. “When I show the property, I don’t know whether someone wants to shoot a deer or look at it,” Mr. Todd says. He isn’t concerned that the house, which was featured on March 17, has yet to attract a buyer. Listing agent David Johnson of Hall & Hall says ranches usually stay on the market at least a year.

SOLD: Connecticut midcentury modern with pedigree, for $3.75 million.

This Philip Johnson-designed house in New Canaan went into contract within four months of being listed, albeit at a 12% reduction, from $4.25 million. The sale closed in just six months. Meanwhile, sales volume in Fairfield County, Conn., was down nearly 15% in the first three quarters of 2006 compared with the same period in 2005. Listing agent Susan E. Blabey of William Pitt Sotheby’s International Realty attributes the modern home’s speedy sale to its being “100% pure Philip Johnson,” practically unchanged since the award-winning architect designed it in 1950. Not that there weren’t challenges to overcome, including strict preservation easements that protected the land, the house and even some of the interior features. The “House of the Week” for June 9, had also been vacant two years and needed work.

But Craig Bassam and Scott Fellows knew what they were getting into. The buyers run the design firm BassamFellows and also own another vintage modern in New Canaan, which they’re selling.

AVAILABLE: Low Country home on a South Carolina island. Asking $1.95 million.

This four-bedroom, nearly 5,000-square-foot home on Daufuskie Island, a second-home area about a mile from Hilton Head Island, came on the market in July 2005, just missing the area’s primary selling season. Interest picked up the following spring, says listing agent Catherine Donaldson of Cora Bett Thomas Realty, but then the market hit a severe slump in the summer. (The home was featured on June 16, 2006.) The owners — Detroit Red Wings center Robert Lang and his wife, Jennifer — cut the price in August, but by then it was too late, Donaldson says. She adds that the 21% cut has generated interest, but mostly low-ball offers. “When you drop a price that much, you give the impression that it’s a fire sale, and it’s not.” It doesn’t help that Daufuskie Island is accessible only by water. “It is tough to sell a home on an island you can only get to by boat,” she says.

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By M. P. McQueen

From The Wall Street Journal Online

A backlash against insurers is building in several coastal states where homeowner premiums have increased sharply despite several years of rising industry profits and an uneventful hurricane season in the East.

In Florida, where back-to-back hurricanes have helped some rates more than double since 2004, the state legislature yesterday approved a measure aimed at reducing homeowner premiums offered by private insurance companies by 5% to 25% or more. The legislature has been meeting since last week in a special session specifically aimed at addressing the state’s insurance crisis. The measure now goes to Republican Gov. Charlie Crist, who has made insurance-rate cuts a top priority since taking office this month.

That comes after several large insurers in California recently agreed to roll back homeowner insurance rates by as much as 20%, or a total of $439 million. The cuts, by insurers including Farmers Insurance Co., State Farm Mutual Insurance Cos. and Safeco Corp., came in response to the state insurance commissioner’s efforts since last summer to force down rates in the state. Premium rates rose substantially in California in the early part of the decade, and many homeowners lost their coverage after devastating wildfires in 2003.

Insurance companies are regulated by the states, and officials in Connecticut and Georgia recently rejected some requests for further insurance-rate increases. Also, regulators in both states are investigating whether insurance companies are maneuvering to circumvent rules aimed at making sure that homeowners in all areas, including riskier coastal zones, can get coverage. Florida regulators also late last year turned down requests by some insurers to raise rates further by as much as 40%.

Last year, home insurance rates along the Atlantic and Gulf coasts rose between 20% and 100%, or more. Homeowners also are paying more for less, because insurers are dropping policy coverage for wind, hail and mold damage in many states. By contrast, rates outside of coastal areas last year rose between 2% and 4% nationally, according to the Insurance Information Institute, an industry research group, and are expected to rise modestly in 2007.

Efforts to rein in rates are meant to help people like Arline Lafferty Wallace, 68, a real-estate agent in Marathon, Fla., in the Keys. Ms. Wallace says her windstorm policy premium soared from $5,500 two years ago to $21,000 last year on a home with an insured value of $775,000. Ms. Wallace says she has never filed a windstorm claim in the 30 years she has lived there. By increasing the deductible to 25%, and getting assistance of a consumer advocacy group, Ms. Wallace managed to cut her bill to $9,000. “It is absolutely unbelievable that this kind of thing can happen,” she says.

The backlash comes as the insurance industry has had three straight years of rising profits, despite 2005’s devastating Hurricane Katrina, the country’s costliest ever. (Insurers continue to do legal battle in Katrina-hit zones.

Property and casualty industry profits rose to $68.1 billion in 2006 from $49 billion a year earlier, according to A.M. Best, a ratings concern.

Insurance officials say the high profits essentially reflect the industry making hay while the sun shines. In most years since 1980, insurance companies have barely broken even or have paid out more in claims than they collected, says Julie Rochman, senior vice president of the American Insurance Association, a trade group. “It’s a good idea that insurers have good years so that we are around for exceptionally bad years like 2005,” she says.

Analysts and insurers say that if states force insurers to take on risks they don’t want or to price their policies too low, then companies might withdraw from unprofitable markets, creating shortages, or be unable to pay claims.

The Florida measure would require private insurers to cut homeowner rates an average of 5% to 25%. Devastating hurricanes in 2004 and 2005 made insurance rates unaffordable for many state residents. Insurers also dropped coverage for many homeowners, driving thousands of people into the state’s high-risk pool, Citizen’s Property Insurance Co.

The Florida bill also would require insurers who write home and auto policies in other states to offer home insurance in Florida, or else be banned from selling any other line of insurance in the state. Avoiding riskier lines of business, commonly known as “cherry picking,” also has come under pressure in other states because it reduces the availability of homeowner insurance. The bill also would allow Citizen’s Property Insurance to lower its rates to compete on price with private insurers, which is expected to inject greater competition into the marketplace.

Florida plans to ease some of the pain the measure may cause insurers by boosting contributions to its hurricane catastrophe reinsurance fund. The fund, which is intended to bail out insurers if claims run too high, allows insurance companies to purchase reinsurance at cheaper rates than the companies can buy in the open market.

“The bottom line is that Florida has just reinforced its reputation as one of the most overregulated insurance markets in the country,” says Cecil Pearce, vice president, Southeast region, for American Insurance Association, an industry group.

In June, the California insurance commissioner ordered several insurers, including Allstate Corp., State Farm, Farmers and Safeco Insurance, which combined insure over half the state’s homes, to justify their rates. The move followed release of a study that showed the insurers were paying out less than 50 cents in claims on each dollar of premium they took in. Insurers historically have paid 65 cents to 75 cents on claims for every dollar in premiums, excluding expenses, according to the Consumer Federation of America. Safeco says a 20% rate reduction amounts to an average annual saving of $190 per household. Combined with reductions in automobile insurance rates, California overall has won rate cuts totaling $1.6 billion since the summer.

“We will be monitoring our costs in California closely, but we hope we will be OK,” a State Farm spokesman says. The company expects the reductions, which are awaiting approval, to take effect as early as April.

In Connecticut, the attorney general has opened an antitrust investigation into attempts by some insurance companies to require homeowners to install storm shutters at a cost of $50,000 or more as a condition of continuing coverage on properties near the Long Island Sound. Critics say the steep added cost could make it impossible for some homeowners to obtain insurance.

Georgia’s insurance commissioner says he plans to hold hearings next month on whether St. Paul Travelers Companies Inc. is discriminating against coastal homeowners by cutting independent agents’ commissions in six coastal counties by about one-third, but not in the rest of the state. State law forbids insurers from writing business in the interior but not on the coast. “This appears to be a backdoor way around the law,” says Commissioner John W. Oxendine.

“We understand the commissioner’s concerns, and we remain committed to the Georgia insurance market,” says a St. Paul spokeswoman.

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By Emily Meehan

From The Wall Street Journal Online

When David Vallas, 28 years old, decided to take a year off from his lucrative job as a systems engineer and move from Anchorage, Alaska, to Pennsylvania, where he grew up, he needed to do it cheaply. He wanted to relax, hang out with his dog, and maybe write a book.

His girlfriend would be the breadwinner, but she didn’t have a job lined up in Philadelphia. He grew up in the suburbs, but she was set on the city. In December, they moved into an $875-a-month two-bedroom house in West Philadelphia, a part of town that is cheaper than many other neighborhoods. The two-story unit is within their budget and has a washer, dryer and yard.

But Mr. Vallas is not relaxed.

In early January, he and his girlfriend heard gunshots outside their door. They huddled in the basement. Police arrived, and chased a suspect along the side of their house. An officer at Philadelphia’s 18th precinct casually characterizes the incident as an argument between two acquaintances, not a homicide. “In the end, a bullet went through our right neighbor’s window,” says Mr. Vallas. “Four bullets went through our upstairs neighbor’s car. Police tape was strewn across our porch.” When a neighbor later suggested that the chipped bricks on the side of his house were the result of bullet ricochet — not from the mayhem in January, but from a shooting incident three months before — Mr. Vallas and his girlfriend decided to move.

For young adults on a tight budget in the city, moving to a less expensive — and less fashionable — neighborhood is a way to make ends meet. The hood has perks. In addition to more space for less money, we may find historic housing stock, a bohemian atmosphere, and vibrant multicultural communities. Many of us were brought up in the suburbs. Now we either can’t afford to move back, or can’t stomach the prospect of being so isolated and bored ever again. But as Mr. Vallas learned, there may be irreconcilable downsides.

Besides gunshots, Mr. Vallas says there’s a litany of problems on his block. There are two condemned buildings. Their backyard is actually a mudflat where neighborhood dogs jump the fence and attack their Doberman pinscher, Phoenix. The front porch attracts uninvited neighbors who leave empty Pepsi bottles and chip bags in their wake. One neighbor relieved himself on the side of Mr. Vallas’ house.

Next month, he and his girlfriend will move to a pricier part of town, near Philly’s posh Rittenhouse Square, where they’ll rent a smaller apartment for $900 a month. “There’s less likely to be a shooting there,” says Capt. Benjamin Naish, a spokesperson for the Philadelphia police department.

Others who cope with inner-city conditions may be amused by the cat-calls of local lotharios and appreciate graffiti. These hearty individuals can be rewarded for their patience.

Hrag Vartanian, 33, is one of them. He first moved to New York City’s Bushwick neighborhood in Brooklyn six years ago, when the area was in bad shape. Much of Bushwick burned in riots, looting, and arson prompted by a 1977 blackout — and the housing stock still hadn’t recovered. In 2000, Mr. Vartanian’s rent for an 850 square foot loft was $1,000 a month — quite low for a comparable space in fancier city districts. The price was right. He was single, a free-lance writer and earning just over $30,000 a year working at a nonprofit in Manhattan. He says he wanted to live alone, with more space and light to do his writing than he had in a basement apartment he had shared in Manhattan.

In 2001, Bushwick’s 83rd police precinct had 606 violent crime complaints, including rape, felony assault, and murder. Five miles south, in Brooklyn’s tony Park Slope neighborhood, the 78th precinct had 120 violent crime complaints the same year. Mr. Vartanian says he was robbed of his cellphone once while walking down the street, attacked once by muggers and, he says, there was a crack house at the end of his street. The neighborhood had small grocery stores and only a few restaurants, where he says the staff often gave him the cold shoulder. But he puts a positive spin on it: “It encouraged us to cook,” he says. He laughed at the teenage wise guys who heckled him, and befriended his fellow tenants: a carpenter, a bartender, a writer, an artist. “It put me at the epicenter of creative life in New York,” he says.

Mr. Vartanian and other creative types may have helped spur Bushwick’s continuing gentrification. Though he says his rent has not increased significantly in the past six years, nearby loft spaces of the same size, listed on Craigslist.com, are on the rental market now for $1,600 to $2,000 a month. A couple of hip restaurants have arrived, and quirky residents of the area’s copious converted warehouses host dance performances, D.J. parties, rock concerts and open studio tours that make it into blogs, newspapers and magazines. Mr. Vartanian says that “The New York Times,” long absent from neighborhood shops, is finally available. The crack house went out of business. Its building has been refurbished and adorned with a graffiti mural of penguins, sanctioned by its owner. The number of violent crime complaints in the 83rd precinct was down to 436 in 2006.

Young adults have been homesteading in neglected urban neighborhoods since after World War II, according to geographer Neil Smith, an author and professor who studies gentrification at New York’s CUNY Graduate Center. Artists did it long before, in spurts, he says. Now gentrification by the poorer, younger crowd is almost systematic in cities around the world.

That doesn’t mean we will reap the benefits when the neighborhoods become trendy. Unless we buy, we may eventually have to leave when the urban trenches become rose gardens — and rents rise accordingly. “People who are moving in at the front end of the process often become victims, along with the long-time residents, of the very gentrification that they helped foment,” says Mr. Smith.

In Atlanta, Andy Sisk, 27, says he and his wife bought a three-bedroom house in the Edgewood neighborhood two years ago for $200,000. “In the suburbs of Atlanta we could have found a cheaper house, but traffic is notoriously bad… and they’re cookie cutter housing developments.”

Mr. Sisk, a financial analyst at a real-estate fund, figures that the value of his 1928 bungalow has appreciated about 5% each quarter on average since he bought it, based on Atlanta real-estate-price-appreciation rates from the Office of Federal Housing Enterprise Oversight. “Early on, we suffered two home break-ins and one stolen car stereo,” he says, “but we began to adapt… I enjoy being close to the cultural center of Atlanta where I can catch a play or go to the aquarium.” Mr. Sisk says the eclectic mix of people in his neighborhood has exposed him to sorts of people he didn’t meet growing up in the small Georgia city of Warner Robins. “It has been nice to not worry about ‘keeping up with the Joneses’ next door,” he says.

Part of the reason Mr. Sisk chose the neighborhood in 2004 is because he foresaw a demographic transition and subsequent increase in the value of homes, he says. In chorus, Barnes & Noble, Target and Best Buy arrived with other “big box” stores a year later. However, Atlanta police department crime statistics show that rates of violent crime, robbery and burglary have gone up in Mr. Sisk’s neighborhood in the past two years. While crime there is not the city’s worst, it’s not low either.

In Texas, Christian Stagg, 27, bought a three-bedroom house in East Austin’s Govalle neighborhood last August for $167,000 (about $7,000 less than the median home price in the metropolitan area). Austin’s city demographer, Ryan Robinson, describes Govalle as a “historically undervalued barrio that’s gentrifying. It’s the last part of the urban core that’s affordable,” he says.

Ms. Stagg grew up in rural Idaho. She works in development at a university and produces theater with her husband. The house was in their budget. “People always ask me, ‘Do you walk around at night by yourself?’ but I feel pretty safe,” she says. Their lawn mower was stolen, but otherwise the neighborhood has been hospitable. She can walk to the theaters she works in and to an organic farm a few blocks away where she gets the bulk of her groceries. “After growing up in a rural community where you are so dependent on cars … it’s huge.”

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By Dennis K. Berkman and Jennifer S. Forsyth and Ryan Chittum

From The Wall Street Journal Online

The real-estate arm of private-equity firm Blackstone Group last night reached a $20 billion deal to acquire Equity Office Properties Trust, the nation’s largest office-building owner and manager, as Wall Street wrapped up at least $52 billion of deals on one its biggest deal-making days ever.

If completed, the deal to take Equity Office Properties private would be the largest such transaction in history — and possibly the largest real-estate deal ever — after factoring in the company’s $16 billion in debt.

Even so, it was just one of a parade of multibillion-dollar deals expected to be announced by this morning. They include a $25.9 billion takeover of mining concern Phelps Dodge Corp. by Freeport-McMoRan Copper & Gold Inc.; a $3.3 billion takeover of U.S. Trust, the private-banking arm of Charles Schwab Corp., by Bank of America Corp.; and a $2.5 billion agreement by Russian steelmaker Evraz Group SA’s to acquire Oregon Steel Mills Inc. Last night, Wall Street bankers were discussing the possibility of still more major deal announcements today.

The continuing boom in deal making stems from several factors, including a world-wide glut of capital. Having restructured after the stock-market meltdown earlier in the decade, corporations have built up massive war chests they can use for acquisitions. Interest rates are also near historic lows, giving buyers ample access to the credit they need to pull off massive transactions. Meanwhile, private-equity firms, which seek to acquire companies and resell them at a profit, have been showered with tens of billions of dollars by investors including pension funds, state retirement plans and wealthy individuals.

Merger expectations across all sectors of the economy have helped drive up the bellwether Dow Jones Industrial Average by 15% this year, a run-up that has in turn inspired more deal making. Meanwhile, the stigma of botched marriages, such as America Online Inc.’s $160 billion merger with Time Warner Inc., appears to have retreated for the time being.

Blackstone will pay $48.50 for each share of Chicago-based Equity Office Properties. That represents about an 8.5% premium to the company’s closing price of $44.72, down 13 cents, in 4 p.m. New York Stock Exchange composite trading. The deal is expected to close in the first quarter of next year.

The deal, if completed, would break the record for “take private” transactions set earlier this year by the recently completed buyout of hospital operator HCA Inc. for $21.3 billion, plus $11.7 billion in debt, by a group of buyout firms and the company’s founding family. The record could be eclipsed again by year end as private-equity firms, with their massive war chests, take aim at publicly traded companies once considered too big or too independent-minded to be takeover targets.

Over the past year, big corporations have mostly sat on the sidelines of the acquisition game, but yesterday’s deal making suggested they may be becoming more active. Flush with years of accumulated cash and driven by investors eager for growth opportunities, they are uncorking a slew of largely cash transactions.

Bank of America is expected to say it is paying $3.3 billion for U.S. Trust, according to people familiar with the situation. The deal would vault the giant consumer bank from also-ran status in the increasingly lucrative business of managing rich people’s money to the top tier of private banks. While Bank of America is a colossus in retail and corporate banking, it has been unable to top rivals J.P. Morgan Chase & Co. and Citigroup Inc. in private banking.

Freeport-McMoRan Copper & Gold’s cash-and-stock agreement to acquire rival Phelps Dodge, which would create North America’s largest copper producer, marks a huge long-term bet that metals prices will remain strong. Freeport, which is based in New Orleans, said it pursued the deal to gain the scale it needs to compete among other miners for equipment and prospects amid increased Chinese demand for commodities and high prices. The combination continues a recent streak of big-ticket mining deals, as the industry scrambles to secure new production and mine developments.

Russian steelmaker Evraz Group SA, meanwhile, is near a deal to acquire Oregon Steel Mills, the latest step in the global consolidation that is transforming the once-moribund industry. Russian metals companies have long wanted to play a larger role in the industry’s consolidation. Highlighting those ambitions was an agreement by Russia’s OAO Severstal earlier this year to acquire Arcelor SA of Luxembourg, the world’s second-largest steelmaker by output, which was fighting off a hostile bid by larger rival Mittal Steel Co. Mittal eventually topped Severstal and forged a friendly deal with Arcelor.

This year’s huge deals have been good news for the Wall Street bankers who arrange the transactions and expect to enjoy what may be the largest pool of year-end bonus payments in the history of U.S. finance. Amid their euphoria, however, there are signs the three-year-old wave of mergers could be headed for some trouble.

Banks, for instance, are willing to finance ever-larger deals with less-stringent terms and covenants. Companies are pursuing increasingly complicated transactions, such as CVS Corp.’s $21.3 billion agreement to purchase pharmacy manager Caremark Rx Inc. Holders have sent shares in both companies down since the two announced their deal on Nov. 1. And the prices paid by private-equity acquirers lately have been significantly higher than over the past three years.

The real-estate sector — which has been home this year to $264 billion worth of deals, up nearly 50% from 2005, according to data from Thomson Financial — has been one of the most fertile for acquisitions.

Blackstone has emerged as the sector’s most formidable investor in recent years, purchasing six publicly traded hotel groups and three commercial real-estate firms. The private-equity firm’s investment thesis for office buildings has been relatively simple: Take comfort in the fact that office locations are expensive to replace, and expect that corporate rents will rise as part of general economic growth nationwide.

Its latest target, Equity Office Properties, either on its own or through partnerships, owns more than 590 office buildings in 25 markets. Among its more notable properties are the AIG SunAmerica Center in Century City, Calif., the Civic Opera building in Chicago and the Rowes Wharf building in Boston. The property company is organized as a real-estate investment trust, or REIT. REITs are public companies that acquire and manage real estate and pay no corporate income taxes if they pay out 90% of their net income as dividends.

Speculation about Equity Office Properties’ prospects for going private has simmered since founder Samuel Zell admitted to a “flirtation” with the California Public Employees Retirement System last spring. But some investment bankers and analysts discounted the speculation, believing Equity Office’s debt load was too high. Even as the company has worked to reduce debt and reduce its holdings in weaker markets, Michael Knott, an analyst with Green Street Advisers, a real-estate research and trading firm, placed the chances of Equity Office being bought at only 20% as recently as two weeks ago.

Mr. Zell isn’t expected to remain an active part of the company, people familiar with the matter said. Equity Office said last night that neither management nor its trustees are participants in the buying group. And the sale could reduce Mr. Zell’s influence in the REIT business. Equity Office Properties was the first real-estate company in the Standard & Poor’s 500-stock index.

That Equity Office Properties would turn its back on the equity markets is in itself momentous, as Mr. Zell had championed the concept of publicly traded real-estate companies. He evangelized for the REIT structure as a way to make real-estate a liquid investment and increase transparency in what had been a notoriously behind-closed-doors business.

That lack of disclosure helped contribute to a broad industry collapse in the late 1980s and early 1990s, costing the government billions of dollars to bail out crippled savings and loans and helping tip the economy into recession. Mr. Zell argued that making real estate public would help the boom-and-bust industry moderate its cycles. More crucially, Mr. Zell also promoted REITs as a better way to gain access to capital financing, the life-blood of real-estate owners and developers, than private deals.

But with the massive amounts of private capital that are available to real-estate developers and the alternative financing methods, such as commercial mortgage-backed securities, that have boomed in the last five years, real-estate companies have become less enamored of public markets.

Equity Office Properties, which went public in 1997, has been the most prominent office-building REIT, but hasn’t been much loved by Wall Street analysts. For years, the company argued that a big REIT could benefit from economies of scale across a nationwide market, even as some smaller REITs outperformed it by exploiting a more intimate knowledge of just a few markets. Over the past five years, Equity Office Properties has underperformed its office peers and the real-estate sector as a whole. Its five-year return, including dividends, is 108.6%, compared with 149.5% for all office REITs, according to SNL Financial. The average for all REITs is 182.8%.

In an interview last summer, Mr. Zell pointed out that Equity Office Properties had no barriers such as a shareholder rights plan — or so-called poison pill — to prevent it from being sold, and that he would consider any offer at any time. “We are very shareholder friendly. We always do whatever is in the best interest of shareholders,” the REIT’s chief executive, Richard Kincaid, said in a conference call with analysts last month, in response to a question about the possibility of a takeover.

In the past few years, Mr. Zell, though remaining chairman, has ceded day-to-day responsibility for running the company to Mr. Kincaid. And much of his interest and time has been more focused on his private pursuits, particularly his international investments. Nonetheless, he remained the face of the company and was in great demand at REIT industry functions, where a younger generation of real-estate moguls waited to hear his latest ideas about the state of the industry. As of September, Forbes ranked him as the 52nd richest American, with a net worth of $4.5 billion.

Merrill Lynch & Co., and law firm Sidley Austin are advising Equity Office. Goldman, Sachs Group Inc., Bank of America, Bear Stearns Cos., Blackstone Corporate Advisory, Morgan Stanley and law firm Simpson Thacher & Bartlett are advising Blackstone. Goldman, Bank of America and Bear Stearns are leading the financing.

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By Jeff Bater

From The Wall Street Journal Online

New home-building activity in the U.S. resumed its decline in October, tumbling to its lowest level in six years as builders dealt with bloated inventories of unsold property.

Housing starts decreased by 14.6% to a seasonally adjusted 1.486 million annual rate, the Commerce Department said Friday. Building permits, an indicator of future building activity, fell a ninth consecutive time.

The government also lowered its original estimate for September starts, a number some economists considered a fluke. Construction rose 4.9% to 1.740 million in September, revised from an originally reported 5.9% climb to 1.772 million. Starts fell 5.7% in August, 4% during July, and 6.1% in June. Construction rose 6.6% in May.

Economists had expected a less-severe drop in October. The median estimate of 22 economists surveyed by Dow Jones Newswires was a 5.6% fall to a 1.672 million annual rate. The 14.6% decline was the largest since 16.1% in March 2005, and it carried starts to their lowest since 1.463 million in July 2000.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, said the housing data were a “sharp poke in the eye” for those who had argued that September’s jump in housing starts was a sign that the housing-market slump was nearly over.

The slowdown in housing this year stands in stark contrast to the past five years, when the lowest mortgage rates in four decades had powered a housing boom that pushed sales of both new and existing homes to five consecutive records.

In a sign that starts will likely continue to fall, October building permits dropped 6.3% to an annual rate of 1.535 million; the last month permits rose was January. Economists expected permits would be up by 0.1% to 1.640 million. Permits decreased a revised 5.2% last month to 1.638 million, compared with an earlier estimated 6.3% drop to 1.619 million.

Despite the worse-than-expected drop in the headline number, Mr. Shepherdson sees a rebound in the next month, based on the less-volatile building-permits data. “The key point though,” Mr. Shepherdson wrote in a note to clients, “is that housing is set to be a big drag on fourth-quarter gross domestic product, more than in the third quarter’s -1.1%. It’s not over.”

The housing weakness trimmed a full percentage point off economic growth in the July-September quarter, when the economy expanded at a tepid 1.6% rate. Housing is expected to continue acting as a drag over the next year but analysts believe the adverse effects of falling sales and construction cutbacks will not be enough to pull the country into a recession.

And, even as there were signs that the housing slump isn’t over, there were some glimmers of hope that the slide may be beginning to level off. The monthly survey of builder sentiment edged up slightly in early November following another small increase in October. It marked the first back-to-back improvements in builder sentiment since June 2005.

Regionally, housing starts fell 11.7% to 242,000 units in the Midwest, 26.4% to 705,000 in the South, and 2.1% to 374,000 units in the West. The only region showing an increase in building activity was the Northeast, where starts jumped 31% to 165,000 units.

Breaking down the rate of 1.486 million overall U.S. starts in October, single-family housing fell 15.9% to 1.177 million units. Construction of housing with two or more units decreased by 9.1% to 309,000; within that category, groundbreakings of homes with five or more units — or multifamily — fell 14.7% to 266,000 units.

An estimated 131,300 houses were actually started in October based on figures unadjusted for seasonal factors. An estimated 130,400 building permits were issued last month, also based on unadjusted figures.

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By Rex Nutting

From The Wall Street Journal Online

Home builders’ confidence in the U.S. market improved for a second straight month in November, an industry trade group said Thursday.

The housing market index improved to 33 in November from 31 in October, the National Association of Home Builders reported. The index had fallen for eight months in a row to a 15-year low of 30 in September.

The index shows that about one-third of builders are optimistic about the housing market. A year ago, the index was at 61 and it peaked at 72 in June 2005.

Economists surveyed by MarketWatch had been predicting the index would remain at 31. See Economic Calendar.

“More and more builders are seeing light at the end of the tunnel,” said David Pressly, president of the NAHB and a builder based in Statesville, N.C. “Our members are telling us that the market is steadying after a significant downward correction. We look for sales to stabilize and gradually move up in the coming months.”

“The data tell us that the worst of housing is behind us,” said Robert Brusca, chief economist for FAO Economics. Realtors also see “signs of recovery.”

“It is still too soon to definitively confirm” that a bottom has been reached, wrote Brian Carey, an economist for Moody’s Economy.com.

The report comes one day before the Commerce Department discloses data on U.S. home construction for October. Economists are looking for a 4.5% decline in housing starts to a seasonally adjusted annual rate of 1.69 million.

All three components of the NAHB index moved higher in November:

* The single-family sales index rose to 33 from 32.
* The future sales index rose to 46 from 42.
* The traffic of prospective buyers’ index rose to 26 from 23.

The index improved in two of four regions, and it fell in the other two.

Specifically, builder confidence in the Northeast improved to a reading of 37 from 35, while the index rose to 40 from 38 in the South. Confidence fell to a cyclical low of 34 in the West and matched a cycle low of 16 in the Midwest

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By Matthew Heimer

From The Wall Street Journal Online

After hurtling along for years, the nationwide real-estate boom has come to a screeching halt. In 2005, home prices in the U.S. rose more than 12%; this year, the National Association of Realtors expects appreciation to reach just 1.9% — the lowest gain since 1992.

Rising mortgage rates and selloffs by skittish real-estate investors have helped depress housing prices in many metropolitan areas. But there’s another factor that many observers miss: the relationship between home prices and incomes.

When the cost of housing in a given area grows far faster than local wages and salaries, the pool of potential buyers shrinks, and prices are much more likely to sink.

For the past five years, SmartMoney magazine has worked with Ingo Winzer, president of the consulting firm Local Market Monitor, evaluating home-sale prices against local income to determine whether a given market is overvalued, undervalued or fairly valued. Mr. Winzer relies on more than 15 years of housing and income statistics to find out where prices are headed.

According to Mr. Winzer, any market that’s more than 30% overvalued is due for a correction. In the fall of 2003, only eight markets on the list of 152 fit that description; on this year’s list, 37 did. Sure enough, price decreases are beginning to pop up in many of the markets that have shown up year after year as the most overvalued — especially in Florida and California.

What to do if you’re in a falling market? Obviously, that’s a promising climate for a bargain-hunting buyer. A savvy real-estate agent can help you craft a bid that’s low enough to save you money, but realistic enough to be accepted. When one of Frank Borges LLosa’s clients finds an appealing home, the Northern Virginia broker searches the history of the selling agent — data not available to consumers — on the local multiple listing service. If the agent frequently sells below the asking price, Mr. LLosa knows he can be aggressive.

Listing archives can also help buyers figure out the right bidding range. Ask your agent to comb the MLS for “pending sales,” deals that are in contract but haven’t yet closed, to get an up-to-date sense of price ranges in your market.

In an ideal world, you wouldn’t sell a house at all while prices were falling. But if you must, experts agree that it’s best to act quickly, before prices slide further.

Often, that means gritting your teeth and offering the best price to get potential buyers in the door. Here again, getting your agent to tap pending-sales data can pay off. Pay attention to the pricing per square foot for homes similar to yours, and set your asking price at the bottom of, or even below, that range.

South Florida broker Mike Morgan recommends that his clients take 1% to 3% off the price every week until they get an offer.

Another way to motivate a potential buyer: Motivate his broker. In a typical sale, a commission of 6% is split evenly between the buyer’s and seller’s agents. But you can ask that a higher percentage go to the buyer’s agent, or even offer extra money out of your own pocket, so that she’ll steer customers your way.

David Lereah, chief economist of the National Association of Realtors, expects that nationwide prices will bounce back in 2007.

He adds that one-third of the country is primed for growth — a claim that Mr. Winzer’s research supports. And if you don’t have to sell your home, the short-term turmoil underscores the point that it seldom makes sense to obsess over your home’s value the way you’d obsess over, say, your Google shares. Better to sit back, enjoy your mortgage-interest tax deduction, and wait for better days.

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By Michael Corkery and Darren Everson

From The Wall Street Journal Online

The 874 well-heeled people who put up deposits of as much as $1.3 million to join the Tanner & Haley Resorts destination club, which filed for bankruptcy protection this summer, are being offered a consolation prize.

Ultimate Resort — an Orlando, Fla., rival — has agreed to buy the club’s real-estate assets for $98 million, and is extending new memberships to Tanner & Haley members.

Under the asset purchase agreement, which was announced yesterday, Tanner & Haley members will be able to join Ultimate Resort without having to pay the club’s upfront deposit — which ranges from $120,000 to $215,000. But they will face a number of restrictions on how often they can travel to Ultimate’s properties.

Unlike most other destination clubs, Tanner & Haley had very few restrictions on when members could travel. Its business model ultimately proved unsustainable, as the company was forced to rent out homes at high costs to keep up with their members’ demands. All Tanner & Haley members — whether they chose to join Ultimate or not — will remain unsecured creditors in the bankruptcy case. But they aren’t expected to recoup much of their original deposits.

“I think most members are realistic,” says Joel Lawson III, chairman of the unsecured creditors committee, which represents many Tanner & Haley club members in the bankruptcy proceedings. “This is an outstanding opportunity for members of Tanner & Haley to continue to do what they wanted to do when they joined, which is to travel.”

The deal needs to be approved by a bankruptcy judge, who is expected to review the agreement on Dec. 19.

Destination clubs are a twist on the time-share concept for high-net-worth travelers. The clubs buy homes in desirable locations around the world, then charge membership fees for access to them. The model is more akin to a country club than a time-share. In most cases, members own no property at all; they just have the right to use an array of homes for a set amount of time each year. There are now more than 20 such destination clubs; the largest is the Denver-based Exclusive Resorts LLC.

Tanner & Haley, whose founder, Rob McGrath, pioneered the destination-club concept in 1998, filed for Chapter 11 bankruptcy protection on July 23, sending shock waves through the loosely regulated industry about the financial transparency and viability of some of the other clubs.

The problems at Tanner & Haley sparked calls for tighter regulation of the industry after it was revealed that many of the club’s members could lose most of their deposits — which started at about $85,000 for early members and went up to about $1.3 million for more recent ones.

Holly Etlin, Tanner & Haley’s chief restructuring officer, says only about $10 million to $15 million will be available to pay back the membership and other creditor claims, which total roughly $350 million. Membership claims alone are estimated at $308 million. The bulk of the sale’s proceeds will cover loans that allowed Tanner & Haley to operate under bankruptcy protection, and to pay for administrative and legal fees.

Ms. Etlin says the company is also setting aside some of the money to pursue possible litigation against “certain former officers and directors” and other parties. She says the company and the creditors committee are continuing a forensic investigation of the company’s books “to see whether some money paid to those parties might be recovered.”

While acknowledging that members may be frustrated with having to swallow lost deposit money, Ms. Etlin says the deal with Ultimate Resort is the best outcome for members who wish to continue using the company’s homes. The details were still being finalized late yesterday, but under one proposal, Tanner & Haley members would be able to join Ultimate without having to pay a deposit, but would pay annual dues between $11,000 and $16,000, Ms. Etlin says.

That would entitle them to travel for two to three weeks a year. Members would have the option of staying at the homes for more time, depending on what package they choose.

It’s unclear what would happen if a Tanner & Haley member chooses to join Ultimate and then cancel his membership. “There is no refund available if they join Ultimate,” Ms. Etlin says. “There might be one in the future under certain circumstances.”

Selling Tanner & Haley members on joining Ultimate is critical to the deal. The purchase agreement requires that at least 400 Tanner & Haley members join Ultimate, Ms. Etlin says.

“I’m relatively sure I’d opt to stay in the new club,” says John Harvey of Oklahoma City, who’s listed in the Tanner & Haley bankruptcy filing as having a $1.3 million claim. “For a lot of us, we don’t relish the thought of joining a new club and coming up with new dues. It’s either this or liquidate the club for pennies on the dollar.”

The purchase of Tanner & Haley’s homes greatly expands Ultimate’s current portfolio of 10 properties, located in 10 destinations, including Lake Tahoe, Nev.; Steamboat Springs, Colo.; and New York City. The club currently has 90 members.

Under the agreement, Ultimate will purchase roughly 60 of the properties that Tanner & Haley owns world-wide. That represents the bulk of Tanner & Haley’s properties, which were appraised at about $130 million. Ms. Etlin says Ultimate would also agree to take over many of Tanner & Haley’s 80 long-term leases.

Ultimate Chief Executive Officer Jim Tousignant says that unlike Tanner & Haley, his club will not have to lease properties in order to keep up with demand. He says Ultimate plans on “taking on some additional properties” as a transition strategy over the first four to six months. Ultimately, the new Ultimate will have over 100 properties in 24 destinations, Mr. Tousignant says.

The destination-club industry has been consolidating rapidly. Also this week, two small clubs — called Solstice and Parallel — announced that they are merging. The new club will have 80 members and 10 properties in places such as Aspen, Colo.; St. Barth’s; and Napa Valley, Calif. The new club will operate under the name Solstice.

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By DAVID P. WILLIS
Gannett New Jersey

After taking a slight dip in the second quarter of 2006, median home sale prices in the region that includes the Shore area rose 7.3 percent in the third quarter, the National Association of Realtors reported Monday.

The median sale price for an existing home in the region that encompasses Monmouth, Ocean, Middlesex and Somerset counties was $415,100, up from $386,900 in the same quarter last year, according to the association. In the second quarter, the median sales price had fallen 0.1 percent to $393,600.

The median means that half the homes in the area sold for more and half for less.

“The fact that it is up rather than down is at least some sort of hint that the area is not suffering greatly, at least yet, from any major price pressures,” said Joel Naroff, chief economist at Commerce Bank. “That is not to say that I don’t think it might happen.”

Other areas of New Jersey saw increases in the third quarter as well. The median price in an area that includes Bergen and Passaic counties was $558,600, up 4.7 percent from $533,600. The median price in Union, Hunterdon, Morris and Essex counties was $455,400, up 1.9 percent from $446,800.

Economist James Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, said the median price increase may indicate that fewer moderate-price homes are selling.

The number of homes on the market remains high, he said.

“It was during the third quarter that there was starting to be a realization that the boom was history, but I think we still have people who refuse to sell at the new prices,” Hughes said. “That is why you have a lot of unsold inventory or people actually pulling their houses off the market.”

As overpriced homes come off the market, they are being replaced with houses at a more “modest price level,” said Albert S. Veltri, president and chief executive officer of Veltri & Associates in Toms River.

“As that transition happens, the market will begin to build up more steam,” Veltri said.

So far this year, the average sales price of a single-family house in the Monmouth-Ocean Multiple Listing Service rose 4.2 percent, said Maureen Penta, general sales manager at Diane Turton, Realtors. The average sale price was $486,521, up from $466,878 for the same period last year.

The number of homes sold so far this year has fallen to 9,212, Penta said, citing listing-service figures. That’s down 19 percent from 11,339 in the same period last year.

Prices are stabilizing, but some sellers are still reducing prices. “People who have been sitting with their home on the market for an extraordinary period of time obviously are reducing the prices of their houses,” said Christina Banasiak, president of the Monmouth County Association of Realtors.

Yet some homes, which are priced correctly, are getting multiple offers, said Banasiak, assistant office manager at Weichert Realtors in Marlboro. “It’s happening so if a house is priced right, and it’s a good house in decent condition, it’s still going to sell.”

The key is setting the price correctly when a home is first listed, Veltri said. “Houses that are priced high and start to come down, they actually become invisible to buyers,” he said. Potential buyers look for homes that are new to the market, he added.

Toms River resident Doug Frank recently put a house on the market on Old Post Road in Freehold Township after he renovated it. He priced it at $599,000.

“I really want to move it,” he said. “With the economy the way it is, I priced it right so it would sell.”
www.courierpostonline.com

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By James R. Hagerty

From The Wall Street Journal Online

The air continues to seep out of the U.S. housing market, according to the latest data, and some economists are warning that prices will keep declining through much of 2007.

The National Association of Realtors yesterday reported the biggest drop in home prices since the trade group began compiling price data in 1968. Specifically, the association said the median price for home sales completed in September was $220,000, down 2.2% from a year earlier. That matched a revised 2.2% decline in August. In addition to being the largest price drops in at least 38 years, the back-to-back declines are the first time median home prices have fallen since 1995.

Other data gathered by The Wall Street Journal show large inventories of unsold homes and declining price trends in most major metropolitan areas.

“Housing is still contracting,” says Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta. “We haven’t yet found the bottom.” Mr. Miller doesn’t expect house prices to resume their usual rising trend until 2008.

The latest report is likely to encourage many potential buyers to hold off in the hope of further price declines. “There’s no rush,” says Robert Cook, a procurement manager living in Whitehall, Pa., who is looking to buy a larger home for his family in Pennsylvania’s Lehigh Valley.

Rather than slash their prices, some sellers are taking homes off the market until they see stronger demand. Audrey Heckaman, a pharmaceutical sales representative in Cleveland, bought a new condo in a golfing community in Naples, Fla., in 2004 for $221,000. Early this year, she put it on the market for $429,000. But she found that too many other units in the same development were on the market. After cutting her price to $384,000, she yanked the home from the market in June and found renters for part of the year. In the long run, she figures, demand from retiring baby boomers will drive prices back up.

For those who want to buy now, sellers are dangling lots of incentives. A developer in Dadeland, Fla., near Miami, is offering $5,000 of furniture as an inducement for buyers of new condominiums, says Ronald A. Shuffield, president of the brokerage firm Esslinger-Wooten-Maxwell Inc. Other developers offer to pay some of the fees and other costs usually borne by home purchasers.

Some people who are forced to sell quickly are suffering huge losses. At an auction in Naples last weekend, the highest bid for a three-bedroom lakefront house was $440,000, including commissions and auction fees. The house had sold in July 2005 for $690,000.

Despite the recent drop-off, house prices remain far above the levels of five years ago, and they continue to rise in some areas, including Seattle, Houston and Raleigh, N.C. But they are falling sharply in other places. In Massachusetts, the median price for single-family homes in September was down 8.3% from a year before, according to Warren Group Inc., a publisher and data collector in Boston. In Phoenix, the median price dropped 4.8% in September, the local Realtors association reported.

In some areas, prices are only just beginning to fall back toward realistic levels, says Thomas Lawler, a housing economist in Vienna, Va. He believes that prices could fall more than 10% from their peak levels in markets such as Sacramento, Calif.; San Diego; Las Vegas; Reno, Nev.; Phoenix and parts of northern Virginia and Florida.

Nationwide, sales of previously occupied homes in September were at a seasonally adjusted annual rate of 6.2 million, down 1.9% from August and 14% from a year earlier, the Realtors group reported.

In a mildly positive sign for home sellers, the number of homes listed for sale at the end of September declined 2.4% from a month earlier to 3.75 million. But that was smaller than the usual decline in September, when the resumption of school and the approach of the holidays typically begin to reduce the number of for-sale signs. Over the past decade, inventories of home sales have declined an average of 3.6% in September from the previous month.

Inventories in September were up about 35% from a year earlier. A surge in inventories, fueled partly by investors rushing for the exits, began chilling the housing market in mid-2005 after a five-year boom that more than doubled prices in many areas.

Despite the spreading weakness in house prices, few experts expect anything approaching a collapse. The economy continues to expand, though at a slower rate, and a recent drop in interest rates helps make mortgage costs more affordable.

To gauge residential real-estate prospects for 27 major metro areas, The Wall Street Journal gathered data on inventories of homes for sale at the end of the second quarter from a variety of local sources; pricing trends based on surveys of real-estate agents by Daniel Oppenheim, an analyst at Banc of America Securities in New York, a unit of Bank of America Corp.; and data on late mortgage payments and job-creation prospects from Moody’s Economy.com, a research firm in West Chester, Pa. Employment trends tend to drive demand for housing.

Metropolitan areas with large increases in homes on the market and weak job-growth projections include Detroit, New York and Los Angeles. Inventories have more than doubled from a year earlier in the Miami, Orlando, Tampa and Phoenix metro areas, but strong job and population growth should help to soak up excess supply in the next few years.

Even within metro areas, price trends vary considerably depending on neighborhoods and types of housing. In northern New Jersey, for instance, prices for homes below about $400,000 may start rising again slightly by next spring if interest rates remain around current levels, says Jeffrey Otteau, president of Otteau Valuation Group Inc., an appraisal and research firm in East Brunswick, N.J. At that price level, “there’s virtually zero construction,” he says. But he says there is such a glut of luxury housing in the area that prices of such homes won’t recover before 2008.

Tom Doyle, an agent at Naples Realty Services who compiles market data on his Web site (www.naplesinsider.com), estimates that prices for typical homes in the area are down 15% to 20% from their peak a year ago. Inventory has doubled during that time, but many of the homes on the market are priced so high that they have “only a lottery’s chance of selling,” he says. Looking ahead to this winter’s selling season, Mr. Doyle says he expects prices to be flat to lower because of the large supply of homes for sale.

Seattle has been one of the strongest markets in recent months but is showing signs of losing some steam as inventories of unsold homes rise. In 17 counties of western and central Washington State covered by the Northwest Multiple Listing Service, the median price in September was up 9.4% from a year earlier, the first single-digit increase in two years.

Mike Skahen, owner of real-estate brokerage Lake & Co. in Seattle, says inventory is still lean in good neighborhoods near the area’s biggest employers. But the overall market is slowing to a more normal pace as “buyers are feeling they can be more selective.”

Houston’s market is benefiting from job growth at energy and technology companies and draws newcomers because of its low home prices. The median price in the second quarter was $152,700, compared with a national median of $227,500, according to the National Association of Realtors.

In North Carolina, Charlotte, Raleigh and some other areas have been strong lately as moderate weather and relatively low housing costs attract employers and retirees. Pat Riley, president of Allen Tate Realtors in Charlotte, has noticed increasing numbers of people moving to North Carolina from Florida to flee congestion and high housing and insurance costs. One hitch: Some people moving to Charlotte are having trouble selling their homes elsewhere and so are delaying purchases.

The median price of new and previously occupied homes sold in the eight-county Charlotte region was $182,000 in the third quarter, up 6% from a year earlier, according to Market Opportunity Research Enterprises, a research firm in Rocky Mount, N.C. But the Charlotte market may be starting to cool a bit. The Charlotte Regional Realtors Association reported that home sales in September slipped 2% from a year earlier, while the average price edged down 0.2%.

The California Association of Realtors last week forecast that the median home price in the state will slip 2% to $550,000 in 2007, after rising 7% in 2006 and 16% in 2005. That would mark the first California-wide decline since 1996. California’s last house-price slump lasted from 1992 through 1996.

Leslie Appleton-Young, the California Realtors’ chief economist, says she doesn’t expect the current downturn to be as severe as the one in the 1990s because she thinks the job market will be healthier this time. Many people don’t need to sell and will withdraw their homes from the market until demand recovers, she says. Still, she adds, some investors who bought near the top and took on too much debt “are going to get into trouble.”

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By Greg Ip

From The Wall Street Journal Online

The Federal Reserve held short-term interest rates steady for its third consecutive meeting, and continued to warn additional rate increases may be needed to stem inflation.

Still, investors concluded the Fed will remain on hold for the foreseeable future as it balances concern over the uncomfortably high level of underlying inflation against a slowing economy.

As widely expected, the Fed left its target for the Federal funds rate, charged on overnight loans between banks, at 5.25%, where it has stood since late June. It had raised it to that level from a historic low of 1% in mid-2004.

In a statement released after its meeting, the Fed said growth has slowed in part because of a “cooling” housing market. “Going forward, the economy seems likely to expand at a moderate pace,” it said, the most notable change from the statement released after last month’s meeting.

Core inflation, which excludes food and energy, remains “elevated” but inflation pressures are likely to moderate thanks to lower energy prices, “contained” inflation expectations, and the impact of previous rate increases, the Fed said.

“Some inflation risks remain,” the Fed said, but whether rates would rise again depends on the outlook and “incoming information.” For the third straight meeting, Federal Reserve Bank of Richmond president Jeffrey Lacker cast the lone dissent among the 11 voting members of the Federal Open Market Committee, arguing in favor of a quarter-percentage point rate increase. (One voting seat is empty and seven other members don’t vote.)

Since the summer time, the Fed has been juggling competing concerns of rising inflation and slowing growth. Core inflation rose to 2.9% in September, the highest in a decade and well above the 2% level many Fed officials have said they are comfortable with. Although inflation by the Fed’s preferred index is lower, officials still want to see it drop back to 2% over the next few years.

At the same time, falling housing activity and automobile sales are denting growth; it’s expected to have fallen to an annual rate of about 2% in the third quarter. The official figure will be reported Friday.

But in recent weeks, both concerns have moderated, which has made it relatively easy for the Fed to stay on hold. Inflation in the most recent months has slackened a bit, investors aren’t boosting their expectations of inflation and falling energy prices should have an indirect moderating impact on core inflation over the next year.

While home and car sales have been a sizable drag, business investment, exports and other types of consumer spending appear to be growing at a reasonable pace. The Fed, judging from Wednesday’s statement, appears to share Wall Street’s view that growth will remain between 2% and 3% through the middle of next year.

“As has often been the case over the past five years, the slowdown itself has set into motion market adjustments that may mitigate or even reverse it,” noted John Makin, a scholar at the American Enterprise Institute. Most important, the slowing economy, led by a fall in housing activity, led the Fed to pause and investors to reduce long-term interest rates in particular on mortgages. Online lender Quicken Loans’ pipeline of mortgage applications has grown 20% to 25% since the peak of rates in late June, said the firm’s chief economist, Bob Walter. The increase has been driven mostly by refinancing applications, while applications to purchase homes are steady. “Whether we’ve seen the bottom or not, remains to be seen,” he said.

On Wednesday the National Association of Realtors said existing home sales fell 2% in September to an annual rate of 6.18 million, from August, about as much as economists had expected. The inventory of existing homes, at 3.8 million, was equal to about 7.3 months’ worth of sales for the third month in a row. The median price was $220,000, down 2.2% from a year earlier, a rate of decline equal to August’s. Even after the declines, both the level of sales and prices remain high, and the drop does not appear to be accelerating.

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By Alex Frangos

From The Wall Street Journal Online

The unexpectedly rapid decline of the nation’s housing market will mean an overall drop in construction spending next year, with spillover effects in areas such as job growth and real-estate development.

In a closely watched report expected to be released today, McGraw-Hill Construction will forecast the first decline in overall construction spending since 1991. The company says the value of new construction will decline 1% in 2007 to $668 billion, compared with an expected rise of 1% for 2006 and a 12% increase in 2005. McGraw-Hill said the anticipated decline was due mostly to a 5% fall in construction of single-family homes. But the overall drop also reflects a 3% slide in construction of stores and shopping centers, a component closely tied to population growth and home-building trends.

“Single-family housing has fallen more steeply than what we had anticipated and the correction is taking place faster,” says Robert Murray, vice president at McGraw-Hill Construction, a unit of McGraw-Hill Cos. The industry “no longer has single-family housing to bolster total construction.”

The construction industry accounts for almost a tenth of economic activity, and its contraction could have a ripple effect through the economy as it is a major buyer of finished products and generator of jobs. Local governments’ ability to raise revenue through development fees and taxes, especially in fast-growing parts of the country, could suffer as well.

The McGraw-Hill forecast comes on the heels of a report yesterday by the Census Bureau showing that home builders have had to slash prices to sell homes. Although new-home sales for September rose 5.3% to a seasonally adjusted annual rate of 1.075 million, the median price fell to $217,100 from $240,400 a year earlier. That was the lowest price in two years and the biggest year-over-year decline since December 1970.

Meanwhile, at a conference yesterday in Washington, David Seiders, chief economist of the National Association of Home Builders, predicted average prices of single-family homes will drop next year. It is the first time the trade association has predicted a price decline in roughly a decade of providing estimates.

Mr. Seiders blames a confluence of factors for the anticipated declines, including overbuilding, prices that have outpaced incomes, and rising inventories of unsold new and resale homes. The imbalance between supply and demand, as buyers continue to sit on the sidelines waiting for prices to drop, has already had a big impact on builders.

In the second quarter of 2006, the annual rate of single-family starts fell 41.2% to 1.53 million, while “permits are in free fall,” Mr. Seiders says.

To be sure, prices still remain higher than several years ago and many consumers maintain hefty amounts of equity in their properties. Moreover, mortgage rates remain near historical lows and prices remain stable in many markets. Yet the latest news has prompted some economists to question whether the construction industry will become a drag on economic growth or whether the worst has already been felt.

Yesterday, former Federal Reserve Chairman Alan Greenspan said he saw “early signs of stabilization” in the housing market. Mr. Greenspan noted in a speech to the Commercial Finance Association that a weekly index of applications for home-purchase mortgages, compiled by the Mortgage Bankers Association, has “flattened” at relatively high levels. The index plunged in the second half of 2005 and early this year, but lately has been steadier. It is currently 18% below the year-ago level.

“We’ve already had the hard landing,” Angelo Mozilo, chief executive officer of Countrywide Financial Corp., the nation’s largest home-mortgage lender, said in a conference call this week. Mr. Mozilo said he expects the mortgage market to “tread water” in 2007. “In 2008,” he added, “we’ll have one hell of a year for people who remain in the industry” as demand rebounds.

U.S. home prices rose an average of 58% in the five years ended Dec. 31, according to an index produced by the Office of Federal Housing Enterprise Oversight. In some cities, prices more than doubled in that period. Over the past year or so, house prices have declined moderately in many areas — including Massachusetts, the Washington, D.C., area and parts of California, Florida and Arizona — but they remain far above their levels of a few years back.

Some of the negative effects from the housing slump are likely to linger well into 2007 and perhaps much longer. Some economists think housing prices will continue to drift downward through much of next year. That may damp consumer confidence, and it will diminish consumers’ ability to borrow against their homes to finance spending. And foreclosures are expected to rise at least modestly; that could prolong weakness in housing as lenders dump properties on the market.

“We’re not out of the woods yet,” says Peter Kretzmer, a senior economist at Bank of America in New York.

Mr. Murray at McGraw-Hill Construction concurs. Just weeks ago, he was figuring there would still be growth next year. “We thought the correction [in the housing market] would be, in the words of Fed chairman, ‘orderly,’ ” he says. But recent data have shown it is “not as orderly as what people thought.”

But the decline won’t be limited to housing. Also expected to see a falloff is the construction of retail centers, whose development has been consistently strong in recent years as consumer spending and housing formation grew.

The link between retail construction and home building is strong. “When there’s a new neighborhood, there’s a new grocery store and pizza parlor in a small shopping center,” says James Haughey, director of Research and Analytics at Reed Construction Data, a Norcross, Ga., publisher of building information and a unit of Reed Elsevier Inc. He doesn’t see retail falling off right away, however, as retailers are still catching up to consumer growth. “It will be a delayed impact because the pipeline of shopping centers is so full,” Mr. Haughey says.

The continued rapid construction of a wide range of other commercial projects — hospitals, schools, offices, hotels and factories — will keep bulldozers and backhoes somewhat busy and the massive construction industry active. That, of course, could be reassuring news for the economy. Spending on commercial construction, including multifamily dwellings, will increase 2.5%. Among the fastest-growing segments are hotels and manufacturing buildings, as well as schools and health-care facilities.

Construction activity has a major impact on the overall economy. Census Bureau estimates of construction spending, which rely on McGraw-Hill’s numbers while adding other spending categories, showed $1.2 trillion of spending on construction in the year ended August.

The fallout is being felt at some of the nation’s largest home-building companies, which are downsizing staffs. Pulte Homes Inc. of Bloomfield Hills, Mich., said yesterday it has reduced its work force by about 10%, or 1,400 full-time jobs, since Jan. 1. The cuts have been made throughout the company and across the country. “We’ve taken these measures in response to lower housing demand, which has resulted in a reduction in construction volumes,” Pulte spokesman Mark Marymee said.

Centex Corp., a large builder based in Dallas, said this week that its salaried work force has been reduced by about 10% since April 1 to around 6,400 employees.

In the Phoenix area, construction accounts for 10% of salaried jobs, “and they are pretty good-paying jobs,” says Jay Q. Butler, director of the Arizona Real Estate Center at Arizona State University. He sees the slowdown in the home-building sector being offset somewhat by strength in health care, schools, convention centers and highways. He cautions, however, that local governments that rely heavily on fees garnered from home builders could face fiscal crises. Several municipalities in his area, he says, are considering instituting or augmenting fees on commercial developers to make up for the projected shortfall.

Some developers could benefit from the housing downturn as demand for materials such as gypsum, copper electrical wire and lumber drop. Already this year, prices for those products have fallen. Falling house prices would also bring welcome relief to buyers who have been buffeted by steadily rising price tags.

Certain sectors of the commercial construction industry could continue to grow. Hotel construction spending, for instance, was up 64.4% to $21 billion in August on a seasonally adjusted annual basis, according to the Commerce Department. Though McGraw-Hill predicts no growth in hotel spending, others think the increase is likely to continue in 2007. “The rebound in [hotel] construction is everywhere,” says Bjorn Hanson, head of the hospitality-and-leisure practice for PricewaterhouseCoopers LLP.

About 70% to 80% of the hotels, says real-estate consultant Patrick Ford, are popping up near freeway exits with limited meeting spaces and food service. The area around Dulles International Airport in Virginia is adding 22 hotels, most in that mold, according to Mr. Ford, president of Lodging Econometrics in Portsmouth, N.H.

Manufacturing and industrial construction will grow thanks partly to the mushrooming of ethanol plants in the wake of federal legislation mandating increased supplies of the fuel additive. Matt Hartwig, spokesman for the Renewable Fuels Association, an ethanol trade group, says there are more than a “couple hundred” ethanol plants in development, with 46 under construction.

The office-building sector is also expected to grow as it reacts to recent job growth and business expansion. Office-vacancy rates nationally hit 13.5% in the third quarter, the lowest since the third quarter of 2001, says Sam Chandan, chief economist at Reis Inc., a New York-based research firm. And bond issues passed in several states to accommodate growing school-age populations has meant a classroom building boom. Fast-growing states such as Arizona and Nevada are adding dozens of schools a year.

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By Rex Nutting

From Marketwatch

U.S. homebuilders slashed prices at the fastest pace in 36 years in September, boosting sales to the highest level in three months, the government said Thursday.

The government reported that sales of new homes unexpectedly rose 5.3% in September to a seasonally adjusted annual rate of 1.075 million, the most in three months and well above the 1.05 million expected by economists surveyed by MarketWatch.

However, sales in June, July and August were revised down by total of 67,000 annualized, continuing a pattern of downward revisions to the originally reported data.

August’s sales pace was revised to 1.021 million annualized from the 1.050 million initially reported, a 3.8% rise from July’s downwardly revised 984,000 annual pace.

New-home sales are down 14.2% in the past year and are down 16.5% year-to-date.

“September’s results show the market works — if builders cut prices enough, people will buy,” said Bart Malek, an economist for BMO Nesbitt Burns.

Inventories, prices falling

Inventories of unsold homes fell 1.9% to 557,000, representing a 6.4-month supply at the September sales pace. It’s the second consecutive decline in inventories. The supply of inventory peaked at 7.2 months in July.

Inventories of unsold homes are up 14.4% in the past year. The number of unsold completed homes rose to a record 157,000 in September, up 47% in the past year.

Median sales prices dropped 9.7% in the past year to $217,100, the lowest price in two years. It’s the largest percentage decline in median prices since December 1970. Median prices for existing single-family homes are down 2.5% in the past year, the largest decline ever recorded.

Home builders have piled on incentives, including vacations and new cars, to sell homes. Such incentives are not subtracted from the sales price reported to the government.

“The median price series in both the new and existing home sales reports are not good indicators of short run price swings because they are impacted by shifts in the mix of homes sold,” said David Greenlaw, an economist for Morgan Stanley. In September, there was a 16% dropoff in the number of houses sold for more than $200,000, and a corresponding increase in sales of homes priced under $200,000.

Some economists said the report showed the market is stabilizing, while others said it’ll take months before the bottom is reached.

“This trend, if maintained, points to gradual stabilization in new residential

construction,” said Peter Kretzmer, an economist for Bank of America.

“The pressure on the housing market will not end any time soon amid sky-high inventories and a deteriorating price environment,” said Malek. “Both new and existing single-family home prices are deflating, which will make many households feel poorer, restrain mortgage equity withdrawal, dampen consumer spending and reduce housing starts.”

Quirks in data

Sales are reported when a contract is signed, not at the closing of the sale. Home builders have reported a large increase in cancellations in recent months.

The government cautions that its housing data are subject to large sampling and other statistical errors. Large revisions are common.

The standard error is so high, in fact, that the government cannot be sure sales increased at all in September. The 5.3% increase is statistically meaningless compared with the 15.6% confidence interval.

It can take up to six months for a trend in sales to emerge. New-home sales have averaged 1.10 million per month over the past six months, roughly unchanged over the past four months. The six-month sales average is now down 15% from December.

Regionally, sales rose 24% in the West and rose 6.9% in the South. Sales fell 35% in the Northeast and dropped 6.3% in the Midwest. Except for the drop in the Northeast, none of the changes are statistically meaningful.

In a separate report, the Commerce Department said orders for durable goods soared 7.8% in September on a near-tripling in aircraft orders.

http://www.realestatejournal.com/

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