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[TTHQ Staff]

BEING STREET SMART
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Sy Harding


REAL ESTATE IS SO HOT! June 24, 2005.

Need a place to stay when in New York to see a Broadway show or a Knicks game? The penthouse apartment in the Trump Tower just went on the market. $35 million.

A high-end real estate broker in New York appeared on TV this week to announce a new condo building (30 units) going on the market the following day. The price for the apartments is $1,000 a square foot ($1 million for a 1,000 square foot unit). . . . Whoops, you’re too late. That price was good for one day only. The following day the plan was to increase the price to $1,050 per square foot. That price in turn would be good for one day only, and then the price will increase to $1,100, and on the fourth day the price will increase to $1,150 per square foot, a 15% increase in four days.

It’s kind of like the stock market in 1999, when private businesses rushed to take their businesses public while demand was so high that any new stock would sell at any price they asked. In fact, as is happening these days in real estate, investors would fight over the right to pay those prices, arguing with their brokers to try to get an allocation of some of the shares of those IPOs (initial public offerings). Rarely getting any, they then rushed into the aftermarket, driving the prices higher and higher. Those stocks were being flipped at higher prices so often that the volume of shares traded in a week sometimes exceeded the entire number of shares in existence. It was such fun.

Flipping houses for quick profits has become just as much of a sure thing, and developers are becoming concerned. They don’t like the way ‘for sale’ signs by speculators are appearing in developments while they are still building.

National builder Ryland Homes told a reporter for the Orlando Sentinel that the last straw for them was when a speculator bought five houses in one development at pre-construction prices, and then a few months later began selling the contracts before the homes were completed, at prices that were below the builder’s current prices, but still at a profit for the speculator.

So some of the nation’s largest builders have begun including clauses in contracts preventing the contract itself from being sold, forcing the buyer to wait and close the deal. Some have begun prohibiting selling or renting the property in the first 12 months after taking ownership. If a new owner has to sell in the first year, he must sell back to the builder at the original price.

David Seiders, chief economist for the National Association of Home Builders says builders are becoming concerned about what the current level of speculation would do to their entire industry, if prices cool off and speculators dump an unusual amount of homes on the market, or refuse to close on deals they’ve contracted on that are not yet built.

However, while developers may be getting nervous, demand for their product shows few signs of weakening, as the powerful fuel of low mortgage rates continues to drive the engine.

The average national rate for a 30-year fixed mortgage is 5.57% this week, compared to 6.25% a year ago. That in spite of eight hikes in short-term interest rates by the Federal Reserve in its year-long effort to get long-term rates up to cool off inflation, to particularly cool off demand and rising prices in the real estate sector.

Meanwhile, lenders are working in the opposite direction, to increase demand by offering increasingly creative home financing. And they’ve been winning. Beginning several years ago, the lowest mortgage rates in a couple of generations allowed many buyers, previously frozen out by high rates, to become home-owners. That was followed by still others gaining entry through the aggressive selling of Adjustable Rate Mortgages (ARMS), which offer low initial rates but can be adjusted higher in subsequent years if rates increase.

Now the latest form of creative financing, ‘interest only’ mortgages, make it possible for still more potential home-buyers to find a monthly payment they can afford. Whether they can actually be said to be ‘buying’ a home, rather than renting it, is debatable, since they are not paying even a minimum amount toward the price of the home. And at some point down the road when payments on the principal must begin, they may find their monthly mortgage payments have doubled. Unless their income has gone up substantially they may discover they have no equity, yet can’t afford to stay, and so weren’t buying a home after all.

But for now it’s all working so well.

On Friday, the Commerce Department reported that sales of new homes rose again in May, climbing 2.1% nationally. If you want to be picky, the growth was spotty. The increase was led by a big jump of 23% in the Mid West, while some of the previously hottest areas cooled off some. Home sales plunged 24% in the Northeast in May, and were down about 1% in the South.

Perhaps it was an early warning for speculators that the median home price also dropped 6.5% nationally in May. But what the heck, the bubble in the Internet stocks in 1999 continued on past early warnings.

So give that penthouse in the Trump Tower some thought.


Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.