Notes on Real Estate

Federal Reserve Board chairman Alan Greenspan made it “official” last week: Indeed, home price "bubbles" exist in some parts of the country where values have soared far beyond local income growth and, yes, they might deflate. However, on a national basis, there is no housing bubble that threatens to bust and harm the country's economic growth or overall real estate values.

"I don't expect that we will run into anything resembling a collapsing bubble," said Greenspan. "I do believe that it is conceivable that we will get some reduction in prices… but that is not a particular problem."

Office of Federal Housing Enterprise Oversight (OFHEO) identified unusually high appreciation rates in Las Vegas (a record-setting 41.7 percent), Los Angeles (30.5 percent), San Diego (30.4 percent), Port St. Lucie-Ft. Pierce, FL (28.2 percent), Santa Barbara, CA (27.7 percent), and Honolulu (24 percent), among three dozen metropolitan markets with 20 percent-plus annual appreciation rates. According to the Fed's estimates, home equity wealth in the U.S. has doubled since 1996, jumping from $8 trillion to $16 trillion last year. Mortgage debt also ballooned during that period from $3.5 trillion to $7 trillion.

"Remember," Greenspan told the congressional panel, "there's a very significant buffer in home equities at this stage" -- He was referring to the estimated $9 trillion differential between the $16 trillion in home market values and the $7 trillion in outstanding mortgage debt.

Greenspan claims the equity buffer should be enough to protect even low down payment buyers in high- cost markets in the event of local economic reversals.

A recent survey of the second home market shows a large share of buyers, gobbling up second homes as investment properties instead of as vacation or retirement homes, representing what could be a quantum shift in the market.

The EscapeHomes.com Second Home Buyer survey of visitors to the second home portal netted only 363 responses, but found the greatest share of prospective second home-buyers, 29 percent, looking for investment properties. The survey said 26 wanted a retirement home, and only 18 percent were looking for a vacation home. A year earlier saw a more evenly split situation for second home buyers. 25 percent sought a second home as an investment, 25 percent wanted one for retirement, and 24 percent sought a vacation home.

"Also you finance the purchase with leverage. If you get a 10 percent return (in appreciation) over a couple of years with 20 percent down that's a 50 percent return on your investment. Still, if it's an investment decision, you need to run the numbers and make good investment decisions," Lyons added.

Last summer, "The Second Home/Vacation Property National Study" conducted for Altamonte Springs, FL-based Centex Destination Properties (CDP) by American LIVES, Inc., of Carmel Valley, CA found that about two-thirds of those surveyed, were searching for properties for investment potential.

Baby boomers aren't moving down to smaller homes and they aren't moving out to retirement homes, likely because their current homes are sufficient or they have the option to move into another home they own.

Even before the National Association of Realtors' "2005 National Association of Realtors Profile of Second-Home Buyers" revealed the second home market accounts for 38 percent of the existing housing stock and 36 percent of all homes purchased in 2004, Parsippany, NJ-based ERA Real Estate found that nearly two thirds of baby boomers own two or more homes.

I’ve teamed up with Bruce Colton of Olde Time Mortgage to assist people in doing real estate investment in income properties. Bruce and I have done several residential deals with my buyers, and he has the handle on making the money work. In fact, he has created a high-powered (if you were looking for a cliché, you might even say “robust”) investor specific software application specifically for income property analysis that is unique (in the true sense of the word). I’ve been moving more and more into investment real estate and been taking many hours of continuing education designed for that.

Bruce and I each spent a zillion hours creating a Power Point presentation to explain the Whys & Hows of income property investment. Next, I invited several friends and associates to the presentation, and seven folks showed up.

We all met for a pizza-provided lunch at Coldwell Banker Burnet’s Minneapolis Lakes Office’s conference room on February 16th and did an hour-plus program.

All this, to tell you that we had 100% positive endorsement as regards meeting expectations, and 100% interest in pursuing income property investment further.

We are planning a second seminar for Monday, April 4th, 11:30 - Noon registration, Noon to 1:30 presentation. If you are interested in attending, reply to this e-mail and include your best contact phone number. If you can’t make this one, but would like to be on a “first call” list, do the same.

You can do it yourself, or you can get together with a group and pool your resources, often times via a Limited Liability Corporation (LLC).

Some relatively new mortgage strategies will allow you to parlay your income property equity into additional real estate investments.

That’s it for now. Except this:

1. If you have interests or questions, please e-mail me or give me a call.
2. Check out my website HERE

The opinions expressed in this newsletter are solely those of Tom Crone and others being quoted and do not necessarily reflect the opinions of Coldwell Banker Burnet or its affiliates.