Real Estate and Housing Feature Articles

Cashing out

2007-06-03T21:06:00.002-07:00

Reverse mortgages are becoming more popular with older Americans looking to tap their home equity.

By Sarah Max, CNN/Money senior writer

SALEM, Ore. (CNN/Money) � "House rich, cash poor" is a common predicament for older Americans whose homes have appreciated in value while their incomes have failed to keep up with rising healthcare costs, property taxes and other living expenses.

Rather than sell their homes, many are taking out reverse mortgages, which allow homeowners age 62 and older to borrow against the equity in their homes in one lump sum, via regular monthly payments or, most commonly, with a line of credit.

Although reverse mortgages still represent a fraction of the mortgage market, the number of loans originated in 2004 was more than double what it was the previous year.

"Demand for information on reverse mortgages has increased exponentially," said Bronwyn Belling, a reverse mortgage specialist for the AARP Foundation.

The advantage of a reverse mortgage over traditional home equity loans is that borrowers don't pay principal or interest on their loans until they sell the home or pass away. The downsides are high upfront fees and compounding interest.

Reversing 101

There are three national providers of reverse mortgages, the Federal Housing Administration, Fannie Mae and the Financial Freedom Senior Funding Corp. The most popular reverse mortgage by far is the FHA's Home Equity Conversion Mortgage (HECM).

To qualify for any kind of reverse mortgage, you must be at least 62 years old and own most of the equity in your home. Loan amounts are determined by your age, the value of your house and current interest rates.

A 75 year old with a $300,000 house could qualify for a $193,000 HECM, for example. A 65 year old with a $200,000 house could borrow about $108,000 against the house.

The FHA caps loans based on the maximum FHA mortgage limit for an area, currently $172,632 to $312,895. Fannie Mae has a slightly higher limit, while Financial Freedom loans are designed for more expensive houses and have virtually no limit.

The interest on the HECM, was recently 4.37 percent for loans adjusted monthly and 5.97 percent for loans adjusted annually, according to Peter Bell, president of the National Reverse Mortgage Lenders Association, while Fannie Mae's HomeKeeper carried an annual rate of about 5.88 percent. The Financial Freedom reverse mortgage, which is tied to the 6-month LIBOR index had a rate of 7.92 percent.

Most borrowers, said Bell, opt for a line of credit, allowing them to borrow money as they need it and pay interest only on the amount they draw down. When borrowers sell their homes or pass away, the principal and interest owed on the house is subtracted from the proceeds of the sale.

The interest can add up pretty quickly. A homeowner who borrows $100,000 from the house at today's annually-adjusted HECM rate would owe $200,000 in interest and principal on that loan 12 years from now, and that's assuming rates don't increase.

If the amount due is greater than value of the house, the loss is absorbed by the lender. But that's not common. "Your home continues to appreciate in value," said Bell. "It's not unusual for borrowers to have substantial equity left in their house."

High up-front fees

If you're not sure how long you think you'll stay in your house, think twice about a reverse mortgage. The reason: Up-front fees for a reverse mortgage can easily add up to $10,000 for a $200,000 loan limit, regardless of how long you keep the loan or how much you borrow.

"This is not a loan you would want to get for the short term," said David Carey, senior product manager for Fannie Mae's HomeKeeper. "If you don't hold this loan for five or 10 years you're going to pay a lot of money for it."

Up-front costs for the HECM include:

Origination fee equal to $2,000 or 2 percent of the loan whichever is greater.

Mortgage insurance premium equal to 2 percent of the maximum claim amount or home value, whichever is less. (This up-front insurance is waived only if the all of the loan is used to pay for long-term care insurance.) There also is an ongoing annual premium equal to 0.5 percent of the loan balance.

Other closing costs, such as title insurance, and fees for appraisal, credit reporting, escrow, document preparation and recording vary depending on the size of the loan but $1,700 is typical according to Carey.

Servicing fees of $30 to $35 a month, added to the balance of your loan.

Also keep in mind that because you don't pay down your debt until you sell, move or die, the interest you owe could add up to quite a bit over time. Mandatory mortgage insurance ensures that you (or your heirs) don't end up owing more than the house is worth. But it's entirely possible to drain all or most of your home's equity.

More students sold on studying real estate

2007-06-03T21:06:00.001-07:00

Like the market itself, real-estate education is hot. But some experts warn this industry is headed for a decline.

By Lisa Leigh Connors | Staff writer of The Christian Science Monitor

After watching Chicago real estate explode in the past five years, college senior Jorge Lopera was inspired to learn more about the commercial market. Yet when he started at DePaul University three years ago, there weren't many opportunities for undergraduates.

Much to Mr. Lopera's delight, DePaul is offering a new bachelor of science degree in real estate starting this month.

Now Lopera has six months to squeeze in all the required credits to graduate in June with a double major in finance and real estate.

"With the real estate major, you're seeing the whole investment-analysis side," says Lopera, who is enrolled in real estate law and urban-planning development courses. "I'm getting completely different exposure through these courses."

Real-estate education is red hot, thanks to a booming real-estate market nationwide. As a result, colleges everywhere are adding new programs and building on existing ones to keep up with industry and student demand.

Some experts warn, however, that the market may have hit its peak - and the field could be headed for a decline.

"If you went back to the late 1990s, you probably saw very similar situations with classes in the securities industry for stockbrokers or Internet-related enterprises," says Peter Schiff, president of Euro Pacific Capital, an investment firm based in Newport Beach, Calif.

"The real-estate industry is going to be one of the worst industries to be associated with in the next 10 to 20 years. We are in a major bubble."

Instead, Mr. Schiff says, students should turn their attention to agriculture, horticulture, engineering, and foreign languages, such as Mandarin.

"That's where a lot of trading and wealth is going to be emanating from the world," he says.

"The US needs to move back to a wealth-producing, manufacturing, and exporting economy."

But as long as people demand space for businesses, there will be a market for leasing and selling, determining value, and issuing loans, says Gerard Mildner, professor of urban studies and planning at Portland State University in Oregon.

"There's an old saying about the legal profession - they can make money in good markets and bad markets, either forming new companies or managing bankruptcies," says Professor Mildner.

"In some ways, the real estate industry is similarly insulated. There's obviously more money to be made in a strong market where you're developing new properties, but not everybody is developing properties. A fair number are managing properties."

Last spring, Portland State started offering an undergraduate degree in real estate finance and a minor in real estate development. Mildner was instrumental in creating the university's Real Estate Center and he also helped set up the graduate certificate program.

"Sometimes real estate gets overlooked by business schools and undergrads," says Mildner, "perhaps because it's not as sexy as other parts of corporate America. But one of the things that these degree programs can do for people is to help them see over their small segment and broaden their career horizon."

That's why Christopher Magalhaes, a junior economics major at New York University, is working toward a noncredit real estate certificate. He may not pursue real estate as a career, but he feels it's crucial to have a good understanding of as many fields as possible.

"It's important because I know that some day I may want to buy a house," says Mr. Magalhaes.

"I may also want to try my hand in commercial real estate at some point in my life, so I don't want to limit myself." This year, more than 5,000 students enrolled in NYU's Real Estate Institute - an increase of 500 from 2000.

While real estate schools specifically train students to sell houses, most college programs concentrate on the commercial end - appraisals, development, investments, and management.

About 10 years ago, only about 30 colleges offered real estate degree programs. Today, that number has more than doubled to 62, according to Don Moliver, director of the Real Estate Institute at Monmouth University in West Long Branch, N.J.

At Monmouth, professionals can enroll in an MBA program with a specialization in real estate. The school also plans to add an undergraduate degree in the future. "It's something that is growing," says Mr. Moliver, "and I'm pleased to say that if you look at schools that offer real estate, they really are among the best in the country."

Although universities are adding to their programs, they have actually been slow to respond to the real- estate boom, says Moliver, because in some circles, the old perception that it's a trade and not a profession still exists.

"In the early days, the genesis of it was primarily women, maybe on a part-time basis who were selling houses and the commercial side was only men," he says.

"Today, it's a highly competitive industry and most of the people in the industry got their education by the seat of their pants. What we have is a lot of seasoned folks who are saying, 'Let's take these young people who are joining the industry and send them out for training.' "

It's evident there is a demand for educated professionals. In the past year, DePaul has received a record number of job listings in the field, from investment to mortgage lending companies, says Susanne Cannon, director of the university's three-year-old real estate center at DePaul.

By the end of this academic year, about 300 students will have taken an introductory real estate analysis course already offered at DePaul, up from 266 the year before. At least 50 students now declare real estate as their major.

"As industry has moved from the cowboy developer and the small-shop real estate broker into much larger institutional investors, the demand for qualified professionals in all areas of real estate continues to escalate," says Ms. Cannon.

This is welcome news for Lopera. When he hears chatter about the real- estate bubble bursting, he doesn't want to believe it. He hopes to one day invest in Chicago condominiums and to buy land in Arizona and Texas and develop it.

"I don't see it bursting, but at the same time, I do see areas of Chicago that might be overdeveloped," says Lopera. But if it doesn't work out as a career, "I'll always be able to use the degree for myself because I will personally want to invest in real estate."

In hot real estate market, 'rondos' are new trend

2007-06-03T21:05:00.001-07:00

Low mortgage rates but pricey single family homes? Rental units turned into condos are another option.

By ADRIENNE P. SAMUELS, Times Staff Writer

Don Madio used to rent his apartment.

Now he owns it.

Madio, who lives in the Audubon Condominiums in the Feather Sound area, is one of thousands joining the nationwide trend of buying into "rondos," or rentals converted into condos.

Rondos are a cheaper and better located option than single-family homes in Pasco County, said the 72-year-old insurance agent.

"The only reason I was thinking about (buying) was because the interest rates were so doggone attractive," said Madio, a 15-year renter. "I have a garage, an end unit with a balcony and a fireplace, two beds, two full baths and my own private entrance overlooking the golf course."

He is seconds from Interstate 275, across the street from a Publix, near a hospital and in a community where the developer throws New Year's Eve parties for residents.

All for $169,000.

Five percent of Tampa's apartment stock and 11 percent of Pinellas' have or are expected to "go rondo." That's about 10,300 conversions since 2003.

Like a single family home, a rondo's pull comes down to location, price, amenities and quality. That's why Atlantic American Realty Group snagged the Cloisters apartments (now Fountains at Countryside), just north of Westfield Shoppingtown Countryside. Built in the 1980s, the 168-unit complex has concrete firewalls between some units.

Each unit is gutted. All pipes, flooring, air conditioning and kitchen equipment are replaced. A butterfly garden, Pilates room and 11-person jacuzzi are planned.

Prices range from $101,500 to $157,000 - far lower than $167,000, the median single family home price for Tampa Bay. Forty-one units sold in three weeks.

Villa Sonoma, near Tampa's International Plaza, doesn't offer golf lessons or wine cellars. The location and construction is enough.

"We've sold 60 percent in just eight weeks," said Michael Caggiano, sales manager.

Some conversions are expensive, depending upon location. At the "15 minutes from downtown Tampa" Waterford Luxury Condominiums in Palm Harbor, 1,000-square-foot one-bedrooms start at $150,000. Other models cost up to $237,900.

Renovation and construction prices add to the cost of the home - sometimes. Waterford, formerly the Essex Luxury Apartments, is two years old, so there is no need for new appliances or to upgrade anything, said Jon Preciado, sales manager. Eighty of the 170 "as is" units have been sold.

Still, not everyone is convinced rondos are a good investment. For one, the units might flood the market, causing a drop in prices and reverting unsold communities into half-rental/half-owner.

Others don't think it's wise to spend upward of $130,000 on a tiny apartment with no garage.

"The prices are insane," said John Boitano, 60, one of a handful of renters still living at the Cloisters/Fountains at Countryside. (Conversion developers are required by law to allow existing residents to live out their lease.) "If you're going into the $150,000 range, buy yourself a home and get the land."

Some buyers also worry about sounds traveling through walls, inefficient windows and roaches from neighbors.

Preciado suggests buyers get a home inspection and read the condo documents - which include maintenance fee information.

"In every condo conversion I've seen, ultimately you're at the mercy of the original builder," said Preciado. "We have cinder block and some framing (but) unless you have separation between the walls, you're going to hear something.'"

A fine mess

2007-06-03T21:04:00.000-07:00

House sharing is all about diplomacy, domesticity, and someone else's dirty dishes

By Leigh Belanger, Globe Correspondent | January 6, 2005

The last straw was when the cat started using the tub as a litter box. Until then, Melissa Filgerleski, 25, a downtown paralegal, had tried not to make a big deal out of her roommate's living habits. She and a third roommate would "passive-aggressively not do the dishes in the sink," says Filgerleski, "just to see how long they'd stay there."

Sometimes weeks would pass before Filgerleski addressed her roommate's messes. But when she found cat feces in the tub one morning before work, Filgerleski shook the woman awake and urged her to clean up the mess. The roommate took the incident personally, says Filgerleski, and it wasn't long before Filgerleski began looking for a new apartment -- and a new person to share it with.

The situation is common. The average age of Boston residents is 31. Talk to any number of Bostonians around that age and you're likely to hear a roommate horror story. There are tales of stolen rent, rampant mold, illicit drug use, and missing food. The median rent for a two-bedroom apartment in Boston was $1,400 in 2003. With thousands of income-restricted students and recent graduates paying off education loans as they begin their careers, many budgets dictate splitting the rent multiple ways. For many young Bostonians, negotiating households and habits is a fact of life.

Cleanliness is the most common source of conflict in shared housing. For some, like Sam Phinizy, 27, who shares an apartment in Brookline with four others, mess "isn't a big deal," he says. He describes the household as being "pretty laid-back"; as a result, they live in a pretty messy apartment. The living room smells like snack food and dirty socks, and the floor is a jumble of electrical cords, old newspapers, loose change, and piles of clothing. Empty Coke bottles line a windowsill.

Luckily for the four men and one woman, ranging in age from 19 to 27, household conflict hasn't arisen. It could be due to the uniform standards of the group. "We did have one girl who moved in for a month and was really anal. She wanted a [cleaning] schedule" says Phinizy. "That didn't work out."

After that experience, says Phinizy, "we just looked for people with common interests." He says that the friendships in the house help relieve any tension that might arise when dishes are piling in the sink for weeks.

But while some people are eager to live with friends, others have had relationships dissolve as a result of living together. Kelly Andreoni, 23, and her fiance recently found their own place after living with a friend of theirs from college.

"In the beginning, we sat down and made what we called the Wheel O' Clean," says Andreoni. "We divided the chores into kitchen, bathroom, and living/dining room, and switched every week," she says. While she and her boyfriend did their chores as they came up, the other roommate never did. "I think he expected me to do everything," she says. After months of tension, Andreoni stopped talking to her roommate. "My boyfriend had to be the liaison," she says. After parting ways, Andreoni says that she and the ex-roommate are no longer friends.

For some, cleanliness comes before friendship. When the situation with her unclean roommate ended badly, Filgerleski, the paralegal, realized a few things. "I learned you really need to be up front with people," she says. "Now I'll say, 'this is my standard and I can't change it, so can you meet it?' " For Filgerleski, common standards are more important than common interests. "I don't need to be your friend," she says. "I need to be able to live with you."

And the ability to keep house, while a priority, is just one quality people seek in a housemate, be they friends or strangers. "Respectful" and "sane" are among the other qualities most cited by people looking for roommates on craigslist.org, a widely used online housing resource.

"We look for no drama," says Emily Shull, 29. In her Somerville household of six, candidates meet with the entire group, and "they usually have to come twice," says Amy Jollymore, 33, another resident. They specifically look for busy men or women over 25. "We don't want people thinking this is the center of their lives and they've just inherited a new bunch of buddies," says Jollymore. But members of the household, whose ages range from 28 to 33, agree that it's important to have someone likeable, who fits in, rather than just someone to fill the room. "If we don't find anyone we like," Jollymore says, "we suck it up and pay the rent."

As for cleanliness, this group has it figured out: They recently hired a cleaning service.

The future of homes and housing

2007-06-03T21:01:00.000-07:00

20/20 foresight: looking to the future

As we move further into the 21st century, it's natural to wonder what the future will bring: In what kinds of houses and communities will Americans be living in 2020? What kind of jobs will people hold? Will fewer of us be married? Writers Kim Campbell, Clayton Collins, Marilyn Gardner, and Elizabeth Lund sought answers to these questions - and more - from eight experts whose jobs require them to predict what our lives will be like in 15 years. Read excerpts from those interviews in this section.

Where do you think we're going to be living in 2020? Are we going to be more suburban or urban? Who will make up these communities?

I think it's a combination of [suburban and urban]. Aging will drive where people live. Some people argue that because urban areas have better healthcare, that means more people will move to the city. That may be right, but I don't think that means they're going to be moving downtown. I don't see us having the traditional suburb; I see more satellite cities, all midsized places [near big cities], where people have a combination of their work, their fun, their recreation, and healthcare. It's like being able to have everything that they want in a big city, but not in large doses.

The way I can tell you what's going to happen in a city [in terms of inhabitants] is I pay attention to who serves me French fries.... Who is it that's doing the lawn care in your neighborhood right now? [It] tells you ... who the children are going to be attending the schools. It tells you something about the political systems. It tells you about some of the social and political and economic challenges your community is going to be faced with, and obviously that speaks to demographics. The statistics show that in terms of the large urban areas, whites are moving out, blacks and browns are moving in. That's not always the case; there are a lot of blacks who are moving into the satellite communities as well.

Ninety percent of all the growth in the population will be minorities between now and the year 2050; 100 percent of all the growth in the workforce will be minorities. So that impacts all of our cities.

Between now and the year 2020, there will be a 74 percent increase in the growth of the number of people who are over the age of 50. Guess what the increase will be for the number of people who are under the age of 50? Only 1 percent. When you think about cities, think about where people will live, we cannot underestimate what impact aging will have. Nobody's ever seen this before. It's going to impact the way taxes are levied; it's going to impact the way we fund public schools.

The one thing that we have going for us is immigration. The thing is you don't need to wait [until 2050] to really start to see the impact of how much diversity we're going to have. You're going to see it in our cities now, in 2010, 2015, 2020. When you walk into a gas station, listen to the music that's being played. This is where you find out how culture is changing. Pay attention to the kinds of combinations of restaurants that are coming up in your community, the sort of Mexican/Italian restaurants.

It's about opportunity, [and] people remaking America all over again.

Nat Irvin II is founder and president of Future Focus 2020, an urban-issues think tank, and a professor of future studies at Wake Forest University.

What factors will consumers consider as they approach the designing and purchasing of homes in 2020?

People are going to recognize that the McMansions ... of today are going to be traded in for something that's more tailored. It will be a little smaller, because people are already really "getting" that square footage doesn't make them feel better.... It's [about] adapting to lifestyles, eliminating rooms we don't use anymore.

Technology in the house of the future is going to be beautifully integrated, but it's not going to be the selling point, per se. If you think about some of the things you've seen at Disney World or Disneyland, they always are visions [out] of the Jetsons. But I don't believe that's what's going to happen.

The thing that's going to be the most different is the way we go about "delivering" houses. In 10 to 15 years it will be a thing of the past to have a house built on the lot, stud by stud. It will be a more manufactured product. [As with cars] it will be the design quality that will be why people purchase houses. And they will be delivered in component parts that can be assembled, probably within a week. Through the tools of virtual reality, we will actually be able to "try on" our houses as a family before we build them. And there will be ... architect franchises, if you like, that will assist people in selecting the appropriate house for their site.

When we think of "manufactured" we think of limitation, but today you can manufacture anything and have a very wide array of options. The problem right now is that there is sameness.

In most houses today people are building a floor plan, and extruding [it] up to the ceiling plane. So it's a two-dimensional idea that gets forced through to an eight- or nine- or 10-foot ceiling. What architects do is design the third dimension, so the heights of everything vary, depending on the activity going on below it. You end up with these cozier places that look out into more open, wider spaces. Like a road map, a [traditional] floor plan tells you how to get ... from one place to another, but it doesn't tell you about the shape of the space. For that you need information about the third dimension. The tailoring of three-dimensional space is what's going to distinguish what we're doing tomorrow from what we're doing today.

Sarah Susanka is an award-winning architect and author of the books 'The Not So Big House' and 'Home by Design.'

A Turf War for the Lords of Flatbush

2007-05-24T02:51:00.000-07:00

As soaring property values in New York's Brooklyn draw megabrokerages to the area, street-smart local outfits make service their key defense.
For increasing numbers of Manhattanites weary of the big-city hustle and bustle, the quiet, tree-lined streets of Brooklyn have become a welcome alternative. The Flatbush neighborhood brownstones that set the backdrop for The Cosby Show -- the actual home in the show's title sequence can still be seen at 10 Leroy Street -- remain a much-sought destination for families in search of space and value. What's changing, however, is the way local real estate agents and much larger newcomers are competing for the district's business.
With the new year comes a whole new way of doing business. On Jan. 3, the big Manhattan brokerages that have increasingly staked their claim across the East River instituted MLS, a computerized database that allows them to share listings. For brokers who subscribe, it means access to thousands more listings -- that's the upside. But it also means co-brokering those sales, which halves commissions -- a fundamental change that represents a disproportionate blow to smaller firms moving fewer properties.

LOCATION, LOCATION...REPUTATION. In this storied section of New York City, most brokerages operate with exclusive listings, with a single agent having sole rights to represent an individual seller for a specified time. That means one commission for the agent, and often more personalized service for the seller. But because those agents don't share listings, it can also mean a lot more legwork for buyers, since no single broker has access to all potential properties in any given area. It's not uncommon for prospective homeowners to work with half a dozen agents before deals close.

Critics say the old system was inconvenient for customers. Its defenders argue that a neighborhood benefits from a mosaic of small brokers who know it best. "That's how we've been doing business for almost 20 years," says Ali Young, a sales agent with Cobble Heights Realty, which also operates Heights Berkeley Realty, each with about 10 agents per office. "We have great locations, an established office, and a word-of-mouth reputation within the community."

Now a seismic shift is in store for these old-style brokers, who share a unique, small-business culture in one of the last surviving enclaves of independent real-estate brokering in the U.S. Young calls it, "a small, genuine, little brownstone community." These firms are having to adjust as bigger kids move onto the block. Large outfits like Corcoran and Brown Harris Stevens (owned by Terra Holdings) have made a strong push into Brooklyn over the past several years, as the spillover from Manhattan has increased. In the face of takeovers and stepped-up competition, the David-and-Goliath metaphor has become popular in Brooklyn real estate circles.

CUSTOMER FIRST. The corporate firms say they are simply providing potential buyers with more, easier-at-hand choices, and sellers with a deeper pool of potential customers. "The advantages are not for the brokerage firms -- the advantages are for the consumer," says Pamela Liebman, president and CEO of Corcoran, which has operated in Brooklyn since 1998 and now boasts 144 agents there. "The seller wants to expose his home to the widest audience possible, and the best way to do that is to co-broke. And if you're a customer looking for a place in Brooklyn, you might find it very frustrating to see four or five different brokers."

Rather than subscribe to the new listing service and take significant cuts in commission, many smaller firms are ready -- and in some cases, eager -- to defend their niche with personalized service, which they say the heavy hitters have trouble matching.

As with many small businesses facing bigger competitors, the customer-driven method has thrived in Brooklyn, with its unique, high-end properties and "upscale bohemian" residents and would-be residents, says Laurie Bleier, owner and president of local portal HelloBrooklyn.com. For potential buyers, small agencies with exclusive listings can mean more traipsing from neighborhood to neighborhood, looking for just the right fit, but independent shops like Cobble Heights say their reputation and long-standing relationships with the community overcome that disadvantage, making for happier buyers and sellers in the end.

"If you walk down Carlton Street in Prospect Heights, the perception of older people, the real neighborhood people, is that these larger agencies are opportunists," says Young, who has lived in Brooklyn for years and won't be subscribing to the shared-listing database. "I'm certainly not worried."
OLD HANDS. While some firms are mulling buyout offers, Warren Lewis Realty Associates' president, Marc Garstein, just finished a major renovation to his 18-year-old office and plans to continue the same personalized customer service that he credits with the referrals that he says have helped to improve his bottom line every year for the past five years. "We're neighborhood people," he says of his nine agents, whose combined experience amounts to some 117 years. "We work this neighborhood."

"They may say 'we know the neighborhood better,' but that's a bunch of nonsense," counters Corcoran's Liebman. "The brokers who work for Corcoran in Brooklyn have been there for years."

Michael Burke, director of the Downtown Brooklyn Council, a local economic development group, says Brooklyn residents are accustomed to dealing with certain brokerages, and despite the recent influx of Manhattan brokers, "there is still a strong sense of locals promoting locals."

At Cobble Heights and Heights Berkeley, Young makes sure that listed clients are on a first-name basis with almost the entire staff, saying that a personal relationship with the professionals who will be leading strangers in and out of the sellers' homes on inspection tours makes the process less disruptive.

GETTING ALONG. The microculture within the brokerages is also different at smaller agencies. For one, brokers at smaller outfits rely on sharing information and being open about each other's client's, listings, and needs. At larger firms, rife with competition, agents often have to fight to get listings and hold on to clients.

"And besides, which agent is going to work harder for you," asks Young "the one who's working for a 5% commission or the one who's working for half of a 5% commission?" According to Young, collaboration is a key aspect of the sales culture in her office.

For decades, brownstone Brooklyn has been a boutique business, and at least some smaller firms are committed to keeping it that way. Young admits that the larger agencies may work better in certain cases, and her office sometimes refers clients with specific, hard-to-satisfy needs. "Sometimes you go to Target (TGT ) for a pair of jeans, and sometimes you go to Kiwi to get that special pair," says Young. "They both work." As they adjust to life with a new system and new competition, the small brokerages are hoping there's enough room in Brooklyn for both David and Goliath.

Buyers Snap Up Country Houses -- In Other Countries

2007-05-24T02:50:00.002-07:00

tefan Lovgren
for National Geographic News

To experience the Swedish heartland, head down one of the remote roads in Småland, a forested district of southern Sweden. At the end of the road, you may reach a torp, the type of small Swedish summerhouse popularized by Pippi Longstocking author Astrid Lindgren in her children's books.

Only these days, the people living there may be German.

During the early 1990s southern Sweden was discovered by German second-home buyers. In 1991 there were about 1,500 Germans owning second homes in Sweden. Today they may number more than 10,000.

Germans are hardly alone in setting up a second life away from their main home. Second-home tourism around the world has exploded in recent decades. While most people still buy second homes in their home countries, an increasing number of people are also venturing abroad.

Just how many is hard to say. Second homes have been a largely neglected research topic, and there are few reliable figures on the number of second homes around the world.

But few people doubt that second homes are an integral part of global tourism, especially in rural areas. Although there are social and environmental drawbacks to second-home tourism, most researchers believe its economic and overall impact is largely positive.

"Second-home tourism forms an important contribution to the local economy," said Michael Hall, co-editor of Tourism, Mobility and Second Homes (Channel View Publications). "However, the local tourism authorities rarely acknowledge this role of second-home tourism and mainly make efforts to attract more high-profile tourists."

Getting Away

In Europe a house in the countryside was once an exclusive asset for the nobility. But in the last century second-home ownership spread to groups outside the upper classes.

In North America second homes were built in wilderness areas, partly as a cultural reminder of frontier development. In Australia many of the first coastal second homes were little more than fishing huts on public land.

The main increase in second home ownership since 1960, researchers say, can be explained partly by greater personal mobility offered by cars and air travel. As people have become increasingly urban, the appeal of the country home has grown, too.

While there is no global data on second-home ownership, individual countries maintain some statistics. In 1999 7 percent of Canadian households owned second homes, 77 percent of which were located within Canada. In mainland Spain in the last two decades, growth in second-home ownership has increased 75 percent.

The reasons for buying a second home are universal. Many people seek a place to relax and escape everyday routine. A second home may also represent a step back to nature. "Most of the Germans I met in Sweden were carrying a rather idyllic image of Sweden and were disappointed, because the Swedish countryside is more modern than they expected," said Dieter Müller, who co-edited the tourism book with Hall.

However, I think they created their own little Sweden somewhere in the Småland forests," added Müller, who is German and teaches geography at Umeå University in Sweden.

Many people also buy a second home to retire there. Some southern European countries, like Portugal and Spain, have seen a dramatic influx of retirees from northern European countries, primarily England and Germany. The newcomers are lured by the warm weather, pristine beaches, and abundant golf courses.

"One of the most interesting aspects about tourism in Portugal is how many people who holiday there then go on to buy a second home or even retire there," Hall, the Tourism, Mobility and Second Homes co-editor, said.

So large is the English expatriate population in Algarve, in southern Portugal, that many British political parties routinely come to seek donations for political campaigns back in the U.K.

Some Drawbacks

There is little doubt that second-home tourism can be a major contributor to local economies, boosting local service supply and keeping local entrepreneurs in business.

It can also ensure the survival of rural areas by filling vacancies caused by rural out-migration. In Finland the countryside population declined by 31 percent to about 900,000 between 1980 and 2000. At the same time the number of people using second homes had increased by 79 percent to more than 1.8 million.

However, second homes can also increase the tax burden for the local population. In some areas housing prices may rise beyond the means of locals.

Sometimes social resentment may also develop toward second-home owners, who may be seen as outsiders or even invaders. Many people who buy second homes in foreign countries do not learn the local language. This is particularly true in places like Portugal and Spain, where some resort communities have been completely taken over by English and German settlers.

In Ireland's Gaeltacht—the country's seven, historically Irish-speaking regions along its western seaboard—the local tongue, Gaeltacht Irish, is slowly ceding ground to English as the language of daily life, mainly because of the number of non-Irish speakers moving into Gaeltacht communities.

The environmental effects of second-home tourism may be mixed.

Second-home owners often use indigenous architecture in restoring buildings that may otherwise fall into disrepair. Many second-home owners are committed to environmental issues, and second-home tourism has, in many places, led to the protection of natural areas and wildlife, some researchers say.

"The capacity of [popular second-home tourism destinations such as] southern Portugal to host so many people may be greater than some of the more environmentally sensitive areas in the tourists' own countries," Hall said.

But the demand for development of second homes in previously untouched areas, from the plains of Montana to the north woods of Maine, is also seen as a crisis by many environmental and conservation groups.

Time-Shares

Second-home ownership in the United States is less common than it is in Europe.

"Relatively speaking, this form of tourism is much smaller than other forms, because only a small portion of the U.S. public owns a second home in the traditional form," said Dallen Timothy, a professor at the School of Community Resources and Development at Arizona State University in Tempe.

Still, second-home ownership in the United States has almost doubled in the past 35 years. In 2001 there were more than 3.5 million second homes in the country.

Most U.S. second homes developed as a result of people escaping either intense summer heat or bitterly cold winters. Native Americans commonly sought refuge away from their normal abodes. For example, Cape May, New Jersey, was a popular seaside refuge for the Leni Lenape Indians centuries before the beach homes of the 1800s were built there.

A particularly popular form of second-home ownership in the U.S. is time-shares, where consumers purchase periods of time at a property. Since the late 1970s time-shares have grown between 14 and 17 percent per year. Today the industry is worth more than four billion dollars in the U.S.

There has also been a strong growth in U.S.-owned homes abroad. Americans have long owned vacation homes in Mexico, particularly around Acapulco and Puerto Vallarta. But today some Americans are settling in more exotic territory, such as the rain forests of Cayo in English-speaking areas of Belize.

Researchers say that a demographic shift will have a substantial impact on second-home tourism. As of 2000 11 percent of the world's population was 60 years old and above. By 2050 that figure is estimated to rise to 20 percent.

Particular types of tourism geared toward retirees, such as recreational vehicle cruising, should continue to grow in popularity. But second homes that go on to become permanent retirement homes may also become increasingly important in tourism-development strategies, researchers say.

Don't Miss a Discovery

Here Comes The Neighborhood

2007-05-24T02:50:00.001-07:00

Around Araby Bog, A Suburb Rises From the Ashes

By Lynne Duke

Washington Post Staff Writer
Tuesday, December 21, 2004; Page C01

Patricia Stamper's long thin braids swing across her chest as she hikes through mucky soil. She's heading toward the rare magnolia bog she's spent six years fighting to save.

"In the winter, it's not much to look at," she says apologetically. The sweet bay magnolias aren't in bloom. The three-foot-tall cinnamon ferns have gone dormant for the season, along with the panoply of flora that flourishes in this rare pristine ecosystem in rural Charles County known as Araby Bog.

Stamper, 66, a Navy mathematician, steps gingerly. Her horse, a chestnut named Fancy, kicked her and shattered her right elbow several weeks ago and she is recovering from surgery to repair her arm. She has to be careful not to stumble.

"There's the sphagnum moss," she says suddenly, pointing to a bright green patch growing along the bank of a stream that delivers clean water into Mattawoman Creek and the Potomac River.

And just beyond the stream, up a hill and through the trees deep in these woods near Indian Head, the reasons for this field trip are visible. Stamper wants to show how close to the bog the new houses are being built, and how certain is the bog's ultimate demise.

But far more than the bog is endangered, she believes. With 500 homes set to be built in subdivisions called Hunters Brooke and Falcon Ridge, the new traffic, the new people, the new noise all will conspire to rob this region of its tranquillity, its slow country life. Not to mention lowering the water table, which Stamper fears could affect individual wells like her own. Hunters Brooke is just a couple minutes' drive from the 52 acres where Stamper and her husband, John, live in a small bungalow-style house. She especially bemoans the light pollution that will obscure the stars at night.

"It's heartbreaking, the damage to the community," Stamper says. "A way of life is being destroyed."

Up the hill from the bog, though, the view of this region is different. There, in his brand-new home with its soaring foyer, its 33 windows and its high-end kitchen, Sylvester Kelley putters about, arranging his new life. The Christmas tree is up, the houseplants set in the windows, the family photos arrayed on a shelf.

Kelley's doing what suburbanites do everywhere. When he moved in on Nov. 30, he staked his claim in an area sure to grow and sure to appreciate in value once commercial development catches up with the residential.

Kelley, 56, doesn't know Stamper. In fact he knew virtually nothing about the region or its environmental controversy -- until the fires of Hunters Brooke put this obscure community in the national news and exposed the clash of values between the region's old-timers and its newcomers.

The old-timers' frustrations are understandable, says Kelley, an information technology specialist for a defense contractor.

"They have a cause to fight," he says.

Trouble is, "It's a juggernaut effect," he says with a slow drawl. "You can fight all you want, but you're going to get bowled over. . . . It's a way of life. That's just the way it is. Money has power."

And the bog, he says, isn't something he's given any thought to

The Condemned

2007-05-24T02:49:00.000-07:00

News: In Ohio, and across the country, homeowners are battling cities and developers conspiring to seize their property.

By Gary Greenberg

From his office at the top of Rookwood Tower, the seven-story, glass-and-steel building that his family’s real estate company built, Jeffrey Robert Anderson Jr., or J.R. as he is known here in Norwood, Ohio, can easily survey his empire. Directly below the tower and its 185,000 square feet of professional and financial services offices is Rookwood Pavilion, 23 acres of shopping and eating. A little farther to the left is Rookwood Commons -- not, Anderson advises me, a shopping plaza, but a "lifestyle center" containing a Gap, Ann Taylor, and 46 of the other usual suspects. This former brownfield, abandoned when a machine tool factory left Norwood, is now the premier shopping destination in Greater Cincinnati, if not all of Ohio, according to anyone around here that you ask. It’s an impressive sight, and perched high up in his well-appointed office with its sculptures and paintings and enormous glass-topped table, you might believe that this tall and fit 32-year-old with flaxen hair and bright blue eyes rules over all that he sees, or at least all that lies this side of the interstate.

And he would, were it not for the 13-acre, triangular spit of land directly below the tower. There, under the spruce and maple trees, are the asphalt-shingled roofs of a tidy neighborhood of modest houses. Bounded by the Cincinnati city line to the east and Rookwood to the south, and cut off from the rest of Norwood by an interstate highway, these 97 homes and small businesses are glaringly out of place, a mid-20th-century remnant amid all this 21st-century glitz. They’re also in Anderson's way. He wants to expand the Rookwood complex, but he has to buy and raze all these houses first, and while most property owners have eagerly accepted his offer to buy their houses at a premium price, five have refused. And so the $125 million-plus project, known as Rookwood Exchange, slated to be under construction by now, is at a dead standstill.

But Anderson has an ace up his sleeve. At his behest, and using his money, the city of Norwood has invoked its powers of eminent domain -- the right, granted by the Takings Clause of the Fifth Amendment to the Constitution, of a government to seize private property and turn it to public use -- to condemn a neighborhood and order residents out of their homes. Norwood is not the first city to act as a real estate broker whose offer can’t be refused, nor is Anderson the first businessman to benefit from this kind of largesse. A 1954 Supreme Court decision stating that the economic benefits of private development are a legitimate "public use" has forged an unholy alliance between cities strapped for cash and entrepreneurs promising economic bounty. (Anderson, for example, forecasts that Rookwood Exchange will net Norwood, a city with an annual budget of $18 million, between $1.5 and $3 million in annual taxes.) Struggling cities have placed their urban renewal hopes in the hands of developers like Anderson, who in turn rely on governments to assemble the parcels for their projects.

According to the Institute for Justice (IJ), a public-interest law firm, this is a growing trend. The institute analyzed eminent domain cases between 1998 and 2002 and found more than 10,000 instances where local governments had attempted to use a power once reserved for indisputably public projects like highways and railroads to obtain properties for private development projects such as box stores and golf courses.

No properties are off-limits -- working-class communities, ski chalets, and one-tenth of San Jose, California, have all been targets of condemnation proceedings on behalf of enterprises as varied as casinos, Costco, and the New York Times -- and no one has yet been able to thwart this newly privatized version of eminent domain. But by litigating against what it calls "eminent domain abuse," the IJ has succeeded in creating enough disarray in state courts to achieve its ultimate goal: convincing the Supreme Court to revisit the issue. This spring, for the first time in 50 years, the court will address the parameters of eminent domain, and the institute hopes the justices will rein in the private use of what the court itself once called government’s "despotic power."

"It was the day before Mother’s Day in 2002," Joy Gamble says. "They said they were going to build this fabulous project, and we were going to be gone. The roof fell in." The Gambles, who have lived in Norwood their entire lives, made an immediate decision. They weren’t selling, no matter what price Anderson was paying. "And start life all over again?" Carl adds. "We started here, we raised two kids here, we finish up here."

"Here" is the Gambles' two-story stucco home a few doors up tree-lined Atlantic Avenue from its terminus at the I-71 off-ramp. An American flag is planted by the brick front stairs, next to a hand-lettered sign that says, "IF YOU WANT THIS PROPERTY YOU SHOULD HAVE BOUGHT IT IN 1969." Inside, a hunting supply catalog sits on the coffee table, a Ronald Reagan calendar hangs from the kitchen wall, and vivid tapestries and paintings of stags and partridges give the overall effect of Field & Stream on acid. The Gambles, who won’t give their ages ("I forgot," says Carl; "I don’t tell," says Joy), appear to be in their 70s, and they speak in clipped sentences inflected with the local twang. "The first time we had contact with these people," Joy tells me, "[Anderson] wanted to meet with us. I said, 'We don’t want to sell.' He said, 'Thank you.' I said, 'You're welcome.' I hung up. Very nice." Joy goes on to list several other unsuccessful attempts, noting that Anderson’s people were always extremely polite.

But what the Gambles didn't know was that in January 2002, before he called them or any of their neighbors, Anderson had asked the City Council to undertake an urban renewal study, the prerequisite to condemning properties. "I figured we wouldn’t have to go through with it," Anderson says. "Just pass the urban renewal study and get things rolling." When he built Rookwood Tower back in 1997, Anderson had easily convinced the city to authorize such a study -- although he was ultimately able to assemble the necessary properties on his own. But in 2003, three years after he was indicted for corruption, the longtime mayor -- whom Anderson had given $23,000 in campaign contributions ("an astronomical sum around here," says one city official) and an undisclosed amount toward legal fees -- resigned. The council, perhaps eager to seem less cozy with its largest private taxpayer, had earlier told Anderson "to go out and pound the doors, go assemble as many houses as possible," he says. "Once I’m completely at a stalemate, then come back and discuss urban renewal."

While Anderson was going door to door in the early summer of 2002, so was Joe Horney, a 35-year-old construction manager. Sitting on the Gambles' couch, bouncing his two-year-old daughter on his lap, Horney proudly recounts how he used an inheritance to buy a two-family house across from the Gambles when he was 21. When he heard the news, he says, "I decided to go out and meet the neighbors. I found out from a lot of people that they were perfectly happy here, they'd like to stay. So we started a petition." At first, about half of the homeowners vowed not to sell. But in September, Anderson and his partners announced their terms: They'd buy everyone's house at a 35 percent premium over its fair market value, but only if they had all the neighbors under contract. If any residents held out, the developers would ask the city to condemn those properties, and a jury would decide the price. Throughout the fall, many of Horney's erstwhile allies signed contracts. In the meantime, Anderson eliminated from his plans a 28-house section of the neighborhood in which resistance was most concentrated, and by year’s end, with 5 of the remaining 69 owners still refusing to sell, Anderson had his stalemate -- in no small part, as it turns out, because condemnation had been in the air all along. "Where I made my decision is when eminent domain was threatened from day one," says Horney. "Once they threatened my rights, my decision was made."

The City Council authorized the urban renewal study, which Anderson paid for, in April 2003. Citing certain facts -- small driveways, narrow streets, lots that don't conform to current zoning regulations, houses that are more than 40 years old, a neighborhood subject to all the light and noise and traffic that progress (much of it Rookwood-related) has brought -- the study declared the neighborhood blighted and thus eligible to be seized, emptied, and razed.

Standing in the Gambles' tranquil back yard, with its lilacs and bird feeders, it's hard to understand how anyone could think this property was blighted. Horney points out that by the study's criteria, nearly anyone's home could be taken by the government. "You could call the White House blighted because it's over 40 years old, it's got a lack of parking, it's surrounded by commercial development. I'm sure there is noise. If you tore it down and put in a big office building, certainly it would generate more taxes than Mr. Bush living there." The City Council proceeded to condemn the five properties not under contract with Anderson. According to Mayor Tom Williams, they took this action reluctantly, partly to secure tax revenues for the city. "I was a cop for 34 years, got shot once and shot people twice," Williams says. "It's the same with this thing. You hate to pull the trigger, but sometimes it’s a necessity."

When Institute for Justice lawyers Scott Bullock and Dana Berliner first visited Norwood in December 2002, they were pleased with what they saw: "a classic mixed-use neighborhood, in perfectly fine condition," as Bullock puts it. That boded well for the institute -- which Bullock describes as an "unabashedly libertarian" organization and which gets much of its funding from wealthy opponents of big government like energy magnates David and Charles Koch -- and its overall goal of reversing what it sees as a disastrous half-century of eminent domain jurisprudence.

Governments have always taken land on behalf of private interests; owners of mines and railroads relied heavily on condemnations for their rights of way, which were granted because, as one Pennsylvania court put it, "the necessities of a great public industry, which although in the hands of a private corporation, [serve] a great public interest." But in Berman v. Parker, a 1954 case, the Supreme Court ruled that the District of Columbia could seize a fully functional store in a blighted neighborhood on the grounds that, as Justice William O. Douglas wrote in the unanimous opinion, "It is within the power of the legislature to determine that the community should be beautiful as well as healthy, spacious as well as clean, well-balanced as well as carefully patrolled." It was not up to the courts to insist "that public ownership is the sole method of promoting the public purposes of community redevelopment projects." Legislatures, in other words, were free to determine -- as the Norwood City Council did -- that one private use of a property was better for the overall community than another, and to use eminent domain to enforce this finding.

According to the IJ’s Berliner, the Berman decision has devolved into a license for cities to "rent out" their eminent domain powers to private developers, with bogus blight designations providing the legal cover. But Jason Jordan, a government affairs director at the American Planning Association, sees the decision as underpinning the "hottest" trend in urban renewal: replacing economically obsolete neighborhoods with large-scale, tax-generating developments like Rookwood Exchange. "Eminent domain is an important tool for communities interested in revitalizing themselves," Jordan told me, and, according to Jeffrey Finkle, head of the International Economic Development Council, it's also a needed tool for reducing sprawl. "Unless we want to pave over all the land outside cities, we have to be able to do these projects inside the urban ring. How can we reposition cities if they don’t have the power to acquire private land?" The ability to team up with developers is indispensable to this agenda, Finkle adds. "Communities have to respond to market opportunities," he says. "If you have a developer willing to invest millions of dollars, it’s important to make that happen."

Rick Dettmer, who runs Norwood’s one-man municipal development office out of the basement of City Hall, says this is precisely why Norwood couldn't turn Anderson away. "The reality is that you need to rely on developer interest in order to facilitate projects. We're not paying for this party." If he were, Dettmer says he might throw it elsewhere -- perhaps in Norwood's decaying downtown, less than a mile from the Rookwood complex. But Norwood, which has suffered two decades of factory closings, and which has a $1.5 million budget deficit, desperately needs this party, wherever it is held.

Many American cities are in a similar predicament, and in the wake of Berman and related state and federal court decisions, cities and entrepreneurs have worked out an elaborate courting ritual in which local governments offer up their eminent domain authority while developers tout the economic benefits of their projects to the electorate. "All the developer has to do," says the IJ’s Bullock, "is to convince the city that it’s good for them and that he will pay for it, and the city will start taking away people’s property." He adds that cities often offer more than condemnations. "Eminent domain is part of a whole set of incentives -- tax breaks and deferrals and other public subsidies -- that add up to massive corporate welfare. Often the numbers fail to live up to expectations. Jobs don't materialize or the economic benefits don’t outweigh the subsidies or the drain on public services that the development creates." When this happens, Bullock says, cities are left holding the bag.

The IJ took on its first eminent domain case in 1996, winning a favorable ruling for an elderly homeowner who refused to sell her Atlantic City property for a Donald Trump casino. "After that decision, we were swamped with phone calls," Bullock recalls, "and we started to think that courts might be willing to revisit this issue." The IJ has since taken on several cases nationwide, and saw Norwood -- with its unblighted neighborhood, its developer-driven condemnations, and its questionable public use -- as another opportunity to illustrate to a court how wrongheaded the private use of eminent domain is. An Ohio judge, however, was unswayed, ruling in June that although the neighborhood was not blighted, it was "deteriorating," and on these grounds, Norwood could go ahead and condemn the holdouts' properties; they are appealing.

In the meantime, a series of jury trials will decide the value of the five condemned properties. (In September, in the first of these trials, Horney’s house was valued at $233,000, money that, he says, "I hope I never see.") But developments elsewhere might make these trials irrelevant. In August 2004, the Michigan Supreme Court invalidated its 1981 landmark Poletown v. Detroit decision, which had determined that "one entity's profit maximization contributed to the health of the general economy." Stating that "Poletown's 'economic benefit' rationale would validate practically any exercise of the power of eminent domain on behalf of a private entity," the court refused to allow Wayne County to condemn land for an industrial park. "State courts from Nevada to Connecticut have relied on Poletown in upholding condemnations," Berliner said. "Now the same case will work for our side."

Add this case to those roiling communities across the country (see "Doing Developers' Dirty Work," page 44), and you have the kind of confusion in lower courts that begs for clarification from the U.S. Supreme Court. And indeed, shortly after the Poletown decision, the court agreed to hear another IJ case, in which the city of New London, Connecticut, condemned an unblighted neighborhood in order to make way for a hotel and condominium complex. Bullock hopes the Supreme Court will revisit the scope of the Berman decision, and rein in the privatization of eminent domain.

Out here on Edwards road, yellow signs bearing messages like "HELD HOSTAGE" and "WE SUPPORT ROOKWOOD EXCHANGE" sprout like dandelions from front lawns, and a king-size bedsheet banner hanging from Sandy Dittoe's pink stucco one-story declares, "64 OF 65 RESIDENTS WANT OUT. I AM ONE OF THEM." Dittoe bought her house for $82,000 seven years ago, and she's almost completely rehabbed it since. In 2002, speculating on Anderson's plans, she bought a house around the corner, which she rents out. When Anderson offered her $175,000 for each property, "it was a godsend," she told me. "I was thrilled." She began to make plans to move and to pay off the loan for her Northern Kentucky nightclub. But she has to wait for Anderson to make deals with all her neighbors before she'll receive a penny.

In the meantime, Dittoe's in limbo -- a maddening situation that she blames on her holdout neighbors. "Sure I'm pissed. They're screwing everybody. I've been stuck in a house for two years. There's no point in putting any more money into it, but I still have to live here," she says, pointing out the unfinished trim in her kitchen and the place where she left off putting purple paint on a bedroom ceiling. Her neighbor, Bill Pierani, a part-time security guard for the Cincinnati Reds, agrees. "We'd have been out of here years ago if it wasn’t for them."

Pierani and Dittoe are glad to show me evidence of "blight": the streaks of grime in eaves; an overgrown back yard, home to rats and snakes; the foundations cracked, they say, by the heavy truck traffic; the "foot traffic" and the "element" it brings in; the guys -- "I won’t tell you what color they were," Pierani says -- who broke into someone's house. They point out the oil change place and the muffler shop down the street and describe how they've long wanted to get away from these nuisances -- although there's little evidence that they or their neighbors tried to sell their homes or otherwise flee the neighborhood before Rookwood Exchange came along. Pierani compares the neighborhood, in which he has lived for nearly all of his life, to the cancer he once had. "The job is to go in and cut it off completely. Not to keep hacking at it."

At a meeting the previous night, the residents' impatience turned on Anderson's lawyer, who assured them that the end was in sight. This statement left resident Walter Sims hopping mad. "That lawyer pissed me off because he stood up there and misled these people," Sims, who is settled into his rocker on the front porch, says in his Kentucky drawl. "He knows these people" -- he points to a holdout's house next door -- "ain’t gonna ever sell to him. But he’s relying on the city to do it for him in court. And he knows that until all these appeals are resolved, they can't do nothing. You know how slow the judicial system is? It takes them months to wipe their ass."

But the residents reserve most of their seething fury for the holdouts, and when Pierani says, "Twenty-five years ago, there would have been a homicide by this point," it's not clear if he's nostalgic or relieved. When Sims says, "I think people are mad and disgusted because they ain't got their money. Why haven't you done something by now to get us the money?" you feel how ugly things might get. And when a man smoking a cigarette on his porch first refuses to talk to you because "the papers always get this story wrong," and then calls you back to say, "Wait a minute. You can quote me on this. Fuck the Gambles. Yeah. Fuck the Gambles, and throw Joe Horney in there, too," you're pretty sure things already have.

In this kind of atmosphere, it's no surprise that the residents don't believe that the Gambles and the others are standing on principle. Explanations vary -- some think that they're angling for a better price, others that they're just stubborn -- but most people seem to agree with Dittoe's assessment that "this project is going to benefit everyone, all the residents here and the whole city." She adds, "There's more to it than just what these people want." But whatever NIMBY concerns may have motivated the holdouts in the first place, they have become galvanized by the large-scale implications of their battle. "What I want to protect is not just myself, but virtually everyone else in the USA from having their constitutional rights undermined," says Horney. "I mean, this is the land of the free and the home of the brave. We're allowed to go out and buy property, and that's being taken away." As they dig in for the appeals, it's clear that these folks are in it for the long haul, that, even with his rented eminent domain powers, Anderson has a lengthy wait before he can extend his empire into this neighborhood. "He can have the house when we're on our deathbed," says Carl Gamble. "Not a minute before."

When property lines run through the front door

2007-05-24T02:41:00.000-07:00

The slowly shifting ground in the Berkeley hills area means the land that's yours today may be your neighbor's tomorrow

Patrick Hoge, Chronicle Staff Writer

The land under Robert Mathews' house in the Berkeley hills has slid about 20 feet since the structure was built in 1916. But property lines do not move, which means that today half of his house seems to sit on his neighbor's land.

"I figure the property line runs right through the middle of the front doorway,'' he said.

Three major landslides in Berkeley and neighboring Kensington are creating a dilemma for residents who, like Mathews, live in the well-populated neighborhoods.

When a home, or a driveway or a deck, slips onto a neighbor's land, does it become the neighbor's property?

Public officials in the East Bay have tried to stay out of the disputes, some of which have landed in court, but experts say they are likely to face increasing pressure to decide whether property lines should be redrawn when the stuff inside them moves.

Mathews didn't worry about the issue when he purchased his home at 1062 Keith Ave. in 1999. The area on his side of the street is part of the Keith Slide, which affects scores of neighboring properties.

But Mathews learned recently of two bitter property-line disputes just blocks away that city records show are in a landslide hazard area. In one case, an arbitrator ruled that although the land had moved, a survey determined ownership -- and thus a couple of feet of disputed earth belonged to the downhill neighbor.

"Now I'm worried,'' said Mathews. "What is that going to do to my (home's) resale value?''

Scientists have mapped and studied slow-moving slides in California for decades, and there are thousands in the Bay Area, said Richard Pike of the U.S. Geological Survey. Most move only as a result of moisture or disturbance.

In June, an international team including UC Berkeley scientists reported that large tracts of East Bay land typically move between 5 and 38 millimeters a year.

Land movement in Berkeley has wrecked home foundations, cracked walls and sidewalks, buckled streets and fences and frequently ruptured water lines. Some homes stand abandoned, and others have been rebuilt with massive and deep foundations.

But the impacts on property lines in urban neighborhoods have been discussed very little, Pike said.

"I'm surprised nobody figured this out earlier,'' he said. "As more people build in the hills, you're going to see this problem get larger and larger and larger.''

Howard Brunner, a consultant to the state agency that regulates land surveyors, said there is no state law specifically designed to address property-line disputes where the ground is slowly moving.

"Sooner or later, they're probably going to come up with some law for this situation, but not as yet, that I'm aware of anyway,'' he said.

According to Alan Kropp, a Berkeley geotechnical engineer, there are two major slides in Berkeley -- the Keith Slide and the Thousand Oaks Slide -- and one to the north in Kensington called the Blakemont Slide. Hundreds of homes are in the slide zones, which straddle the Hayward Fault.

In Kensington, Laurence Ellam said his neighbor in 2002 removed a gate, two trees and part of a brick walkway that his father built when he was 5 years old, and then built a new walkway based on the results of a new survey.

Ellam, 58, who with his mother lives at 1 Kerr Ave. on a slope with a stunning view of the Bay, said he spent $10,000 consulting an attorney who said there was little he could do.

Other residents in the area, which was developed primarily in the 1950s and 1960s, tell similar stories of changing lot boundaries.

Everett Moran, a veteran land surveyor in Berkeley, showed two decades ago that numerous houses in the Keith Slide area were crossing property lines.

In an attempt to facilitate the redrawing of boundaries, Moran in 1983 commissioned aerial photographs and superimposed property lines, and the result was dramatic. But getting agreement among all the property owners proved impossible. Richard Schwarzmann inquired about getting a survey of his property on the Keith Slide at 1170 Arch St. before he bought it in 1988, but a surveyor told him it wouldn't do any good because the structures had probably moved.

Schwarzmann shrugged it off and built a house on one end of the property and consolidated and modernized two early 20th-century cabins at the other end.

In 1996, Peter and Ann Coney of Walnut Creek bought the two-flat apartment building next door and applied to the city to add significantly to the back of the building.

Schwarzmann objected, but the Coneys won approval from the City Council. Along the way, neighbors started arguing over the location of Schwarzmann's southern property line, and whether two of his structures were over the line.

After several heated exchanges that included police being called, Schwarzmann sued the Coneys, seeking a court ruling that the land was his. It didn't go that way.

In binding arbitration, retired Contra Costa County Judge Richard Patsey in October ruled that a 2003 lot-line survey marked the edge of Schwarzmann's land, ordering him to pay nearly $41,000 to help build a new retaining wall and fence, among other things.

"I think the whole thing is absurd,'' said Schwarzmann. "The judge said I should go to my uphill neighbor to get my property from them. I don't want to do that.''

The Coneys and their attorneys could not be reached for comment.

A nearby resident, Howard Menashe, built a partial fence down the middle of a driveway that crosses his land -- even though his uphill neighbors, Linda Aurichio and Ruth Ellen Pearce, claim they have a deeded right to use the driveway to reach a back lot.

Aurichio and Pearce contend in court documents that Menashe built the fence and a concrete barrier in 2003 to block their access after a survey showed that the land had moved significantly downhill -- 5 feet since 1946 alone.

Menashe's attorney said the dispute has nothing to do with land movement, but Aurichio and Pearce's lawyer said that is exactly the issue.

Philip Daunt, Schwarzmann's attorney, tried to argue that such cases should be decided using the Cullen Earthquake Act, a state law passed in 1972 to allow redrawing of property lines. The law was enacted after an earthquake shifted numerous lot boundaries simultaneously in the San Fernando Valley.

The Coneys successfully argued, however, that while the act specifically mentions landsides, it was written to address large, sudden disasters,' not individual disputes arising out of continuous, ongoing occurrences like a slow- moving landslide.

In the past two years, Berkeley officials have started routinely requesting lot surveys from residents seeking to do additions or other modifications to their homes.

City planning director Dan Marks said it was unlikely that officials would allow modifications to a structure that crossed a lot boundary, or allow such a structure to be rebuilt on the same footprint if it is destroyed.

Schwarzmann and others wish that the city or some other government entity would craft an overarching solution to the problem of slow-moving land. Although the arbitrator's decision settled the dispute involving his property for now, the land continues to slide.

Assistant City Attorney Zach Cowan said the city has no authority over property line issues.

But retired Alameda County Superior Court Judge Roderic Duncan, who lives two doors down from Mathews on Keith Avenue, said he has contacted a friend who works for a committee in the state Legislature in hopes that someone there will get interested.

"It's a giant problem,'' Duncan said.

Loophole Pays Off on Upscale Buildings

2007-05-18T18:16:00.000-07:00

By Joe Stephens

Washington Post Staff Writer

First of two parts

Two years ago, after leaving her job as Vice President Cheney's spokeswoman to join a lobbying firm, Juleanna Glover Weiss bought a new house. Weiss and her husband, lobbyist Jeffrey Weiss, settled on a century-old, 10-bedroom home sandwiched between foreign embassies in Kalorama. Today it is one of the most prominent party venues in Washington.

The Georgian-style mansion came with 11-foot ceilings, vintage chandeliers, inlaid hardwood floors -- and a $1.5 million price tag.

After closing on the house, the Weisses signed papers promising that they would not alter its outward appearance without first obtaining permission. They "donated" that pledge, known as a historic facade easement, to a nonprofit preservation trust. That allowed the Weisses to seek a federal income tax write-off for the estimated cash value of the gift.

Easement donors in D.C. usually write off about 11 percent of the value of their homes. That means owners of a $1.5 million mansion can claim tax breaks of $165,000 or more.

Such tax deductions are increasingly common although the District already bars unapproved and historically inaccurate changes in the facades of homes in the city's many historic districts. As a result, easement donors largely are agreeing not to change something that they cannot change anyway.

"It really is money from the taxpayer for nothing," said lawyer John D. Echeverria, director of the Georgetown Environmental Law and Policy Institute. "People are absolutely delighted -- and astounded -- that the federal government would send them $50,000 and more for doing nothing."

The Weisses are among hundreds of affluent Washingtonians who have taken part in the once obscure but rapidly growing program, created by Congress 28 years ago with the goal of preventing developers from ravaging historic streetscapes across the nation.

Before they bought their home, the Weisses already were well acquainted with the facade program. Records show that in 2000 they donated an easement on their previous home, which they purchased for $480,000.

Glover Weiss declined to comment, other than to say, "Washington is a beautiful, historic town, and I would like very much to have it remain that way for my children and grandchildren."

The tax deductions are supposed to represent the decrease in value of the property caused by the easement restrictions. Increasingly, though, the easements have become a way for owners of expensive houses to reap a windfall.

An analysis by The Washington Post of federal and local government data identified about 900 residential facade easements in Washington covering a total of 1,400 homes and condo units. Nationwide, the number of easement donations has been increasing rapidly, hitting about 700 last year.

Today, the average assessed value of residential structures covered by facade easements in the District is more than $1 million, the analysis showed.

The homes tend to be clustered in affluent neighborhoods in Capitol Hill, Dupont Circle and Georgetown. Most display brass plaques, many of them round and bearing a star, identifying the trust that holds the easement.

Homes enrolled in the program need not be architecturally striking. The houses also need not be especially antique -- homes built as recently as 1950 may qualify. And many preservationists say the easements may increase a building's value -- making the tax breaks unwarranted.

"They are giving up absolutely nothing," said former Treasury official Daniel Halperin, now a nonprofit tax specialist at Harvard Law School. J. Peter Byrne, a historic preservation specialist at Georgetown University Law Center, called the donations "bogus gifts" that have been supplying homeowners with "free money."

The increase in easements has been driven by the emergence of for-profit "facilitators" -- businesses that market the program and process the paperwork for homeowners, making the procedure quick and painless. In recent years, such companies and the nonprofit preservation groups that hold the easements have taken in millions of dollars for processing paperwork and monitoring the easements.

All those payments are underwritten by the tax breaks.

"Taxpayers are taking improperly large deductions for facade easements," Steven T. Miller, commissioner of the tax-exempt entities division of the Internal Revenue Service, warned appraisers meeting Oct. 22 in Washington. "The taxpayer can't give up a right to change the facade of a building if he or she doesn't hold that right in the first place."

'Perfectly Legitimate'

The rich, the famous and the merely well-to-do are joining the program in swelling numbers. Easement donors in recent years have included Sen. Christopher J. Dodd (D-Conn.), Sen. Kent Conrad (D-N.D.), film producer Sidney Ganis, Public Citizen President Joan Claybrook, National Public Radio host Steve Inskeep and New Yorker magazine investigative reporter Seymour Hersh.

"In my neighborhood, almost everybody has one," Hersh said. "If I remember, there was much hooting at us for not doing it."

Although public records do not establish whether donors actually took a deduction, tax specialists said it would be unusual to forgo the benefits. All donors who agreed to be interviewed acknowledged taking the tax breaks or planning to take them soon.

The exception was Dodd, who with his wife owns a three-story brick townhouse on Capitol Hill, assessed at more than $700,000. Dodd planned to take the deduction this tax season but is rethinking that decision after being contacted by The Post.

"We were using the best guidance of attorneys and accountants," said Jackie Clegg, Dodd's wife and a former vice chairman of the U.S. Export-Import Bank. "We'll reconsider and do the most appropriate thing."

Officials at nonprofit preservation groups contend that the easements serve a valuable purpose. Some are donated in areas where preservation laws are nonexistent or weak and enforcement spotty, the officials said. In cities with strict laws and enforcement, such as Washington and New York, easements act as an insurance policy, in case ordinances change or authorities fail to enforce existing law.

Not all the donations are identical. Some easements go beyond local ordinances by restricting changes to interior spaces and barring development on adjacent land. The easements also often restrict changes in subtle details, such as exterior paint colors, that are unaddressed or laxly enforced by local authorities.

"This is a perfectly legitimate program," said James M. Kearns, president of the National Architectural Trust, the nation's fastest-growing easement organization. "We are doing historic preservation and doing it extremely well, in my opinion."

Nonetheless, some homeowners who have profited from the program describe the tax write-offs as a waste of government funds. They asked not to be identified, for fear of attracting an IRS audit.

One homeowner, who is claiming a six-figure write-off for his Capitol Hill townhouse, described the program as "a boondoggle." Another, who is claiming a similar-size tax break on his Logan Circle home, said he had difficulty understanding why the "stupid" program exists.

"I was giving up nothing and getting a considerable amount of money in return," the homeowner said. "The government shouldn't allow it."

Last year, The Post began publishing articles examining tax deductions taken for donations of conservation easements -- deed restrictions added to land to preserve scenic vistas and wildlife habitat. The articles sparked investigations by the IRS and the Senate Finance Committee. More recently, their attention has turned to facade easements.

"The facade tax break itself makes it too easy for people to take a big tax deduction they don't deserve," Finance Committee Chairman Charles E. Grassley (R-Iowa) said in a statement to The Post. "I intend to take strong steps in the next Congress to end the abuses."

Also serving on the Finance Committee is Conrad, who lives nine blocks from the U.S. Capitol in a 96-year-old red brick house assessed at $597,000. In December 2000, Conrad donated a facade easement on his four-bedroom home to a trust in the District, property records show.

Conrad said through his spokesman, Chris Thorne, that although he could not recall exact figures, he believed his easement was appraised at 10 percent of the value of his townhouse at the time. After he was told of The Post's findings, Conrad said he believes the Senate should consider lowering the percentage donors may claim, perhaps to 5 percent. In view of the federal budget deficit, he said, lawmakers also should consider capping the amount that donors may deduct.

"The senator continues to believe there is strong support across the country for preserving historic properties, but it needs to be reformed," Thorne said.

Conrad is among many high-profile figures whose donations have helped make Washington the nation's leading city for such easements. At The Post, participants include Book World Editor Marie Arana and her husband, Pulitzer Prize-winning book critic Jonathan Yardley.

"In D.C., virtually the Who's Who has done this," real estate appraiser James D. Donnelly said. "Their lawyers and accountants are all looking at this, and they are all saying 'My goodness, it is for real.' "

There is no comprehensive list of homes with easements. But The Post's study shows that Capitol Hill has about 340, followed by Dupont Circle (290), Georgetown (250) and Cleveland Park (90).

Hersh, a Pulitzer Prize winner best known for his reporting on the My Lai massacre and the Abu Ghraib prison abuse scandal, said he donated an easement three years ago. He called the restrictions a "minimal intrusion" that did not affect how he used his Cleveland Park house, built in 1910 and assessed this year at $985,000.

Hersh said he made the donation primarily for the tax write-offs. There was "nothing illegal" about the deduction, Hersh stressed, or his accountant would have waved him off -- particularly given that he was audited repeatedly during the Nixon administration. Hersh said he could not recall how much he saved but described it as "a nice benefit to have."

"Of course," he added, "it isn't helping the Treasury."

Ganis, who splits his time between Hollywood and his native New York, said he donated an easement on his circa 1825 Federalist townhouse in west Greenwich Village. Ganis has worked as a senior executive at Sony, Columbia and Paramount Pictures, and has produced such films as the Adam Sandler vehicles "Mr. Deeds" and "Big Daddy."

Even though Ganis said his easement is no more restrictive than local New York preservation ordinances, "we get a nice, healthy tax deduction."

"It really is a good business decision," he said. "There aren't that many good, solid tax incentives these days, and this happened to be one of them. Lucky for us."

'It's a Paper Concept'

The tax breaks are available to owners of residential and commercial structures in designated historic districts or individually listed on the National Register of Historic Places.

The owner must find a nonprofit organization willing to accept the easement as a charitable donation. The nonprofit becomes responsible for monitoring the facade, approving changes and suing if it finds violations. The easements are attached to property deeds and remain there in perpetuity.

Property owners who live in historic districts generally begin the donation process by asking the National Park Service to certify their buildings as historic. Since 1996, the Park Service has received 1,632 such applications nationwide, according to federal data analyzed by The Post. All but eight requests were granted.

Although national in scope, the 28-year-old program first found traction in Washington, where preservationists mobilized in the late 1970s to protect the capital's rich architectural history.

One of the first local nonprofits to accept facade donations was the Foundation for the Preservation of Historic Georgetown, whose directors have included such prominent figures as former secretary of state Dean Acheson, former White House counsel C. Boyden Gray and Carolyn A. Fortas, wife of former Supreme Court justice Abe Fortas.

Following the Georgetown group into the business were the L'Enfant Trust, in 1978, and the Preservation Trust, in 1980. The organizations charged each donor a fee, which they described as a charitable contribution. The money was meant to establish endowments and underwrite the cost of annual facade inspections.

Beginning in 1998, facade easement donations increased dramatically. That surge coincided with the rise of for-profit facilitators, such as the Capitol Preservation Alliance. In Washington, the facilitators found lots of opportunity: 25 residential historic districts encompassing about 23,500 structures and 17 percent of the city's land area.

The program has proved popular because it provides money to everyone involved -- the facilitators, the nonprofits that accept the donations and the homeowners.

The size of the tax deduction is determined by appraisers who estimate how much the property value has dropped because of the easement restrictions. Owners generally may write off the value of their donation over as many as six years, offsetting as much as 30 percent of their annual income.

Homeowners typically claim tax deductions of 10 to 15 percent of their home's value, according to preservationists. Until earlier this year, an IRS guide suggested that easement valuations "should" fall in that range.

In Washington, easement promoter Tim Maywalt said, "I have never seen an appraisal come in at anything but 11 percent -- and I have seen 350 appraisals."

Maywalt and other easement promoters said courts in the late 1980s confirmed that such large write-offs are permissible. "That's just as crystal clear as can be," said Kearns, of the National Architectural Trust.

Some analysts, however, described the court rulings as contradictory, narrow and dated.

In one U.S. Tax Court case often cited as authorizing today's large deductions, the judges' ruling specifically warned donors that they were not automatically entitled to substantial write-offs.

"By this decision we do not mean to imply that a general '10-percent rule' has been established with respect to facade donations," the judges wrote in the 1988 case, Nicoladis v. Commissioner of Internal Revenue. "Valuation itself is still a question of facts and circumstances."

Halperin, the former Treasury official now teaching at Harvard, described the large tax breaks routinely taken today as "just crazy." He estimated the true value of the average donation as "pretty close to zero."

In fact, in pitches to prospective clients, some promoters of the tax deductions have undercut the argument supporting the large write-offs by stressing that the easements add few meaningful restrictions that would decrease market value. Those promoters include Maywalt, a contractor for the Washington-based Capitol Preservation Alliance.

At a seminar in January of this year in Washington, Maywalt emphasized in a talk to prospective donors that "prior approval of facade changes are already restricted in exactly the same way by the city's historic preservation review board." A tape recording of Maywalt's talk was provided to The Post by a participant.

The only difference, he said, is that the easements allow the trusts to review color changes and prohibit homeowners from allowing their houses to "fall down" from neglect.

Maywalt also told the property owners they would receive tax breaks for a drop in their property values but stressed that there would be no actual decline.

"It's a paper concept," he stressed on the tape recording. "The reality of it is that the property is going to continue to accrue in value. . . . Properties with easements have turned over one, two, three, four, five times. We have not seen any decrease in value."

Tom Branham, chief tax assessor for Washington, said his office has searched in vain for evidence of lost value, to determine whether property taxes should be reduced for the donors.

"We don't see any difference in value here between the homes that have the facade easements and the ones that don't," Branham said.

Writing last year in the Journal of Financial Planning, Steven McClain, co-founder of the National Architectural Trust, asserted that "the presence or absence of an easement is only a minor factor in the buying decisions of future purchasers."

Interviews with donors show the vast majority have no interest in altering the look of their homes, even if they could.

"I can't imagine anybody who would ever want this house would ever want to alter the facade," said Paul Sherrill, who donated an easement on the brick and limestone exterior of his Georgian Revival townhouse, off Dupont Circle. The home, assessed at $1.1 million, was featured in an eight-page photo spread in the September issue of Architectural Digest.

Some preservationists argue that the easements increase property values, by making neighborhoods well preserved and even more exclusive.

"The property generally becomes more valuable with the easement because buyers place a premium on the architectural integrity of all such properties in the community," Maywalt wrote in January in a Washington-based newsletter for financial planners.

The fact that easements are lucrative and painless puzzles potential donors. Kearns wrote recently in a newsletter for accountants that homeowners' initial reaction to the program was skepticism, "because the opportunity sounds 'too good to be true.' "

Kearns said in an interview that he knew of one easement that recently was valued at $1 million. In another recent case, he said, an easement on a New York commercial building was valued at $150 million; the tax benefits went to a partnership of about 35 people. He would not identify the owners.

Recent data on abuses in the program are scarce. But a 1984 IRS study examined 42 deductions taken for easement donations and determined that all but one appeared inflated, resulting in overvaluations totaling nearly $32 million. The study found that property owners generally overvalued their easement deductions by an average of 220 percent.

The report also found that the tax benefits had largely gone to "higher income" people and companies. Low-income families have difficulty paying for appraisals and coming up with the cash demanded by trusts, preservationists said.

"These tax deductions are only useful to people of great wealth or great income," George Mason University professor James D. Riggle said. He dismisses the write-offs as "tax deals for rich guys."

Advocates put familiar faces on housing need

2007-05-18T18:15:00.000-07:00

Next generation, local workers cannot stay

By Emily Shartin, Globe Staff

Bonnie Sims was running out of options.

The single mother of two wanted to stay in her hometown of Northborough. The town's high cost of housing had forced her to move in with her parents, but she knew that arrangement couldn't last forever.

''I like Northborough," said Sims, 35, who works as an office manager for her father's company. ''It's the town I grew up in."

''This is where all their friends are," she added, referring to her children.

Last year, a new housing development called Sunnyside Estates on Route 135 offered Sims what she was looking for -- a chance to own a home in Northborough at a price she could afford. Under a state law that aims to increase affordable housing by allowing builders to sidestep zoning restrictions if a quarter of the units are offered at below-market rates, four of the condominiums in the 16-unit development were sold for $125,000 apiece. Through a lottery, Sims was selected to buy one of them.

Local housing advocates are hoping people like Sims will help put a familiar face on the need for affordable homes in Boston's western suburbs, where the median price of a home in 2003 was $380,000.

Affordable housing advocates have teamed up with leaders in the economic development and building communities to hold a series of meetings throughout the region aimed at debunking what they call persistent misconceptions about affordable housing, and to show how a lack of affordable homes can affect the whole community. The next meeting will be held at 7:30 tonight at Bolton Town Hall. Another is scheduled for 4 p.m. next Thursday at Franklin Town Hall.

Sims is one of several local residents and officials featured in a video that will be shown at the meetings. The campaign has been organized primarily by the 495/MetroWest Corridor Partnership, an economic development organization based in Westborough, and the Boston-based Citizens Housing and Planning Association, which hopes to channel public awareness into the creation of 13,000 new homes across the area by 2010.

For many suburban residents, their introduction to the debate on affordable housing has often been a specific -- and controversial -- proposal for a development in their community. Sunnyside Estates, for example, was attacked by residents who were concerned about the development's density and potential traffic problems. But organizers of the new campaign say they hope people will begin to think about the issue of housing in newer, broader ways.

Lynn Sand, chief executive of the 495/MetroWest Corridor Partnership, said she prefers to think of affordable housing as ''workforce housing," because many of the people who are struggling with the region's home prices are teachers, police officers, or firefighters.

Westborough, for example, used to require that all firefighters live in town, said Chief Walter Perron, who also is featured in the video. When the town's housing prices started to increase, the rule was modified to include a ring of contiguous towns such as Shrewsbury and Northborough. When that rule, too, became difficult to abide by, it was expanded to include an additional ring of communities, Perron said in an interview. Westborough has lost applicants for firefighting positions once candidates learned about the residency requirement, Perron said.
'The housing market out here is just completely out of sight," he said. ''I don't think there's really a whole lot the town can do about it."

In the private sector, too, many employers have identified the high cost of housing in Massachusetts as a barrier to recruiting job candidates. That could ultimately force a company to relocate, Sand said, which would mean a loss of revenue to the town. It could also force established homeowners to face moving or losing their jobs.

''The haves can become the have-nots," Sand said.

Along with concrete hurdles such as the high cost of land and the lack of helpful zoning laws, housing advocates have said they are hamstrung by public misconceptions about what affordable housing is and for whom it is meant. The bleak image of a high-rise apartment is what many people conjure, they said, rather than the neatly appointed villages of condominiums that have been built recently in many communities.

Helen Lemoine, a former Framingham Planning Board member who is helping to organize the local meetings, said it is difficult for residents to recognize the need for more housing when they have been comfortable in their own homes for so long.

''The feeling has been that the need for affordable housing is overblown," Lemoine said. She came face-to-face with the realities of the local housing market when her daughter, a teacher in Framingham, had to move back home while searching for housing she could afford.

Under state guidelines, 10 percent of a community's total housing stock is supposed to sell or rent at below-market rates, and several communities in the region are still far from that goal. Less than 1 percent of Dover's housing is considered affordable, according to the state Department of Housing and Community Development. In Boylston, the number is 1.5 percent; in Sherborn, 2.35 percent.

But many communities are making progress toward the goal. Locally, both Westborough and Framingham have achieved the 10 percent mark, according to the state. Franklin is over 9 percent, and Lincoln and Marlborough are both over 8 percent. The community meetings will include some discussion of what communities are doing to increase their affordable housing stock.

''There's some good news out there," said Aaron Gornstein, executive director of the housing and planning association.

Bolton, Lincoln, Shrewsbury, and Stow are among about 25 communities that have state-approved affordable housing plans, which are intended to map out housing production.

Bolton is about to open a 28-unit apartment complex for residents 55 and older that will rent almost entirely at below-market rates, said Doug Storey, a member of the Planning Board and chairman of the town's affordable housing partnership. The town also has been presented with several proposals under the state's Chapter 40B law, Storey said.

Although residents have had concerns about some of those proposals, he believes Bolton has been proactive in raising awareness about the need for affordable housing.

Last hurrah?

2007-05-18T18:14:00.000-07:00

Home prices can't keep going up at double-digit rates, but that doesn't mean 2005 will be a bust.
December 7, 2004: 5:29 PM EST
By Jon Birger, MONEY Magazine

NEW YORK (MONEY Magazine) - If you live in a hot real estate market and you're buying or selling a home, or just perusing the Sunday classifieds and quickly tallying your growing net worth, you have to wonder: Can real estate keep going, or is this Nasdaq 5000 all over again? Our forecast: It'll keep going, albeit at a tempered pace.

Don't bet on further 20 percent gains in 2005. But don't bet on a collapse either. If price declines do occur, they may well happen where you'd least expect.

Even the housing bulls are no longer raging. The perennially optimistic National Association of Realtors predicts 5 percent gains on average this year.

Among the bears, count Yale University economist Robert Shiller, who foretold the March 2000 bursting of the stock market bubble in his book "Irrational Exuberance." "This is the biggest real estate bubble we've ever seen," says Shiller.

He expects widespread declines in home values, maybe not in 2005 but soon enough, because prices have become untethered from incomes: Median home prices are up 35 percent since 2000, while wages are up just 8 percent. Shiller is particularly worried about Southern California, where prices have doubled in three years.

Crazy expectations?

The biggest red flag may be homeowners' expectations. When Shiller and his research partner, Karl Case of Wellesley College, surveyed markets in Boston, L.A., Milwaukee and San Francisco in 2003, they found that the typical homeowner expected his property to appreciate 14.7 percent a year over the next 10 years. Now that's irrational exuberance.

But that doesn't mean the gains of recent years were nuts. They were simply the result of a long-term decline in interest rates that made home ownership more affordable. That brought into the market new buyers who in turn bid up prices.

The typical family today spends just 19 percent of household income on mortgage payments. That compares with 22 percent in 1990 and 31 percent in 1980 -- when mortgage rates averaged nearly 14 percent. Yes, mortgage rates are moving up from their historical lows, but not as much as bears had feared. And the outlook is for modest interest-rate increases at most.

Case, in contrast to his partner, doubts that home prices will fall. The major markets are overpriced and demand will soften, he concedes, but he thinks the correction will take the form of a long period of flat prices, not declines.

His rationale? "Sellers hold out." If you're sitting on a 5.5 percent mortgage at a time when new mortgages cost 7 percent, waiting out the market makes sense if you're not under pressure to move.

"Of course," says Case, "all bets are off if things get rocky on the economic side."

Unemployment is the real risk factor

As Case sees it, unemployment, not overexuberance, is real estate's biggest risk factor. What doomed Houston 20 years ago wasn't so much wild speculation -- though there was plenty of that -- but the cratering of the Texas oil industry. In California, the 13 percent decline in home prices between 1990 and 1995 coincided with a 35 percent jump in the unemployment rate.

All this is why Freddie Mac economist Frank Nothaft thinks today's most vulnerable markets are not in high-priced coastal areas but in states like Ohio and Michigan, which are losing manufacturing jobs.

Bottom line: Don't buy if you're just looking for a big score. But don't be paralyzed by fear of a crash. The real estate market is no Nasdaq. And your house is no Net stock.

Subprime loan market grows despite troubles

2007-05-18T18:13:00.001-07:00

By Sue Kirchhoff and Sandra Block, USA TODAY

WASHINGTON — Bad credit is good business.

Subprime lending — higher-interest loans to consumers with impaired or non-existent credit histories — has been the fastest-growing part of the mortgage industry.

Subprime mortgage activity grew an average 25% a year from 1994 to 2003, outpacing the rate of growth for prime mortgages. The industry accounted for about $330 billion, or 9%, of U.S. mortgages in 2003, up from $35 billion a decade earlier.

The growth has attracted accolades and controversy. Federal Reserve Governor Edward Gramlich has said subprime lenders helped push homeownership to record levels, making it possible for a growing number of minorities to buy homes. But he also raises questions about high delinquency rates.

And dozens of states have passed laws since 1999 to crack down on predatory lending — loans with high fees, excessive interest or other unaffordable provisions — clustered in the subprime sector.

Still, there's no doubt subprime lending is now a Main Street, mainstream business with sophisticated marketing that promises to deliver the American dream of homeownership, or lower the monthly burden of all-too-American consumer debt.

• Ameriquest, one of the nation's biggest subprime lenders, is paying an estimated $15 million to sponsor February's Super Bowl halftime show and became a season-long NFL sponsor. The California-based firm has naming rights to the Texas Rangers' baseball stadium, Ameriquest Field. The efforts are part of a broader move to expand into prime financing.

• Home 123, a subsidiary of New Century Financial, has home improvement guru Bob Vila as a spokesman. New Century Financial's total revenue was up 87% in the third quarter from a year ago. The company expects $40 billion or more in loan volume this year.

• Citigroup, Wells Fargo and H&R Block are among old-line companies that have subprime entities. Major bond firms including Morgan Stanley and Lehman Bros. have a stake in the industry. That's because the bulk of subprime mortgages are packaged into bonds that are resold to investors.

SUBPRIMES FLOURISHING

Subprime loans are increasing in volume and value, particularly in densely-populated states like California and New York. Nationwide, subprimes account for about 10% of all mortages. Share of mortgage loans in 2003 that are subprime:
Rhode Island	14%
California	13.3%
Nevada	12.9%
Florida	12.8%
Tennessee	12.6%
Texas	12.3%
Utah	12.2%
New York	11.5%
Oklahoma	11.2%
Maine	10.6%
Delaware	10.5%
Connecticut	10.2%
Mississippi	10.2%
Alabama	9.9%
Arizona	9.9%
Nation	9.9%
New Hampshire	9.6%
Missouri	9.5%
Ohio	9.5%
South Carolina	9.3%
Indiana	9.1%
North Carolina	9.1%
Louisiana	9.0%
Oregon	9.0%
Colorado	8.9%
Georgia	8.9%
Kentucky	8.9%
Hawaii	8.7%
Illinois	8.4%
Kansas	8.3%
Michigan	8.3%
Pennsylvania	8.2%
Maryland	8.1%
New Mexico	8.1%
Massachusetts	8.0%
Minnesota	8.0%
Nebraska	8.0%
New Jersey	7.9%
Idaho	7.7%
Washington	7.7%
Wyoming	7.5%
Iowa	7.2%
Virginia	7.2%
Montana	7.1%
West Virginia	6.6%
Arkansas	6.4%
South Dakota	5.3%
North Dakota	5.2%
Wisconsin	4.6%
Alaska	4.5%
District of Columbia	4.5%
Vermont	4.5%
Puerto Rico	2.8%
Source: Mortgage Bankers Association

Amerisave, an online mortgage lender, moved into subprime lending about a year ago, after rising interest rates reduced demand for refinancing among borrowers who qualify for prime mortgage rates.

"We found there was a huge opportunity still in the subprime or less-than-perfect credit area," says David Herpers, chief marketing officer for Amerisave. "Many of these consumers were not able to take advantage of the low rates in the last few years. Our estimates are a third of U.S. citizens fall into this category."

Amerisave has 30 loan officers dedicated to subprime lending. They plan to increase that number to 200 by the end of next year. Amerisave estimates subprime loans will account for at least 50% of the company's total revenue within the next six to 12 months.

Subprime lenders are expected to fare better than the prime lenders as interest rates rise, because their borrowers tend to be less rate sensitive.

Higher-priced products

Even as they push states to pass tougher predatory-lending laws, some consumer groups are working with subprime lenders to deliver credit to borrowers who otherwise could not get financing. And the industry is adopting best lending practices or funding consumer awareness and education campaigns.

Some remain concerned, however, that the industry is selling people higher-priced loans they may not need or be able to handle.

"There are a lot of these people who got the subprime who, if they had shopped more aggressively, would have gotten the prime loans," says Jim Campen, a research associate at the University of Massachusetts Gastón Institute, who works with the Massachusetts Community and Banking Council.

Subprime clients are increasingly being marketed products — zero-down loans, interest-only financing and home equity loans as high as 125% of a home's appraised value — that allow them to buy or borrow, but at an elevated risk.

Like the credit card industry, mortgage companies are pushing their product through television advertising, pop-up ads on the Internet and mailings. While the industry touts its efforts at consumer education, a message of its sales pitch is speed.

"Even if other banks may have turned you down. We don't care — we want to get to know you," says a mailing from Home 123. "We'll get your loan application processed instantly, privately and anonymously over the Internet."

The default rate for subprime loans historically has been well above that of prime loans. The Mortgage Bankers Association says the numbers are improving, with 2.4% of prime loans past due in mid-2004, compared with 10.04% of subprime loans. Those subprime past-due figures are down from 15.67% in mid-2002. Still, 4.61% of subprime loans were in foreclosure in mid-2004, above the 0.49% prime figure.

Growth of the industry

The subprime market has grown for a number of reasons.

Deregulation allowed cross-fertilization between banks and financial service firms, while the federal government in the 1980s lifted mortgage interest ceilings. Congress in 1986 ended the deductibility of consumer debt, such as credit card payments, though still letting filers deduct mortgage interest. The change provided incentives for refinancing. Even rates for subprime loans at 3 percentage points above prime loans, or about 8% to 9% now, are lower than many 18% credit card rates.

Advances in risk modeling have produced standardization. The bond market for subprime loans has provided cash.

The majority of subprime mortgages are now sold by the initial lenders, bundled into bonds and offered to individual and institutional investors. In 1994, $11 billion of subprime mortgages were sold on the secondary market; in 2003, it was more than $200 billion.

"Done right, subprime lending provides an important source of mortgage financing for families with imperfect financial or credit histories," Fannie Mae CEO Franklin Raines said in a recent speech. "Done wrong, subprime lending is a huge rip-off that siphons wealth — and hope — from people who have very little to begin with."

Like the prime mortgage sector, subprime lending is becoming increasingly concentrated, partly because of bankruptcies in the late 1990s when some companies became overextended.

The top 25 lenders made nearly 90% of loans in 2002, nearly double their 1990 market share, according to the Harvard Joint Center for Housing Studies. Ameriquest, New Century Mortgage and National City are among industry leaders. Mainstream lenders are entering the market, but the vast majority of business is done by mortgage firms, thrifts and other entities.

"For a small start-up shop ... it would be harder today to come into this business. In the past you could make a lot of mistakes, and there were very wide spreads. That has gone away," says Laura Swartz, senior vice president of American Mortgage Network, a wholesale firm that sells to mortgage brokers.

The industry is increasingly offering purchase mortgages, though subprime lending is heavily concentrated in refinancing and home equity loans. Firms are targeting potential clients with credit scores and incomes just at the margin needed to easily qualify for a prime loan. They sometimes compete with prime lenders for such loans.

The Fed's Gramlich in a May speech said borrowers with credit scores below 620 are generally viewed as higher risk, unable to get a prime loan without a large down payment. About half of subprime borrowers had credit scores above that threshold, Gramlich noted, indicating "a good credit history alone does not guarantee prime status."

Swartz says borrowers with credit scores of 620 to 640 are the "sweet spot" for the subprime industry.

Consumer groups

The rise of subprime lending presents something of a dilemma for community and consumer groups. Even while they fight for tougher laws against predatory lending, and accuse some firms of reverse red-lining — targeting minority neighborhoods — they are forming partnerships with subprime lenders.

In September, Acorn, a community organization representing low- and moderate-income families, announced an agreement with Citigroup to create an affordable lending program for home buyers, with a special focus on immigrants.

"The partnership with Citigroup had less to do with subprime lending, predatory lending, and more to do with our interest in working with Citigroup and other lenders to extend credit broadly," says Steve Kest, executive director of Acorn. "We see thousands of families who have staked their whole future in this country, have jobs, (but have) only been able to access subprime credit through pretty shady lenders."

Ameriquest, working with consumer groups, is among subprime lenders that have developed best practices for loans, including no loan "flipping" — refinancing at high fees that strip out equity.

While consumer groups and subprime firms have joint interests, disagreements remain. Consumer activists say too many subprime customers are not told they could qualify for prime financing.

New Century, one of the biggest subprime lenders, in testimony to Congress laid out its own internal numbers, which it says underscore that the industry does not overcharge for loans or target minorities. But they also appear to bolster the contention that good credit alone does not guarantee a prime rate.

The firm said slightly more than 19% of its borrowers had credit scores 660 or higher, which lending experts say could easily qualify borrowers for a prime loan, including more than 30% of Asian/Pacific Islander borrowers, 23% of Hispanics, 12% of blacks and 19% of whites. An additional 22% had scores between 620 and 660, which could also qualify them for prime rates, depending on their income, collateral and other financial data, including the ability to make a down payment.

A slight majority of borrowers were white, and on average, New Century clients were under age 50 with annual family income of about $72,000.

Terry Theologides, executive vice president for corporate affairs at New Century, says credit scores tell only part of the story.

"The products that we offer to our highest-credit-grade borrowers are competitive with prime (rates). The spread becomes extremely compressed when you get to those folks," he said, adding the company offered loans with interest rates near 5% to 6% — competitive with prime rates.

The federal Office of the Comptroller of the Currency in a 2002 study said pricing in the industry did not seem out of line with its higher risk. But even a small difference in rates means a big jump in payments. The Harvard Joint Center says a 2 percentage-point difference on an $85,000 loan, a common size for many first-time buyers, adds up to $18,000 halfway into paying off a conventional 30-year mortgage.

Subprime borrowers are far more likely than those in the prime market to take out adjustable-rate loans, and could take a hit as interest rates rise.

Subprime lenders offer products from fixed-rate mortgages to interest-only loans, where borrowers pay just the interest for a set number of years, or 80-20 loans, in which borrowers finance a home with an 80% mortgage at one rate and the remaining 20% through a second loan. Prime lenders also offer such products.

Interest-only products are "very appropriate for a sophisticated borrower, but are they appropriate for a first-time home buyer who has not amassed a lot of equity?" asks Jim Carey, vice president of marketing for AmeriDream, a Maryland non-profit for low-income buyers.

Industry officials say they carefully screen clients to make appropriate loans and avoid defaults that cost the industry money and hurt its reputation.

"If you owned a bank, would you rather be Jimmy Stewart or Mr. Potter sitting in the wheelchair?" asks Mitch Feinstein, National Home Equity Mortgage Association, referring to banker Henry Potter, the villain in the classic movie It's A Wonderful Life.

Borrowing patterns fall along racial lines

2007-05-18T18:12:00.000-07:00

By Sue Kirchhoff, USA TODAY

WASHINGTON — Do subprime lenders target minorities?

Consider this: Well-off African-Americans who refinanced their homes in the greater Boston area in 2002 were more than six times as likely as well-off whites to take out a higher-cost, subprime loan.

But well-off blacks, defined as those with annual incomes $90,000 or above, were also three times as likely as low-income whites, those with incomes up to $38,000, to turn to the subprime market, according a study for the Massachusetts Community & Banking Council, a coalition of community groups and banks.

The data do not prove discrimination. High levels of subprime borrowing in minority neighborhoods and among minority buyers, however, do indicate they are more likely to be targeted by unscrupulous lenders.

"There are a lot of folks out there who are convinced their credit is not good enough to get a conventional loan. Some of that has to do with aggressive marketing of these subprime lenders," says Tom Callahan, executive director of the Massachusetts Affordable Housing Alliance. "If you're lower-income minority, (you've) been told for years that sometimes traditional lenders don't want to deal with people that look like you."

Jim Campen, a research associate at the University of Massachusetts Gastón Institute, a Latino public policy institute, who wrote the Boston study, says the data could reflect legitimate lending decisions based on lower credit scores of some minorities. But he points to years of research showing minorities are denied prime loans more often than whites, even with equivalent credit records.

"The way the subprime industry works, it's not about denying blacks more often. It's about making loans, too many high-cost loans, to blacks," Campen says.

Subprime lending, as a share of overall refinancing, was nearly six times higher in the predominantly minority neighborhoods of Boston than in white areas. Overall, subprime refinance activity rose 41.8% in 2002. Similar racial patterns were found in seven other Massachusetts cities. In Boston, subprime lending was highest in neighborhoods such as Mattapan, Roxbury, Dorchester and Hyde Park.

The Boston data track studies in other cities that show concentrated subprime lending in minority neighborhoods and higher foreclosure rates in such areas. A March report on Chicago neighborhoods by the non-profit Woodstock Institute found that for every 100 additional subprime loans from 1996 to 2001 there were an additional nine foreclosures in 2002 compared with the average in Chicago neighborhoods.

The lending industry points to economic data that show Hispanics and blacks have lower incomes and wealth than whites. Immigrants are more likely to have impaired or incomplete credit ratings or lack documented income. Prospective borrowers may have a sparse credit history because they lack consumer education or access to mainstream banks. Some upper-income borrowers may prefer low document or no down-payment loans.

Terry Theologides, executive vice president of corporate affairs at New Century Mortgage, a national subprime lender, disputes charges of minority targeting. "Our pricing is automated, is absolutely colorblind," Theologides says. "The program they (minorities) are offered is identical to the program that would be offered if they were white and lived in the suburbs."

Theologides says New Century's internal statistics do not show an over-concentration in minority markets. Nationally, 52% of New Century borrowers in 2003 were white, 20% Hispanic, 16% black and 4% Asian/Pacific Islander. That includes purchase and refinance loans.

Geoff Smith, project director at the Woodstock Institute, says research finds a high concentration of subprime lending in minority areas, even after controlling for such factors as income and earnings. "I think it is an example of subprime lenders targeting minority neighborhoods and borrowers," he says.

Evidence of racial patterns in lending, and much of the data about the subprime market, comes from the Home Mortgage Disclosure Act. The law requires many lenders to report data about loans, including race of borrowers. Mortgages are classified prime or subprime depending on whether they are offered by a firm that makes predominantly subprime or conventional loans. That has the effect of classifying some prime loans as subprime and vice versa.

Glenn Canner, senior adviser to the Federal Reserve Board, which oversees the law, says reporting probably picks up about 80% of subprime lending. The Fed has tightened the rules so that data for 2004, to be released in 2005, will pick up more data about loan price as well as more subprime firms. The effect will be more data allowing researchers to link race and price.

"The data is supposed to be effective as a screen to identify potential problems, it's not supposed to be evidence of a problem," says Canner.

Subprime lenders worry the change will damage reputations and even destroy the subprime sector. They say the data will not show factors that determine creditworthiness and pricing.

The American Financial Services Association (AFSA), which represents lenders, including subprime mortgage firms, in May asked the Fed to add a disclaimer to the data indicating it does not include factors integral to loan pricing.

"Potential misperception should not be permitted to destroy the subprime mortgage market," the group said. "Looking at race and price without additional context may lead to a wide-based perception that race correlates to cost. It does not."

AFSA officials have not heard back from the Fed and are considering options to get their message out.

More U.S. home buyers fall prey to predatory lenders

2007-05-18T18:10:00.000-07:00

By Sue Kirchhoff, USA TODAY

WASHINGTON — After Martha Lawler lost her job at Bell Atlantic in 1993, she fell behind on her house payments. Then her troubles really started.

Desperate to hang on to her Brooklyn, N.Y., home, Lawler, 55, took out a new mortgage with a local finance company that carried an 18.25% interest rate, big fees that were rolled into her balance and a "balloon" payoff due in five years. Unable to make the higher monthly payments, Lawler refinanced into what she thought was a more affordable loan.

The pattern continued through six lenders, 10 years and thousands of dollars of dubious charges that eroded her home equity and pushed her mortgage balance from $50,000 to $198,000.

"For 10 years I've been going in a circle, robbing Peter to pay Paul, trying to keep this mortgage up," Lawler said. "No fly clothes. No new car. My mortgage is my life."

Lawler got caught up in a problem that has drawn increasing concern and action from state and federal regulators: predatory lending, loosely defined as loans with excessively high interest rates, fees or other provisions that can make them extremely difficult to repay.

The focus on predatory lending has coincided with the heady growth of the so-called subprime mortgage market. Subprime lenders offer higher-interest loans to people with troubled or non-existent credit ratings. While most subprime loans are not predatory, consumer advocates caution that all predatory loans are subprime.

More than 25 states and a host of towns and cities have passed predatory-lending restrictions since 1999. Looking ahead, predatory home lending is expected to be a continuing financial and political issue for several reasons:

•The rise of subprime. Subprime mortgage lending grew an average of 25% a year from 1994 to 2003 and now is a more-than-$330-billion-a-year industry that provides about 1 in 9 U.S. mortgages. The growth has helped broaden homeownership — nearly 70% of American homes are occupied by their owners — and given a boost to minority home buying.

Subprime lenders provide mortgages or home equity loans to people, including high-income borrowers, who don't qualify for conventional financing. Such lenders accept credit scores below the 620-660 threshold generally needed for prime financing and require less-stringent income documentation.

But critics say many of the subprime lenders' clients could qualify for conventional loans. Subprime lenders offer mortgage rates that sometimes range into double digits, though they can be as low as 6% to 7% for those with near-prime credit. Costs rise, often steeply, as credit scores fall.

•Changing demographics. Recent immigrants and minorities, who will make up the bulk of new households and about half of first-time home buyers in coming decades, are far more likely than whites to take out subprime loans — and appear more likely to be victimized by predatory lending. Federal data show even affluent minorities are more likely than whites to take out subprime loans, and some consumer groups say minorities are unfairly diverted to the subprime market.

The elderly population, too, is growing and may be vulnerable to predatory lending, because older homeowners have built up years of equity. AARP has a major initiative to combat predatory lending through education and litigation.

"Most of our clients don't go looking for loans," says Jean Constantine-Davis, an AARP attorney in Washington, D.C. "It very often starts out with a home-improvement loan. ... People think they're getting a loan for a chimney, (but) they've refinanced the house, rolled credit cards into it."

In Memphis, consumer advocates say predatory lenders, including firms owned by blacks, have targeted African-American neighborhoods, resulting in a rash of foreclosures. Data from Boston and Chicago also show concentrated subprime lending in minority neighborhoods.

•The growth of the secondary market. More than $200 billion in subprime mortgages were resold, bundled into bonds and offered to investors as mortgage-backed securities in 2003. Mainline entities such as Lehman Bros. or mortgage giant Fannie Mae are major players in the market.

•Uneven regulation. Mortgage brokers, middlemen who match buyers with lenders, now originate 50% of subprime mortgage loans — about the same as for regular mortgages — but are lightly licensed and monitored by states. The number of mortgage brokerage firms has climbed to 44,000 last year from 7,000 in 1987. State laws on predatory loans don't govern national banks, which are exempted under a ruling by the federal Office of the Comptroller of the Currency. The banks fall under less-restrictive federal rules.

A turning point?

The debate over subprime lending may be at a turning point. Banks and brokerages with a stake in the booming subprime market complain legislatures have gone too far, creating a confusing patchwork of laws that hurt legitimate business and prevent consumers from getting loans. Many want federal legislation overriding state statutes.

"You err on the side of letting people try to live the American dream if they want to buy a house," says Wright Andrews, a Washington, D.C., attorney who represents subprime lenders.

Congress is poised to take up the issue next year, though legislation is far from a sure thing. State governors and attorneys general, already opposed to the Office of the Comptroller ruling, fear a federal power grab. Consumer groups, which had pushed for a federal law, worry about losing state protections.

"A lot of people have been victimized. Not just poor people — middle-class, professional people, people of every stripe," says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.

Predatory-lending restrictions

What is a predatory loan? There's no official definition. Both sides say the issue is akin to a Supreme Court justice's description of pornography: You know it when you see it.

SUBPRIME MARKET

Subprime loans are more common among people of lower income, minorities and people moving to low-income areas and areas with a greater composition of minorities. Subprime share of loans by:

Borrower income¹	Home purchase loans
	Home equity loans
Lower	10.9%
	14.4%

Middle	11.2%
	10.5%

Higher	9%
	6.7%

Neighborhood income
Lower	16.4%
	17.8%

Middle	10.7%
	9.8%

Higher	7.7%
	6.1%

Race of borrower
White	7.4%
	5.7%

Asian/Pac. Islander	9.4%
	5.7%

Native Amer.	16%
	13.6%

Hispanic	19.6%
	14.5%

Black	27%
	20.8%

Neighborhood race composition
Less than 10% minority	6.9%
	6.8%

10-49% minority	12%
	10%

More than 50% minority	20.8%
	20.8%
1-Lower income: borrower's income is less than 80% of median family income; middle: 80% to 119%; higher: 120% or more. Source: Experian, Federal Reserve Board, Inside MBS & ABS, Federal Home Loan Mortgage, AARP, Loan Performance, Harvard Joint Center for Housing Studies, February 2004 paper "Bringing Subprime Mortgages to Market" by Ira Goldstein, Mortgage Bankers Association, USA TODAY research by Kelly Barry

States that have cracked down generally bar or limit these practices: loans that carry excessive interest and fees, exceed a borrower's ability to pay, include big balloon, or lump-sum, payments or penalties for early payoff or are subject to "flipping" — repeated refinancing with fees that strip out home equity.

"We were spending all our time trying to help people become homeowners, but two, three or five years down the road, they were going to get flipped into a loan with high fees and interest. We were building wealth so that it could be stolen," says Mark Pearce, president of the Center for Responsible Lending in North Carolina, a non-profit focusing on homeownership.

North Carolina's 1999 law started the move toward predatory-lending restrictions.

Mortgage giants Fannie Mae and Freddie Mac have set national standards for subprime loans that they purchase or package into securities with a guarantee for payment of principal and interest. Fannie, for instance, requires mortgages be based on ability to repay, not on home equity. It recently said it would not buy subprime loans that included mandatory arbitration clauses, which bar lawsuits. The industry, tarnished by a rash of legal settlements, has begun setting best practices, internal standards that govern lending activities.

How do consumers become victims? One of the biggest reasons is simple lack of education. Freddie Mac and the Department of Housing and Urban Development (HUD) have been reaching out to minority home buyers, saying many consumers don't understand how to get a loan or what they could qualify for. They may not have access to mainstream banks or they may lack a credit history or the proof of income needed for financing.

Fannie Mae CEO Franklin Raines, citing HUD research, says subprime lending is three times as likely in minority neighborhoods. Other research suggests as many as half of those taking out subprime loans could qualify for conventional financing — and would pay lower interest. Subprime lenders hotly dispute those figures.

Pamela Caudill of Dayton, Ohio, is a first-time home buyer who purchased her house from her brother three years ago with a $52,000 adjustable-rate mortgage from a local firm. Though there were no major blemishes on her credit record, she was given an initial rate of 13.25%. In 2001, adjustable-rate mortgages nationally were carrying average initial rates of 5.8%.

After missing a payment because of job troubles, Caudill was put into an expensive catch-up plan. The servicer who bought her loan did not post some payments. Because of the way the lender calculated Caudill's rate, her loan climbed near 15% from 2001 to 2004, as interest rates were falling nationally.

"I was told one thing, and yet the opposite would happen," says Caudill. The National Community Reinvestment Coalition (NCRC), which bought her loan and financed a cheaper one, said Caudill could have qualified for cheaper financing if she had shopped around. The NCRC runs a national consumer rescue fund for victims of predatory lending.

Memphis Area Legal Services lawyers cite the case of Edgar McDaniel, a 68-year-old with a psychiatric disability and minimal reading ability, who in 2003 owed $4,800 on his home, and whose income was a monthly $756 Social Security check.

After being contacted by a door-to-door salesman in summer 2003, McDaniel contracted for $16,500 of home improvements. To finance the project, lender American General Financial Services lent McDaniel nearly $34,691 at 12.81% interest, for payments totaling $78,789.32 over 15 years. Payments were $433, more than half his monthly income.

According to the lawsuit against the lender and contractor, the contractor was paid $22,000, or $5,500 more than the agreed-to price, even though less than $7,500 in work was done, while thousands of dollars in other dubious payments were made. American General is fighting the charges, saying that McDaniel misrepresented his income, that lawyers overlooked missed documented payments and that it pressed the contractor to complete work.

Elzenia Pitchford, 77, also of Memphis, contracted for $20,000 in repairs to her home but, according to a lawsuit, was fraudulently sold a bill consolidation loan, with high upfront fees and monthly payments that were more than 88% of her Social Security income.

She says she was promised new siding for her home, but the contractor did nothing to close up the many holes in the house's exterior.

Now, she says, rats come and go through the house. And the heating system was left in such a mess that the fire inspector will not allow her to turn on the heat. She and an 11-year-old grandson who lives with her use the stove and small heaters to stay warm.

Vulnerable victims

Borrowers can also get into trouble when they are forced to take out loans at stressful points in their lives — a bout of unemployment or an expensive illness that erodes their credit score, even as it increases their need for cash.

Priscilla White, 54, of Peabody, Mass., refinanced her 7% mortgage in 2002 to pay off $20,000 in debt tangled up in divorce proceedings. Her divorce attorney referred her to a mortgage broker, who offered to set her up with financing at a 6% interest rate. At closing, she discovered the rate was 11.25% but signed out of fear she'd be in legal trouble if the debts weren't paid.

Six months later, White tried to refinance, only to discover the initial appraisal inflated the value of her house. Her income had been overstated in loan documents, with monthly payments exceeding her net income. Unable to get an equivalent mortgage, White, a secretary in a large law firm, started investigating. She settled out of court with the company and refinanced through NCRC with a 30-year mortgage at 7%.

"He was my divorce attorney. I thought he was going to be good for me," White says. "The documents were immense and a lot of the (fraudulent) stuff they put in the back. ... By the time you got to the good stuff, you were exhausted."

Robert Armbruster, president of the National Association of Mortgage Brokers, says while most mortgage brokers are ethical, some engage in unscrupulous lending. "There are probably some bad apples out there. There are bad apples everywhere," he says.

Armbruster would like to see a national registry of mortgage brokers and wants Congress to give states seed money to prosecute bad brokers.

The Center for Responsible Lending estimated in a 2001 study that predatory loans cost consumers at least $9.1 billion a year. Lenders call those figures grossly inflated.

There are no comprehensive data on predatory lending, but there are clear signs it has been a problem:

• Household International, now HSBC, in 2002 agreed to change its practices and pay up to $484 million in consumer restitution for alleged predatory-lending practices in the subprime market. Household now funds the NCRC rescue fund.

• Citigroup in 2002 agreed to pay $240 million to resolve abusive-lending charges against its subprime subsidiaries, which the Federal Trade Commission says lured borrowers into high-cost loans through false statements.

• First Alliance Mortgage in 2002 agreed to a $60 million settlement with the FTC and six states.

"When the market expanded rapidly, there were excesses, and excesses created problems," says Mitch Feinstein of the National Home Equity Mortgage Association, a trade group for non-prime lenders. "We believe the market has responded very favorably by companies imposing much higher standards and fraud-reduction efforts."

Still, the legal cases continue churning.

"When I first started ... I wasn't in big trouble. I was running along smooth. But then I got jammed up, and I never could get out of it," says Allen Winston, 64, a Natchez, Miss., mechanic who was part of a lawsuit against lender Beneficial Mississippi.

Winston and his wife, Mary, in 1987 took out a home equity loan to consolidate $18,000 in debts. The couple paid $3,300 in fees, and according to their law firm, was required to buy $2,261 of special insurance to pay off the mortgage if they died. Premiums for single-premium insurance, which some state laws bar, are collected upfront and added to a loan balance.

After closing the deal, the Winstons were deluged with offers for more loans. Lenders sent letters pegged to Christmas or other expensive times of the year. After cashing a "check" that came with a solicitation, the Winstons found themselves in yet another loan.

Allen Winston, who left school after the eighth grade, and Mary, who attended through sixth grade, saw their original $22,500 loan gradually rise above $66,000, including $23,000 for insurance.

Montgomery, Ala., law firm Beasley Allen Crow Methvin Portis & Miles represent the Winstons in arbitration with the lenders. Officials of HSBC, which now owns Beneficial, say they do not have permission from the firm to talk about the case. They note it dates before 2002, defend their lending record and add, "In light of our contract with the Winstons, arbitration is an appropriate way of resolving their concerns."

Tom Methvin, managing shareholder for Beasley Allen, which has cases around the Southeast, says 90% of its predatory-lending clients are black.

'Paying ... the rest of my life'

Meanwhile, Lawler, the Brooklyn woman who signed multiple refinance loans, has gotten on with her life. The NCRC bought her mortgage in August, refinancing her into a 5%, 30-year fixed-rate loan. But she remains saddled with a high balance.

"Renovations? Forget it. Whatever falls down, forget it. I'll just leave it until I have the money," Lawler says. "I'll be paying for it the rest of my life."

Contributing: Sandra Block

Should You Buy in the Blazing Hot U.S. Home Market?: John Wasik

2007-05-18T18:09:00.000-07:00

With home prices generally glowing brighter than holiday window displays, does it make sense to buy in the hottest residential markets?

The bull market in home prices continues unabated, sporting the best gains in a quarter century. U.S. home prices rose almost 13 percent from last year's third quarter through Sept. 30, reports the Office of Federal Housing Enterprise and Oversight (OFHEO), a mortgage enterprise agency.

The dicey ``to buy or not to buy'' question need not involve timing the market, though. It's important to focus on building equity and achieving investment goals while exercising caution in choosing financing.

The news on the home front is still cheery for most of the U.S., where prices gained an average 4.6 percent in the third quarter. Of the top-20 metropolitan areas tracked by OFHEO, 11 were in California, four in Florida and two in Nevada. Hawaii showed the highest appreciation of any state with a 28 percent annual gain, followed by California with a 27 percent increase. Atlantic City, New Jersey, rounded out the list of top metropolitan areas with a 24 percent jump.

Soft Landing?

Are home prices headed for a soft landing or a crash? That's certainly on the minds of property buyers in Las Vegas, the fastest-growing U.S. area, where prices climbed 42 percent annually for a nearly 80 percent gain in five years.

In California, areas like Los Angeles, Riverside-San Bernardino, San Diego, Ventura (including Oxnard and Thousand Oaks), have seen home prices more than double during the last half-decade.

Even less-frothy markets like New Jersey and New York have experienced five-year gains of 74 percent and 68 percent, respectively.

How long will the gains continue? There are convincing points on both sides of the question of whether a bubble exists on the East and West coasts. One of the strongest economic indicators supporting bubble conditions is that home prices are dramatically outpacing income growth.

Ingo Winzer of Wellesley, Massachusetts, publishes a ``Local Market Monitor'' ( http://www.localmarketmonitor.com ) research report for several U.S. markets. He says that comparing per- capita income growth to residential price increases shows several major coastal markets are at risk for price declines.

Highest-Risk Areas

Some of the highest-risk areas in Winzer's top-25 list of overpriced markets include Orange County, Ventura and San Diego, California; Atlantic/Cape May, Bergen-Passaic, Monmouth-Ocean and Newark, New Jersey; New York City; Boston; and Miami, Ft. Lauderdale and West Palm Beach, Florida.

``For prices to come down in those (overpriced) markets, you'd have to have some pretty stiff local recessions,'' says Winzer. ``Prices wouldn't come down rapidly but decline about 20 percent over the next several years.''

Most residential property observers from Federal Reserve Chairman Alan Greenspan to the real estate trade group National Association of Realtors deny the existence of a bubble.

The confluence of mortgage rates less than 6 percent, buyers eschewing mediocre returns in stocks and bonds, and baby boomers surging into housing may be pivotal factors.

What to Avoid

In Orange County, California, for example, where Winzer calculates that home prices are almost 60 percent overvalued (leading his list of overpriced markets), demand has exceeded supply for almost four years.

Anil Puri, dean of the California State University-Fullerton Business School, sees moderation on the horizon for that county, yet denies that a bubble is present.

``Home prices could drop 20 percent over the next two years,'' Puri says. ``But it would be gradual. I don't see a collapse.''

The conventional wisdom is that consumer price inflation will eventually boost mortgage rates another point or so in a year's time. That may slow demand and trigger a decline in home prices.

Keeping that likelihood in mind, buyers banking on automatic appreciation should avoid adjustable, interest-only loans and no- money-down loans.

The Right Financing

``Some recent buyers of starter homes borrow with no-to-low equity down with adjustable terms at basement-level interest rates,'' reports ``Emerging Trends in Real Estate,'' a new study by the Urban Land Institute and PricewaterhouseCoopers LLP.

``These folks -- stretched to the limit on car payments and family bills -- count on property values to keep escalating. But higher interest rates and rising mortgage payments make them particularly vulnerable to default,'' the report states.

The simplest rule of thumb when buying in this market is to choose the financing that suits your ability to pay and still build up funds for retirement, college and emergencies.

Don't worry about market movements if you plan to stay in a house, co-operative or condominium for five years or more.

If you need to buy in an overpriced market, consider renting, particularly if you plan to stay in a home less than three years. You may get a better deal on monthly payments.

No-money-down and interest-only loans sound great if you are cash challenged, but they may give you no equity upfront. If appreciation doesn't materialize, you don't have much equity to show for your investment. Building equity is an often-neglected part of wealth-building plans.

Build Equity

Remember that if you eventually move to a less expensive house, the net proceeds are yours to keep tax-free. Generally, you need to stay in your principal home at least two out of the last five years to qualify for this break, although some exceptions apply.

Home equity also can be employed in college financing (for loans or cash outs) and is exempted from most financial aid formulae.

``I think that building equity is really important,'' says Randy Johnson, a mortgage broker with Independence Mortgage Company in Newport Beach, California, and author of ``How to Save Thousands of Dollars on Your Home Mortgage.''

``Assuming you want to sell the house in the future, it will cost you 7 percent (of the purchase price) to do so,'' Johnson says. ``That means if you only have 7 percent for equity, you have zip for down payment for the next home.''

To contact the writer of this column: John F. Wasik in Chicago at jwasik@bloomberg.net .

Bubble Busting

2007-05-12T17:45:00.001-07:00

By DANIEL KADLEC; BOB TOLL

Home prices have shown signs of sluggishness in Las Vegas and a handful of other markets, fueling the debate over whether we are in a dangerous housing bubble. TIME senior writer DANIEL KADLEC talked with Bob Toll, CEO of Toll Bros., one of the nation's largest luxury-home builders, who insists that any talk of a slowdown is premature.

TIME Let's start with the question you must be sick of: Is it a bubble?

BOB TOLL You're right. I am sick of it. No, we're not in a bubble. Prices have gone up because there has been tremendous constriction in supply along with tremendous immigration and increases in income for baby boomers. We're on track to see the cost of housing as a percentage of income come to the same place as it is in the U.K. and much of Europe, where they pay up to 45% of income for housing.

TIME Then how do you square soaring home prices with relatively stagnant personal income?

TOLL You can't square it. The polarization of wealth in the past 20 years has been extreme. The number of families making $100,000 a year has grown six times as fast as the population. The rich are getting richer and buying bigger houses. Meanwhile, as an industry, we're only building the same number of homes each year as 20 years ago, even as the population grows.

TIME But babies don't buy houses.

TOLL No, but immigrants do, especially the kind that Uncle Sam is letting into the country these days. They must have jobs and income. Immigrants are two-thirds of our population growth.

TIME There has been some evidence of a housing bust in Las Vegas. Will the trouble spread?

TOLL Las Vegas still has good margins for us. You're asking me if I've stopped beating my wife. Well, I never started.

TIME No slowdown at all?

TOLL There's been a leveling off. We can't raise prices as rapidly as we had been. But we can still raise them.

TIME Are any markets overbuilt?

TOLL Our cancellation rate is below 5%, where it almost always is. There are some softer markets, like Austin, Dallas, Raleigh, Hilton Head, Columbus. Charlotte was soft but is coming back. But New York, Chicago, Washington and almost every other market we're in are on fire.

TIME If mortgage rates increased 2% in a year, how would it affect the value of my home?

TOLL It depends on the neighborhood and price of the home. If it's in the $200,000 range and not in a particularly fresh neighborhood, you could see a drop of 7% to 10%. Buyers of these houses are on a budget, and higher rates eliminate a lot of buyers. But if you are in a $600,000 home, which is our range at Toll Bros., all you'll witness is cocktail talk.

TIME Homebuilder stocks have doubled in less than two years. But now short interest is on the rise [a bet by hedge funds that builder stocks will fall]. Is it really practical to buy these stocks today?

TOLL The shorts are going to get slaughtered. They are making a huge mistake.

TIME What's the next housing trend?

TOLL In the past couple of years we've begun dense suburban developments, and we're back in the cities with low-, mid- and high-rises. There just isn't enough ground left in the suburbs, and you have a whole new thrust from boomers and young hip-hoppers who want to be back in urban areas. Urban developments are less than 5% of our business, heading to 10%. It's definitely caught on. Look at New York. You could have bought the entire meat-packing district for $4. Now you can't get an apartment there for under $1 million.

Terms a borrower may need to know

2007-05-12T17:44:00.001-07:00

Here are terms referred to in mortgage lending and the debate over predatory loans:

Points: An upfront fee separate from interest. A point is equal to 1% of loan principal. Three points on a $100,000 mortgage equal $3,000.

Equity: Ownership interest in a home. An owner with a house worth $100,000 and an $80,000 mortgage has $20,000 in equity.

Home equity loan: Fixed- or adjustable-rate loan secured by the equity in a home. Can be used for home improvement, to pay off high-cost debt or free up money for investment.

Refinancing: A new loan replacing existing financing. Refinancing activity has been heavy in the past several years as interest rates have fallen. Homeowners who were holding mortgages at 8% interest may have been able to refinance into a 5% loan.

Prime rate: The interest rate banks charge their best customers.

Loan-to-value ratio: Calculated by dividing the total amount of a loan by the appraised value of a property.

Adjustable vs. fixed rate: In a fixed-rate mortgage, the interest rate stays the same over the life of the loan. In an adjustable-rate product, the loan rate — after a set period — can move up or down. Adjustable-rate mortgages are usually pegged to some type of rate index.

Mortgage broker: An individual or firm that matches borrowers with lenders but does not originate or service mortgages. Brokers, who work with a variety of financiers, are charged with finding the best deal for the borrower.

Loan flipping: Repeatedly refinancing a mortgage without benefit to the borrower. Firms that do so profit from high origination fees and closing costs, points and other charges that strip away home equity. Excessive fees and interest rates on single loans, rather than repeated refinancing, can also be considered predatory.

Asset-based lending: Federal law bars "a pattern or practice" of mortgage loans that are based on the value of the property and do not take into account a borrowers' ability to meet loan payments.

Single-premium insurance: Insurance products that are supposed to pay off remaining mortgage debt in the event a borrower dies or becomes incapacitated. In "single premium" policies, premiums are collected upfront and added to the loan balance, increasing the interest and cost.

Prepayment penalties: Fees imposed on borrowers who pay off loans before the set 10-, 15-, 30-year or other loan period. Prepayment penalties are not inherently predatory, but they can be set so high that borrowers cannot refinance into lower-rate products.

Balloon payment: Loans can be structured with lower monthly payments but with a large lump sum due down the line. Some borrowers may not be informed that balloon payments lurk ahead. In other cases, the payments are so large that borrowers cannot meet them.

Mandatory arbitration: Written into some loan documents, it requires borrowers to resolve disputes through arbitration, not legal action. Consumer groups say such clauses put borrowers at a disadvantage, particularly in cases where lenders pick the arbitrator.

Financing points and fees: Rolling points and fees into a loan balance can disguise the true cost of the loan. Consumer advocates want such costs reflected in the quoted interest rate for the financing.

How to Reduce the Risk Of Buyers Backing Out

2007-05-12T17:43:00.001-07:00

By James R. Hagerty
Special to RealEstateJournal

Question: I was due to close on the sale of my home in Port Richey, Fla., on Oct. 1, but the last of the four hurricanes that came through Florida hit here the day before the closing. My Florida room was totally destroyed and about 40% to 50% of the main roof on the house was ruined. The buyer saw the damage and backed out of the deal. She had made a $2,000 deposit to be held in escrow by an attorney and her title company.

I told the woman the damage would be fixed and paid for by my insurance, but she still refused to complete the sale. I have been waiting to see whether the attorney will release the deposit to me because the buyer has refused to complete the sale. The attorney has sent the buyer notices about the deposit, but the buyer is not responding to her mail and the attorney can't release the money unless the buyer responds. Can this deposit be given to me now? I think the buyer is ignoring the situation so the deposit can't be released.

-- Marie, Port Richey, Fla.

Marie: The attorney must determine whether there is a dispute between the two parties over the deposit, according to Joe Boyd, a real-estate lawyer at Boyd, Lindsey & Sliger in Tallahassee, Fla. Typically, the attorney would write to both parties to ask them for their positions on the matter. If there is a dispute, he says, the attorney would make a filing with a local court and the two parties would have to "duke it out" there. Legal fees would eat up much of the money in your case.

If the other party doesn't object to your claim of the deposit, the attorney can award it to you. If the other party doesn't respond to the attorney's letter within a reasonable time, the attorney may conclude that the other party isn't disputing your claim. Mr. Boyd says there is no statutory definition of how much time the parties have to respond, so that would be a matter of judgment.

More and more people are backing out of purchases, real-estate agents say. How can sellers reduce the risk of being jilted on the eve of the closing?

There is no way to eliminate the risk that buyers will flee, but "you can make it painful for them to do so," says Valerie Torelli, who owns Torelli Realty in Costa Mesa, Calif.

Here are some tips from Ms. Torelli and other experienced real-estate agents:

Be frank from the beginning about any problems with the house or the neighborhood that might worry potential buyers. Reduce the possibility for last-minute surprises and disputes.
Don't waste your time negotiating with a buyer unless he or she seems genuinely excited about the home. If someone seems hesitant, "go on to the next buyer," advises Ms. Torelli. A good real-estate agent should be able to help you pick up the indecisive signals emitted by a buyer prone to second and third thoughts. One obvious clue: They're still looking at other homes.
If you have a choice of buyers, go with the one who is better financed and more determined to get the deal done, even if that means accepting a slightly lower price.
Ask for a substantial deposit to be placed in escrow. Ms. Torelli likes to see at least 3% of the purchase price. Ruth Golley, associate broker at RE/MAX Executives in Decatur, Ga., says 1% is more common in her area, though some sellers seek 2%.
Limit the time available for an inspection and other information-gathering. In California, 17 days is the typical limit, Ms. Torelli says. Diane Saatchi, a regional vice president for the Corcoran Group in East Hampton, N.Y., goes further. She advises sellers not to sign a sales contract until the potential buyer has done the inspection and lined up financing. Making a deal contingent on the buyer's ability to get a mortgage is a "totally bizarre concept," Ms. Saatchi says. "Why should I take a risk on your finances when you know your finances and I don't?"
Stipulate in the contract that a certain portion of the deposit automatically will be paid to the seller on a nonrefundable basis once certain contingencies, such as the inspection, are removed.

Note to readers: For a forthcoming article, I'd like to talk to people who have used LendingTree.com or other online services that offer a monetary incentive if you use an agent or broker recommended by them. Please email me at bob.hagerty@wsj.com.

-- Mr. Hagerty is a staff reporter for The Wall Street Journal. His "House Talk" column appears most Fridays on RealEstateJournal.com. E-mail him your questions about the residential real-estate market. Please include your first name and city and state. If your question is answered and posted, we will show your first name and city. Due to volume of mail received, we regret that we cannot answer every question.

What to consider when mulling over mortgage options

2007-05-12T17:42:00.000-07:00

By Steve Dinnen

Q: I just bought a home using two loans; a 30-year mortgage fixed for five years at 5.25 percent and a second, 15-year mortgage fixed at 8.75 percent with a balloon payment of $29,000 in 15 years. I plan to refinance at least the second mortgage to get rid of the balloon payment, but I'm overwhelmed by the choices. Any thoughts on how to time this to get the best deal? How can I learn more about mortgages?
W.M., Los Angeles

A: Susan Shute, a mortgage specialist at Bryn Mawr Trust Co., Bryn Mawr, Pa., teamed with Dodie Theune, a certified financial planner there, to handle your question.

Assuming that the loan does not exceed the home's value, they recommend refinancing the two loans into one mortgage at today's rate of 4.25 percent fixed for five years, or a 30-year fixed rate loan at 6 percent depending on how long you plan to live in the home.

Rates, of course, are subject to change at any time. Closing costs such as title insurance and appraisal fees can be added to the loan balance or paid by you at settlement. A loan officer can determine these costs and tell you how long it will take to recoup them as a result of the savings from your reduced monthly payment.

The best way to understand your options, in their opinion, is to consult with an experienced loan officer from a reputable lending institution. You also might call a local junior college or some lenders that offer courses on home buying and financing.

Q: Are the tax ramifications the same if I remove money from my IRA or cash in a life-insurance policy? I'm over 65 and retired.
G.P., via e-mail

A: It depends. First, if you take money out of your IRA after you turn age 59-1/2, you'll owe ordinary income-tax rates on the withdrawal. Very simple.

But with a life-insurance policy, things can get interesting, says Brian Jones, a certified financial planner in Fairfax, Va. He wants to know if you are borrowing against the cash value of the policy or canceling it outright and

taking its cash value.

If you have a whole-life policy and there is cash value that you choose to borrow against, this is not a taxable withdrawal, but a loan.

But be careful. If you were to cancel a policy with an outstanding loan against the cash value, the loan could become a taxable distribution, subject to ordinary income-tax rates.

Mr. Jones says that if you were to cancel a whole-life policy outright and take the cash value, the difference in what you paid into the policy in terms of premiums - your cost basis - minus any gains in the cash value is taxable to you in the year of distribution. Just like an IRA, this gain is taxed at ordinary income-tax rates.

Either way, consult with a tax adviser before executing this strategy.

• Questions about finances? We're prepared to help you find answers. Write: Work & Money Q&A The Christian Science Monitor 1 Norway Street Boston, MA 02115

Sell Your Home — Fast

2007-05-12T17:41:00.000-07:00

IN THIS SLUGGISH HOUSING MARKET, selling your home in a matter of weeks rather than months is a serious success story. Long gone are the days when you could simply stuff a sign into your front lawn and soon get offers for your house. Nope, today you need to work for it. Here are four tips:

1. Hire a Home Stager
A well-decorated home will sell faster and for more money than one that looks frumpy. That's why more sellers are hiring home stagers to do everything from rearrange furniture and paint walls a neutral color to rent artwork. This service can cost anywhere from a few hundred dollars for a small job to several thousand dollars for high-end properties, says Patricia Dugan, a realtor with The Corcoran Group.

And keep in mind, a lovely décor will get you only so far. To really get buyers champing at the bit, you need to highlight your home's storage space as well. That means everything should be clean and organized — closets, bathroom vanities, the garage and basement. It might sound trivial, but your home's sale really could rest on whether your linen closets can comfortably store your towels.

2. Hire a Photographer
Up to 80% of home buyers start their search online, according to the National Association of Realtors. Indeed, the Web has become such an important marketing tool that all the realtors we spoke with encourage their clients to hire a professional photographer, which can cost as little as $100, for their online snapshots. Think of it this way: If someone doesn't like how your home looks on the Web, he or she won't bother to make an appointment to see the property in person. Is that a risk you're willing to take?

While putting photographs online isn't exactly new, there are some emerging trends. Several years ago it was OK to have one outside shot of the house, says Tara Rogers, director of marketing for Real Living, a Columbus, Ohio-based real-estate firm. Now, some potential buyers want to see up to a 10-picture slideshow detailing multiple rooms before they commit to a walk-through, she says. Post small, grainy pictures, and you risk having little foot traffic in your home.

3. Try Marketing Gimmicks
With housing prices flat across much of the country, now is the time to sweeten the pot a little with added incentives. Rather than slash the asking price, a condo owner could offer to pay the maintenance fees for a full year, or ask home owners to provide buyers with a cash rebate that's marketed as a decorating allowance. Nine times out of 10, such gimmicks cost less than it would to drop the asking price enough to attract a buyer with a smaller budget, says Nelson Zide, co-owner of ERA Key Realty Services, a Framingham, Mass.-based real-estate brokerage.

4. Hold Open Houses
The benefits of an open house are debatable. Industry experts agree that they tend to benefit realtors more than home owners. (After all, it's a great way for realtors to get new clients.) But that doesn't mean that they can't work. The key is to hold them at various times of the day and week so that folks with busy schedules can squeeze in a viewing. Real Living's Rogers says her company's agents make sure to schedule open houses on Saturdays, as well as in the evenings so people can stop by after work.

Another technique more people are implementing is to hold open houses at the time of day when their house shows the best. If you have a beautiful garden, show it off during the morning before the flowers start to wilt. If you have a stunning view of the sunset, make sure people get to see the late-afternoon light. In other words, if there's one thing that you love most about your home, be sure to share it with potential buyers.

Is Investing in Florida A Risky Proposition?

2007-05-12T17:40:00.000-07:00

By James R. Hagerty
Special to RealEstateJournal

Question: I purchased a two-bedroom, waterfront condo in the Florida Keys in 1998 for $170,000 and sold it for close to $400,000 in 2002. That same unit is now selling for close to $700,000. This in a building that is more than 30 years old with what can only be described as shoddy construction. The same story is being repeated all throughout the Keys. Prices in Florida have generally skyrocketed, but in the Keys they have become insane. I think it's a classic bubble waiting to burst.

This past hurricane season brought home the fact that the Keys are nothing more than barrier islands that will sustain horrific damage in the event of a major hurricane. According to forecasters, we can expect extremely active hurricane seasons for the next 10 years due to a shift in weather patterns.

All of this means that investing in the Keys is a risky proposition, made even riskier by the speculation of the last few years. What is your opinion about buying in this area?

-- Henry, Miami

Henry: What's happening in the Keys appears to be an extreme version of what has happened in the rest of Florida and all along the country's East and West coasts: A surge in demand, propelled by low interest rates, has smacked into a shortage of homes. It's hard to find space or secure permits to build homes in most coastal areas, but it's particularly hard in the Keys. The islands are considered such environmentally sensitive jewels that the state government severely restricts building there. In most places, local governments decide on such issues. But the state government decides how many permits can be doled out each year in the Keys.

The average sales price in the first half of 2004 for properties in the Keys, from Key Largo to Key West, was $548,000, says Eileen M. Albury, a broker-associate at Coldwell Banker Schmitt Real Estate, Islamorada, Fla. The average was up 32% from a year earlier.

Is that insane?

"We're an island," explains Ms. Albury, who knows about such things because she has been selling real estate in the Keys for 20 years. "They're not making any more of them." Indeed, she says the Keys are still a bargain compared with the coastal areas around Miami or Tampa Bay. Now is the time to buy the Keys, she says: "It's a perfect opportunity for people to get in before it gets absolutely obscene."

What about the hurricanes? "That's what you have insurance for," says Ms. Albury.

Aren't ordinary mortals being priced out of the market? "Paradise ain't cheap," she says.

OK, you might expect Realtors to predict rising real-estate prices, whether they're in Key Largo or Khartoum. What about the dismal scientists? One economist who studies the Florida market closely is Henry Fishkind, who runs a consulting firm, Fishkind & Associates, in Orlando. Dr. Fishkind takes a much more cautious view of the Florida market as a whole. "The era of rapid appreciation has clearly peaked out already," he says. The Florida Association of Realtors reported that median prices in the third quarter were up 18% from a year ago. But Dr. Fishkind, a former economics professor at the University of Florida, says that pent-up demand for housing already has been satisfied and that interest rates are heading up.

He doesn't believe there will be any general drop in prices. But he does warn that values of midpriced condos may fall modestly in some areas because large amounts of new supply are hitting the market.

Dr. Fishkind's advice: Don't buy homes in Florida if you're counting on rapid price appreciation. Buy only if you need a place to live and plan to hang around for a while.

Pessimists will have to wait, as housing boom rolls on

2007-05-12T17:35:00.000-07:00

By Alexandra Marks | Staff writer of The Christian Science Monitor

NEW YORK – Remember that great real estate bubble?

It appears almost as buoyant as ever, despite the Federal Reserve's decision to raise interest rates for the fourth time since June.

In some areas like the Midwest, the housing boom has settled down to a steady, reliable hum as demand has begun to level off. But in many other parts of the country, housing is still very hot.

Builders in New Jersey are having trouble finding enough land to meet the demand. In Silicon Valley - the heart of the dotcom bust - the shortage of available housing has meant double-digit increases in prices. And bidding wars for apartments in New York City, long cited as one of the most inflated real estate markets in the country, are still common.

"It's hard to imagine it getting any better than it is now, but I don't see much of a threat of a real slump either," says Michael Carliner, an economist with the National Association of Home Builders in Washington. "A lot of the things that we've had in the past that led to a big downturn in the market are now absent, such as a lot of speculative building and a large inventory of unsold houses."

Indeed, the supply of available houses is at a historic low, according to measures used by the National Association of Realtors.

Currently, it estimates there are 4.4 months of available housing inventory on the market. That's down from 4.7 months last year, and it's almost half of the eight-to-nine months' supply back in 1989, when the real estate market took a serious dive.

The current limited supply has led many experts to predict the housing market will staystrong well into 2005.

"We'll see continued home-price growth, perhaps less strongly than we've been accustomed to," says Lawrence Yun, senior economist with the National Association of Realtors in Washington. "But even with the rate hike, we expect prices to continue to grow."

Another explanation has to do with the difference between long-term and short-term interest rates. The Fed is ratcheting up short-term interest rates with small, regular hikes. But long-term interest rates, to which mortgages are tied, have moderated and even gone down despite those increases. That's not expected to change because inflation pressures are moderating.

"The Fed is very concerned about housing prices. It's on their radar screens, and I think that explains a lot about why they're being so measured in their approaches to interest rates," says Timothy Riddiough, director of the Center for Real Estate at the University of Wisconsin-Madison. "They're letting the air out very, very slowly and so far have been successful."

At the same time, the seemingly few people who haven't taken advantage of low rates to either refinance or buy a home are expected to jump in now, which could also fuel the market for the next few months.

Then there's the stock market. Some people are still skeptical about investing in it after its downturn. Many investors instead are still apt to plunk down their cash in real estate. But if the market continues to rally, it could negatively impact house prices. Some experts are already seeing signs of big-money investors hedging their bets.

"Big-ticket properties, the likes of which I've never seen before, are in the paper - like islands you didn't know existed with four houses on them selling for $4 [million] or $5 million," says Amy Johnston, author of "What the Experts May Not Tell You About Building or Renovating Your Home." "It feels like people are beginning to cash out at what they fear may be the peak."

Other experts note that over the past five years there's been a pretty substantial run-up in housing prices. "That can't sustain itself for any period of time. We learned that lesson in the '70s," says Stephen Thode, director of the Goodman Center for Real Estate Studies at Lehigh University in Bethlehem, Pa. "I'm not predicting any collapse in the real estate market, but what goes on in the next six to nine months may not be sustainable for the next three to five years."

Indeed, he says, barring any unexpected jolts in the economy, don't expect any signs of a major change in the housing market until the cherry blossoms bloom next spring.

Condo Pandemonium

2007-05-09T03:11:00.000-07:00

Bidders Vie for Family's Ill-Gotten Digs

By David Segal

Washington Post Staff Writer

NEW YORK, Nov. 10 -- Nothing makes New Yorkers pant like a luxury apartment, so when the city announced a few months ago that it would auction off seven high-end condos, a crowd was expected. But the crowd proved larger than expected. Which is why if you showed up at 11 a.m. Wednesday at the Sheriff's Office on Broadway -- the originally scheduled venue -- you were greeted by a sign sending you to a far larger room in a building around the corner.

Which by noon was packed. At least 200 bidders and a few dozen gawkers were milling around an oak-paneled room on the fifth floor of the Surrogate's Courthouse, near TriBeCa, at lunchtime. On the block: the booty of a now-notorious spending spree by a family of Turkish businessmen, found liable in a massive international fraud.

And God bless these infamous characters, wherever they are. (Two are on the lam.) When they spent their ill-gotten gains, they didn't just snatch up yachts and jets, though they did that, too. They gobbled up some of the poshest square feet in New York, including two apartments in nouveau riche central, Trump World Tower on the East Side.

But the back story can wait. For now, let's figure out who is here. And ask a more important question: Is this any way to buy a home?

"Probably not," says Fred Golden, a salesman with Manhattan Realty Corp., chatting while waiting for the action to start. He represents a client interested in buying Apartment 59D in Trump World Tower, but he's proceeding with caution. "For all we know, there are seven people in Turkey who think they own these apartments. You need to do a bit of work before you come to one of these things."

By 12:30, the mood in the room hovers somewhere between heated anticipation and outright hostility. These people are tired of waiting and they share the annoying sense that they'll never land a deal with this many bidders in the mix. But they want action. Either they're going to buy a condo or punch someone.

"Let's buy some real estate!" shouts one from the back of the room.

But a burly guy with a badge has to explain the rules first: Win the bidding and you must walk to the front and plunk down at least 10 percent of the purchase price, on the spot -- cash or bank checks, thank you very much. Then you have until Tuesday to cough up the rest of the dough. Oh, and you're on the hook for any back taxes that might be owed to the city. And for all the fees that are in arrears -- monthly maintenance fees, late fees, legal fees. By the way, the maintenance fees are at least $1,200 a month. Some are a lot higher.

Any questions?

Many, actually. The crowd, which is filled with professionals, peppers Badge Man and reps from the buildings, and the gist of every answer is the same. You have the right to bid, and if you bid the most you have the right to march up here and hand over some cash. Now let's go!

"Opening bid of $1.5 million. Any bidders?"

It took some mighty impressive flimflamming to get us to this moment. All credit, if that's the right word, to the Uzans, a colorful clan, who persuaded cell phone giants Motorola and Nokia to loan them nearly $3 billion, to build a mobile phone network in Turkey. The Uzans really did own the license for this venture but they apparently pumped buckets of borrowed money into a worldwide shopping spree, which unfolded at a game-show pace. When the Uzans failed to repay their loans on time, they blamed an economic downturn and earthquakes. Motorola and Nokia didn't buy it and they sued. The Uzans have maintained that the United States doesn't have jurisdiction in the matter and didn't fight in court. But a federal judge concluded in August of last year that the family had told "an almost endless series of lies," and a fire sale of the Uzans' holdings here has begun.

"We've already sold a couple jets," says attorney Steven Davidson, a lawyer with Steptoe & Johnson, which represents Motorola. "The more expensive one went for $36 million."

The prices never reached that level at Wednesday's auction, but buyers weren't exactly scared off by the prospect of back taxes or liens. The first apartment up for sale was 59D, a 2,000-square-foot gem. Killer views. Massive doors. High ceilings. The works.

"All right, we have one point five," mumbles the auctioneer, a gray-haired guy in an argyle sweater. "One point five, now one million six, now one million six, now seven, one million seven, now eight, one million eight. One million seven now eight. Eight, nine, eight, nine. One million eight now nine."

On it went, until someone gave up and the apartment went for $2.2 mil. A fortyish-looking guy named David Vogel had made the winning bid. In the hallway, after he settled up, he sounded giddy.

"I was motivated by divine intervention," he says in a thick Brooklyn accent. Then he tells his story: On Sunday he went on a date with a woman named Sherri -- "a very young, very beautiful woman who happens to be a brainiac" -- who took him to a real estate seminar at the Learning Annex. You think for a moment that Vogel is pulling your leg. But his eyes roll into the back of his head when he talks and you can't fake that. At the class, he learned about buying real estate at what he called "knockdown prices." He was working on Monday and Tuesday but Wednesday morning he and Sherri did some research on the properties up for sale. Instant due diligence. And then at 11 a.m., a client of his agreed to put up the necessary money.

"I was ready to walk away if the price went too high, but sometimes a businessman has to act fast," he explains, looking elated. As the auctions went on, a few pros in the place quietly stewed about amateurs in the audience wrecking the party, bidding with their emotions instead of their heads. Altogether, more than $11 million was raised, a pittance compared with the sum that's evaporated, but a start. And for Vogel, maybe it's the beginning of a beautiful romance.

"If you could," he says, leaning in, "say something nice about Sherri."

Stumped by the housing market?

2007-05-09T03:10:00.000-07:00

Conflicting news about the real estate market might just be a reflection of the market itself.

By Sarah Max, CNN/Money senior writer

SALEM, Ore. (CNN/Money) – Warning: Headlines about the housing market may make your head spin with mixed messages.

On Wednesday, for example, the Census Bureau reported that new home sales in September were far better than economists had predicted. This came on the heels of an equally upbeat report, this one for existing homes, from the National Association of Realtors.

But an article in the Orange County Register the same day warned that researchers at Cal State Fullerton expect prices in the Los Angeles area county to fall as much as 20 percent in the next two years. In Boston, there are more houses on the market today than at any time in the last five years, according to an article that ran in The Boston Globe on Tuesday.

As we reported in August, the supply of houses on the market in Las Vegas is several times what it was earlier this year, and sellers are having to rethink their asking price.

Or are they? An article in the Las Vegas Review-Journal last week ran with the headline "Home prices on rise."

Confused? You're not alone. Even economists admit that they have thrown up their hands.

"I've given up trying to guess where interest rates will go," said David Stiff, a senior economist with Fiserv CSW, a firm that tracks and forecasts housing prices.

Multiple influences

While housing markets are influenced by a number of factors, including the supply of houses for sale, the strength of the local economy and demographic trends, mortgage rates are a key bellwether.

They are also nearly impossible to predict, according to Susan Wachter, a professor of real estate finance at the Wharton School of the University of Pennsylvania.

"Most people were projecting that interest rates would go up and the housing market would be hit," said Wachter. "But the dog didn't bark. Rates didn't go up." Indeed, the Freddie Mac survey of mortgage rates has shown rates falling steadily since May.

Add to the confusion a war in Iraq, a presidential election and a dubious economic recovery, and it's easy to see why there are mixed messages about the housing market.

Housing forecast..

	Market		Price change*
	Atlanta		5.3%
	Boston		8.3%
	Chicago		7.3%
	Denver		5.3%
	Detroit		4.1%
	Miami		13.8%
	Minneapolis		8.5%
	Nashville		6.9%
	New York		7.5%
	Orlando		10.6%
	Philadelphia		10.2%
	Pheonix		9.9%
	Portland		8.5%
	Sacramento		15.1%
	San Diego		12.5%
	San Francisco		13.0%
	Seattle		9.2%
	Washington D.C.		16.9%

* Oct. 04 - Oct. 05

Source: Fiserv CSW

But, that's only half of the story.

"I've been studying the market for ten years, and I'm always amazed by what a diversified market this is," said Delores Conway, director of the Casden Real Estate Economics Forecast at the University of Southern California Lusk Center for Real Estate.

The strength or weakness of a housing market varies not just from one region to the next, but within any give metro. In Los Angeles, she noted, prices seem to be retreating in million-dollar neighborhoods, but there is still strong demand in areas where homes are selling for less than $500,000.

"The averages hide all of the variations," she explained. "It's like saying I saw mountains and valleys in Switzerland, so it must be flat."

The same can be said of different neighborhoods or types of housing, she said. Prices for big houses in the suburbs may be stagnant even while prices for lofts in an up-and-coming part of town are doubling.

Of course, there's still some value in looking at housing price indexes and forecasts, if only to satisfy your curiosity.

Reading the tea leaves for '05 and beyond

This is actually a very good economy for housing, said Wachter. At the same time mortgage rates remain low, the economy seems to be improving.

"This is the best we could have hoped for," she added.

Meanwhile, experts don't expect higher mortgage rates to take buyers by surprise. "Greenspan has indicated that the Fed will be increasing rates at a measured pace, that means slow and steady," said Conway. "That gives the housing market time to digest any price gains."

In California, where Conway focuses most of her attention, there may be some slowing in price appreciation. "But we don't expect the magnitude of what we saw in the early 1990s, when high rates and rising unemployment had a doubling effect," she added. "The key is employment."

The long-term demographics for housing are encouraging, as well. "The important thing is that the Echo Boomers are coming into home ownership years," said Wachter, referring to the children of the Baby Boomers. "They will be moving into the market and adding stability."

Looking at individual markets, Fiserv CSW expects that over the next 12 months home prices will continue to appreciate in most markets, albeit at a slower pace.

There are even some markets that could see stronger growth in the coming year, among them Atlanta, Cincinnati, Cleveland, Denver, Detroit and Nashville.

Washington D.C. and Miami, meanwhile, may take some of the spotlight from Southern California real estate. Fiserv CSW is forecasting that home prices will rise 16.9 percent in D.C. and 13.8 percent in Miami in the next 12 months. They expect prices in Los Angeles to increase 11.5 percent.

"Some markets still seem overpriced based on fundamentals, and [in those places] we expect prices to decline or taper off," said Wachter.

Prices have already softened in some of those high-priced markets. Or so it would seem.

Homebuilders Are Stretched Thin

2007-05-09T03:08:00.000-07:00

Even as demand falls and inventories rise, they're taking on debt to boost construction and keep up their heady growth

To the casual observer, the homebuilding industry appears to be in remarkably good shape this deep into the housing cycle: Most of the large publicly traded builders such as Lennar Corp. (LEN ) and KB Home (KBH ) are still reporting double-digit gains in both sales and profits. And most also still boast high returns on their investments. Los Angeles-based KB Home, for instance, is on a pace to earn 16% return on capital over the past year. "Other companies only dream about that," says KB Chief Financial Officer Dom Cecere.
Yet despite those solid numbers, cracks are starting to form in the foundations of the nation's largest homebuilders. To maintain their heady growth rates, the big builders are placing ever-bigger bets as they continue adding to their land holdings and the number of houses they have under construction.

BORROWING FRENZY. Even as the Federal Reserve has started raising interest rates -- while signaling that further hikes lie ahead -- builders have continued to throw up new homes at a furious pace. The amount of capital that the 14 largest publicly traded builders have tied up in inventories of unsold homes and land, adjusted for sales, has risen an average 12% over the past year, according to Palladian Research, a New York institutional research firm.

As a result, those inventories now stand at the highest level relative to sales in seven years. And some builders are faring much worse than average. Inventories at Dominion Home (DHOM ) in Dublin, Ohio, for instance, have soared 38.8%, while Ryland Group (RYL ) in Calabasas, Calif., has seen them jump 30.6%. "They are increasingly running their businesses with an 'If we build it, they will come' mindset," says James D. Poyner, a market strategist at Palladian.

To fund all this new construction, homebuilders are burning through cash at a furious pace. For the 12 months ended in June, the large publicly traded builders laid out $373 million more cash than they took in, Poyner notes. Compare that with the much more modest $73 million "burn rate" builders went through for the year that ended in June, 2003. That has left builders increasingly resorting to debt and stock issuance to fund their operations: Of the 14 largest publicly traded builders, six now have debt-to-equity ratios of 95% or higher, including Dominion and KB Home.

OVERBLOWN FEARS. What concerns critics is that this frenzy of borrowing comes as housing demand is starting to cool: Single-family starts dipped 8.2% in September, to a seasonally adjusted annual rate of 1.54 million units. Some Wall Street experts, such as Jan Hatzius, senior economist at Goldman Sachs (GS ), predict that single-family starts could slide an additional 10% to 20% in the coming year as higher rates take their bite. "The risks of a serious problem will rise the longer construction activity remains at its current elevated level," Hatzius wrote in an Oct. 15 report.

Builders counter that fears of a housing crash are overblown. They argue that their land purchases are largely in the form of options that often require them to put down less than 10% of the value of the tracts; even then, they say they often build only when firm orders from buyers exist. What's more, builders contend that if demand cools, they'll have the wherewithal to scale back construction quickly -- and turn negative cash flows back into positive territory by simply selling down their existing inventory of finished homes.

"When the market does slow down -- and our data doesn't show that it is slowing down -- our earnings might slow, but free cash flow will come in bucketloads at that point," says J. Larry Sorsby, chief financial officer for Hovnanian Enterprises Inc., a Red Bank (N.J.) builder.
STRAINING TO BUY. Still, there's growing evidence that cooling demand already has some builders coming up with novel ways to produce higher profits. To generate a 12% rise in earnings during its third quarter -- less than half the growth rate of recent quarters -- Miami-based Lennar resorted to heavy land sales to other builders. Kathy Shanley, a senior analyst for Gimme Credit, a bond-research firm, estimates that in the quarter that ended on Aug. 31, Lennar generated roughly a quarter of its $225 million in earnings from land sales to other builders. Moreover, with gross margins of 37% -- well above the 22.9% gross margin Lennar generates from its home sales -- such sales also help keep overall margins up.
By contrast, land sales contributed less than $2 million to Lennar's bottom line as recently as 2001 and 2002. The company's chief financial officer, Bruce E. Gross, says the land sales occurred only because it saw opportunities to exploit heavy demand for new tracts by other builders. "We're not liquidating our assets to meet a number," he insists.

Maybe not. But Lennar clearly needs land sales to counter weak orders in some markets and to boost profits. In its West Coast markets, new orders fell 6% in its fiscal third quarter.

Another potential sign of weakening market conditions: Fully 35% of Lennar buyers took out adjustable-rate mortgages, vs. just 20% a year ago. That suggests that some customers "are straining to afford current price levels, even with low interest rates," says Shanley. Gross says the rising use of adjustable-rate mortgages simply reflects buyers' growing preference for lower-cost, floating rates. "We haven't seen any degradation in credit quality," he says.

CANCELLED ORDERS. In markets that have gotten overheated, some builders are starting to get burned. In Las Vegas, home prices rose an average 41% over the last year, fueled in part by speculators flipping new homes almost as soon as they're finished. With the rise in interest rates, however, the Vegas bubble has burst. Inventories of unsold existing single-family homes in Las Vegas shot up from 1,400 in February to more than 15,000 in September.

That's one reason Pulte Homes (PHM ) in Bloomfield Hills, Mich., announced in early October that its 2004 profits will come in as much as $50 million below expectations. After raising prices in some developments by over 50% over the past year, Pulte is rolling them back 8% to 28%.

Still, buyers continue to cancel orders in droves. Some analysts say cancellation rates are running at about 25% throughout Las Vegas. "We overpriced our product relative to the competition," says Pulte Chief Executive Officer Richard J. Dugas Jr. But even with lower prices, Dugas maintains that Vegas remains "among the company's leading markets for margins."

Given the heavy bets builders have placed, a slowdown doesn't auger well. All of a sudden, the housing industry's future is looking more and more like a roll of the dice.

The backlash against homeowners' groups

2007-05-05T18:56:00.001-07:00

Residents nationwide are increasingly protesting their associations' fees and rules.

By Mark Sappenfield | Staff writer of The Christian Science Monitor

ORANGEVALE, CALIF. – When Robert Best began building a roof for his patio more than two years ago, he thought it seemed a rather modest prospect. The neighbor didn't mind, after all, and the plan was no Home & Garden channel make-over - in fact, the structure barely peeked above the garden wall.

Today, however, the roof is gone - torn down at the command of his neighborhood architectural committee - and Mr. Best has only a slab of concrete and $3,000 in lawyer's fees to remember it. What started as a bit of do-it-yourself home improvement became the latest in a growing number of picket-fence protests against the power of homeowners' associations.

For decades, such associations have occupied a murky niche as more than a private business but less than a local government - collecting taxlike "assessments" but subject to little public oversight. Yet as more Americans move into homes governed by associations, there are signs of a mounting revolt.

Stories like Best's are but one part of the issue, as residents chafe against the authority of homeowners' associations to determine everything from the appearance of patio roofs to the politics of lawn placards. More broadly, legislators are increasingly taking the issue into statehouses, seeking not only to clarify the laws governing homeowners' associations, but also how to enforce them.

"Lawmakers are being forced to deal with the problem," says Marjorie Murray, who tracks the issue for the California Alliance for Retired Americans.

The pressure is clearly coming from homeowners themselves. More Americans own homes in community associations than ever before. In 1970, less than 1 percent of Americans lived in a community association. Today, the figure is nearing 20 percent, and with local governments providing incentives for new homeowners' associations - which assume some of the costs of street and landscape maintenance - the trend is likely only to escalate.

Familiar spats

In some respects, the disputes are the same as they have always been. In Florida, one community has banned a former marine from flying the United States flag because the pole does not conform to neighborhood standards. In Arizona, another prohibited a resident from putting a sign in his window that supported Howard Dean for president.

But beyond such displays of pride or politics, there is deeper scrutiny of the rights and responsibilities of homeowners' associations themselves. Although people on both sides of the debate acknowledge that most associations are fair and neighborly, several instances have become rallying points for reform.

Last month, one homeowners' association in the Bay Area required that each of its 94 members pay a $12,000 special assessment for emergency repairs, angering residents who complain they were kept in the dark during the decisionmaking process. Another California association famously foreclosed on a couple because they failed to pay $120 in assessments.

"In my view, there is an imbalance of power between homeowners' associations and homeowners," says California state Rep. Darrell Steinberg (D), who sponsored a bill that would have banned foreclosures unless the resident owed more than $2,500 in assessments. "There is an unfairness in giving homeowners' associations that much authority."

Although Gov. Arnold Schwarzenegger (R) vetoed the bill, it is representative of lawmakers' attempt to more sharply define the laws surrounding homeowners' associations, both here and nationwide. In Florida, for example, lawmakers passed a suite of bills this year that open associations' records to homeowners and require professional mediation before any disputes become lawsuits, among other things. Arizona passed a set of bills with similar goals, as well.

"There have been many complaints to the Legislature and the government during the past couple of years," says William Sklar, who was co-chair of a Florida task force convened by Gov. Jeb Bush (R) to deal with the issue. "We found that there needed to be more accountability across the board."

California's proposal

The question of accountability, however, might be leading California down a more radical path. Next year, a law review commission looking at homeowners' associations is expected to make a sweeping recommendation: that the state create an agency to regulate them. It is needed, officials say, because most association disputes involve relatively small amounts of money - or ideological issues such as access to records - so homeowners aren't likely to spend thousands of dollars for a court fight.

For his part, Best turned to a lawyer as a last resort. After a year-long battle with his homeowners' association about the architectural appropriateness of his patio roof, the association said Best had to pay its legal fees, which totaled more than $5,000. When they did that, "they abused their authority," he says. "At that point, I wasn't fighting over the deck.... It was more a Don Quixote-type fight."

The association says it felt it was within its rights. "Our thought was that this was an enforcement act," says Charles Preston, president of Rollingwood Bluffs. Last month, however, a judge found in Best's favor. Yet Best admits that he wasn't blameless. He didn't submit the plan for the roof to the homeowners' association until after he had finished building it, and he missed a deadline when the association demanded that he tear it down, bringing a $800 fine.

It's a common narrative of mutual misunderstanding, experts say. And as homeowners' associations spread into the American mainstream, homeowners, too, will have to educate themselves and share in the accountability.

"The sense has always been, 'My home is my castle' - I can do what I want," says Mr. Sklar. "But the more you have close-in living, the more you have to give up some of that liberty for the common good."

Making Way for Fannie Mae

2007-05-05T18:55:00.001-07:00

Developers Work to Warm Residents of Southwest Waterfront to Their Vision

By Dana Hedgpeth

Washington Post Staff Writer

Mattie R. Sharpless sat in a folding chair Wednesday night in the auditorium of St. Matthew's Lutheran Church at 222 M St. SW as developers, architects and real estate brokers laid out their plans to turn the 13 acres of the outdated Waterside Mall into a pedestrian-friendly open area with restaurants, shops and huge offices for the mortgage giant Fannie Mae.

"Correct me if I'm wrong, but doesn't Fannie Mae have some pretty good real estate up on Wisconsin Avenue?" Sharpless asked the speakers. "Why do they want to come down here?"

The crowd erupted in applause. For a while, it seemed like the developers would get shellacked, as they did two years ago at another meeting of the Advisory Neighborhood Commission for Ward 6D, which represents the neighborhood. But then the crowd started to come around.

And that was an important milestone for the project's three developers. Two years ago, few residents wanted to see more traffic in the neighborhood and others were worried about losing the retailers at the mall. This time around, with a well-known tenant -- Fannie Mae -- taking the bulk of the space and with more-specific ideas about what the 2.5 million-square-foot project will look like, the developers got a warmer reception from most of the residents.

"We received a very hostile reaction from the community the first time around," said Shalom Baranes, whose firm Shalom Baranes Associates is the architect. Now that the old Environmental Protection Agency building has been empty for two years and is getting a little shabby, "people are finally anxious to see development occur there."

Fannie Mae has a large, grassy campus on Wisconsin Avenue near Quebec Street NW, and it leases several other offices in the D.C. region for its 4,000 employees. But the company's workforce has been rapidly growing, and it needs more space.

"We think this is a really terrific neighborhood," said Alvin Nichols, Fannie Mae's director of corporate real estate, responding to Sharpless. "And there are very, very few places you can build the amount of space we're talking about building [in the District.] We could have chosen to move any place. Reston, even. If we were going to spend this amount of money, we wanted to spend it in a place to make a difference."

Getting applause was important for the developers because the project -- one of several the District expects to help revitalize the rundown Southwest and Southeast waterfronts just past the Maine Avenue fish market -- still must go through several public hearings early next year.

The D.C.'s zoning commission must approve the designs, and the D.C. council must also approve re-opening Fourth Street SW through the site and the offer of $17 million cash from the developers to buy the land from the quasi-public National Capital Revitalization Corp., said one of the developers, Gretchen Dudney, vice president of development at Kaempfer Co.

The drab, concrete office buildings on the site, between K and M streets SW, have been mostly empty since the EPA left two years ago, and there are only a few stores, including a Safeway grocery and CVS drugstore.

D.C. planners say the project will bring 4,000 jobs to an area that hasn't had much of a spark in decades. D.C. council member Sharon Ambrose (D) , who represents the area, said she supports the Fannie Mae project.

"It will bring some vitality to that space that has been lacking vitality for a very long time," Ambrose said. "Once EPA left the building they had occupied, it became a wasteland. The Safeway and CVS are used, but they're a small part of a very large space. The developers have been seeking a tenant without much success until now. Fannie Mae will come with their employees, and they will come with a pledge to build housing around the site. It's going to be wonderful for the neighborhood."

While most residents said they supported the project, some were skeptical of the details. Their questions included: Where would Fannie Mae's employees park and how much more traffic would they add to the area? How early in the morning would construction workers start, and would large dump trucks make potholes in roads and create backups? Would there be attractive retail that would be open at night after Fannie Mae's workers went home or would the sidewalks roll up? And where would they shop for groceries and get prescriptions filled once the Safeway and CVS stores in Waterside Mall are closed and construction starts?

Safeway officials and the developers said they weren't sure if the store would remain open -- a worry many residents expressed, saying some elderly people depend on the store because it is within walking distance.

The developers' plans call for tearing down the mall and offices on the site to build a 2.1-million-square-foot office complex for Fannie Mae. The project will also have an estimated 400 residential units -- 20 percent of which will be subsidized for 30 years -- plus 100,000 square feet of retail with a major grocery store and underground parking garages.

One of the major features of the project will be opening Fourth Street, which runs through the center of the mall but is now closed. It will have street-level retail on both sides. No retailers have signed leases, but the developers said they hope to put in smaller stores like a card shop, bookstore and a few restaurants.

Construction is expected to start next summer, and half of the project will be done in 2008. The rest -- the 400 apartments and some office space -- would be built over a five-year span, starting in 2008.

"Getting Fannie Mae down there allows us to jump-start our project," said David Smith, a project manager at Cleveland-based developer Forest City Enterprises Inc., one of the developers on the project. The third developer is Rockville-based Bresler & Reiner Inc.

At the meeting, the architects laid out the changes they had made to the plans since landing Fannie Mae as a major tenant. The office buildings will now sit back from two, existing apartment buildings that border the site on the east and west sides. They also have added more retail space to the site and plan to put the grocery store underneath the residential units on the northeast side of the lot. And there will be substantial underground parking.

Residents still questioned whether the $17 million sales price was high enough, given the new popularity of the area. A few blocks away, D.C. officials negotiated a deal with Major League Baseball to build a stadium for the Montreal Expos.

But by the end of the two-hour meeting, Sharpless -- in spite of her worries about where she and her neighbor, Queen Johnson, would shop once the CVS and Safeway close -- supported the project.

"Once they do this and the rest of the waterfront development the city has planned, this area will be another Georgetown," said Sharpless, who has lived just a few blocks from the proposed project since 1973. "Right now it's like a diamond in the rough."

Building Permit Seems Like It Takes Forever

2007-05-05T18:54:00.000-07:00

By Michael Barbaro

Washington Post Staff Writer

When fast-growing Potbelly Sandwich Works Inc. decided to open a 2,200-square-foot restaurant in the Fairfax Corner shopping center in 2003, the chain dutifully applied for a construction permit from the county. It was granted -- 34 days later.

A year later, when Potbelly decided to open a 2,300-square-foot restaurant on 17th and L streets NW in the District, it sought a similar permit from the D.C. government. It, too, was granted -- 78 days later, D.C. records show.

The longer wait in the District forced Potbelly to pay its contractors extra, according to company officials. They said it distracted the staff, which could not move on to the next project. And it delayed the store's opening by weeks.

For Potbelly, the experience is hardly isolated in the District, executives said. According to their records, it has taken the chain an average of three months to obtain building permits in the District, compared with seven weeks in Maryland and five weeks in Virginia.

"It is one of the longest permitting processes we have encountered in any of the markets we are in," said Tom Jednorowicz, director of real estate for Potbelly.

Chicago-based Potbelly has restaurants in seven U.S. cities. In the Washington region it has 15 -- seven in the District and four each in Maryland and Virginia.

Potbelly's experience illustrates how a seemingly small difference in a jurisdiction's business climate can have a significant impact on companies.

Retail real estate managers who work in the District say the District has never been an easy place to open a store, compared with the suburbs. There are historic districts with special design rules and tight urban spaces that make it difficult to build.

"When you are in the District, there is always more complexity," said Avis Black, real estate manager for Safeway Inc., the region's second-biggest grocery chain, with 140 stores.

The District government says it meets its 30-day schedule for reviewing building permit requests 96 percent of the time. To speed up the process, the District recently installed an automated system that tracks applications through several levels of review, said Gwen Davis, a spokeswoman for the District's Department of Consumer and Regulatory Affairs , which oversees building permits.

In Potbelly's case, D.C. inspectors at times asked the chain to correct its original building permit applications, which lengthens the review process, said David A. Clark, the department's director.

"If complete and proper plans are submitted, they are reviewed and permits are issued within 30 days," Clark said.

Potbelly does not dispute that claim, but executives at the company still described the District's permitting review process as unusually long, given their experiences elsewhere.

Before beginning construction of its Dupont Circle restaurant, for example, the chain said it waited 83 days for a building permit. Nationwide, the chain estimates it receives final construction permits, even after corrections, in an average of about 42 days.

"Corrections and modifications are a standard part of the permitting process," Jednorowicz said. "It should not take as long as it takes to go through this process."

Peter Framson, president of Green Light Retail, a Bethesda-based retail real estate brokerage, said retailers "build in extra time" when seeking permits in the District. "They just know it will take longer."

Beltsville-based Ritz Camera Centers Inc., which operates hundreds of shops in the region, hires professional permit handlers to expedite the building-permit process in the District. "We don't even attempt to get them ourselves," said Eric Lahrmer, a project manager for the company.

Despite the complex permit process, retailers -- particularly restaurants -- still flock to the District because of its residential density, large population of daytime employees and the prestige of an urban identity, retail industry analysts said.

Potbelly, for example, believes it must first develop a strong reputation in Washington, where thousands of office workers eat lunch five days a week, before aggressively branching out into the suburbs, where the same people may later seek it out for dinner, Jednorowicz said.

But starting out in the District market has not been easy. Take the company's experience obtaining a building permit for its restaurant at 1900 L Street NW, which opened in 2003. Potbelly applied for a construction permit on July 29, 2002. Within 30 days, it was reviewed by D.C. zoning, mechanical, plumbing, fire, health and structural engineers, meeting the District's internal schedule, according to a detailed statement outlining the building permit process

But all the reviewers requested corrections. According to D.C. records, Potbelly made revisions to its application and resubmitted it on Sept. 23., triggering another round of inspections.

To help Potbelly begin work while it waited for a final building permit, the District issued a permit allowing the chain to perform interior demolition on the site on Sept. 9.

One by one, D.C. officials approved the new plans -- mechanical, plumbing and health staff on Oct. 16, electrical experts on Oct. 8, fire experts on Oct. 21 and, finally, structural experts on Nov. 4.

That day, the District issued a building permit, more than three months after Potbelly filed its application.

In its statement, the Department of Consumer and Regulatory Affairs called it a "lengthy review and approval" but said it made a "diligent effort in providing customer service" while at the same time "ensuring the safety and well being of the citizens of the District of Columbia."

The department noted that it granted Potbelly additional permits, which sought revisions to the Nov. 4 permit and approval for new exterior signs, on Dec. 11, Dec. 13 and Dec. 24, each applied for and issued on the same day.

Potbelly said it could not calculate the precise cost of a lengthy permit process like the one it experienced before building its 1900 L Street restaurant. "It certainly costs us money," Jednorowicz said.

Framson, the retail broker, said "there is a trickle-down affect that can be extremely expensive" as permit delays push back construction and contractors need to be paid. "The issue is pretty simple," he said. "If you are not open for business, you are not making sales."

Fannie Mae Stock Ratings Warrant Their Own Analysis

2007-05-05T18:53:00.000-07:00

By Jerry Knight

Fannie Mae's stock has dropped about 16 percent in two weeks. And even before the abrupt slide, it's been three years since the stock made any big gains for its investors.

The company's books are being questioned. It will be years before we know if Fannie's financial reports really have reflected how the business is doing.

Top Fannie Mae executives are in danger of losing not only their jobs, but also their political careers. Odds are some of them will be gone long before the accounting snarl is untangled.

And yet, most investment analysts continue to tell their clients to buy Fannie Mae stock.

Two weeks into an accounting scandal that is sure to transform the Washington region's biggest, richest business, Wall Street is humming, "Stand by your Fan."

A few analysts have downgraded Fannie's stock, but the shares still get better ratings than the average stock in the Standard & Poor's 500-stock index. As of Friday, 11 analysts were rating it "buy," eight "hold," and just two "sell," according to Bloomberg News.

Since the scandal broke, the stock has plunged to $65.25 a share from $77, but the analysts telling their clients to buy it are predicting Fannie stock will go as high as $115 within the next year or two.

Fannie will be one heck of an investment if that happens . . . but will it?

It's way too soon to predict how the scandal will evolve, let alone how Fannie's business and stock price will be affected. Predicting, however, is what investment analysts get paid to do, so for the past few days they have been serving up instant analysis. Their comments should be taken with more than a grain of salt -- they ought to be served like margaritas in a glass crusted with the stuff.

Without waiting to see what the ongoing federal investigations will turn up, analysts are choosing sides, dividing themselves into Fannie whackers and Fannie kissers.

The "buy" recommendations by and large are coming from big Wall Streets firms that have continued to push the stock even though it has underperformed the market for the past three years. Some of these same firms earn big fees from underwriting the sale of billions of dollars of Fannie's mortgage-backed securities.

Firms listed by Bloomberg as rating Fannie "buy" or its equivalent are Argus Research Co.; A.G. Edwards and Sons Inc.; Bank of America Corp.; Bear, Stearns & Co.; Credit Suisse First Boston LLC; Merrill Lynch & Co.; Piper Jaffray Cos.; Smith Barney; Sanford C. Bernstein & Co.; Susquehanna Financial Group and UBS Securities.

Only one new "sell" rating has been issued since the scandal broke -- by Fox-Pitt, Kelton Inc., a New York affiliate of Swiss Re, the giant European insurance company. The stock has been downgraded to a "hold" or neutral ratings by analysts at Morgan Stanley; Prudential; Wachovia; and Friedman, Billings, Ramsey Group Inc.

Interestingly, analysts on both sides are predicting Fannie Mae's growth will slow and its profits will shrink as the result of changes in operations and accounting that will be required to answer the criticism of regulators. What divides the analysts is whether Fannie will remain a good investment -- especially in the next few months.

The cautious view is expressed by Sandler O'Neill & Partners, a small New York investment firm: "We believe there is still more negative information to come from the ongoing investigation, which could take a substantial time to play out.

"Overall we think there is substantially more downside risk than upside potential in the share price. We have a very negative outlook on FNM and strongly advise against accumulating share on perceived weakness." Needless to say, that advice comes with a "sell" rating.

In contrast, recommendations to buy the stock are based on the premise that when all the turmoil over accounting has calmed, in a couple of years, Fannie will be fine.

"Don't worry, Wall Street," is the message written between the lines of the "buy" recommendations: Fannie will remain the King Kong of the mortgage business -- America's No. 1 source of mortgage money -- and Wall Street's favorite golden-egg-laying goose. Fannie will continue to feed investment banking firms hundreds of million of dollars in fees for arranging fundraising mortgage-financing deals every year. There is no threat to the billions of dollars that mutual funds and other professional money managers have invested in Fannie's stock, they soothe.

Distilled from the thinking of analysts at several firms, the case for buying Fannie stock goes like this:

The stock has retreated far more than warranted by what's known so far about Fannie's accounting problems. The basic charge by the Office of Federal Housing Enterprise Oversight is that Fannie used "cookie jar" reserves in its accounting. In good times, it stashed away profits in the "cookie jar;" in bad times, it dipped into the stash to bolster earnings.

The result was that Fannie reported steady growth to investors, even though its actual results included quarterly ups and downs.

The accounting rules that Fannie is accused of breaking are so technical and obscure that they will produce "a protracted debate about their merits even among accounting experts" predicts A.G. Edwards & Sons, the St. Louis investment firm that is one of the biggest in the Midwest.

These analysts are betting that accounting questions will take so long to resolve that by the time the issue is settled, investors will have forgotten what all the fuss is about. That's what happened at Freddie Mac, where similar issues came up two years ago.

Freddie Mac shares were trading at about $60 when its accounting scandal broke in June 2003. In less than a week, the shares had plunged to about $47.

This Friday, Freddie's shares closed at $67.22. Even though investigations into Freddie's financial foibles continue today, the stock is more than 40 percent above its nadir and more than 10 percent higher than it was before the whole scandal began.

Wall Street analysts express little interest in what will probably be the biggest accounting question in Washington: Did Fannie Mae pump up its profits so top executives could qualify for big bonuses?

That's a sexy issue to politicians, the media and Washington investors. Many analysts agree that it could lead to the departure of Fannie's chairman and chief executive, Franklin D. Raines; its chief financial officer, J. Timothy Howard, and maybe others.

Top executives may well get the ax, acknowledged Susquehanna Financial Group of Philadelphia. But, "ultimately, we believe the long-term impact from management turnover would likely prove to be negligible, as the business model should remain intact."

That, too, follows the pattern of Freddie Mac, where half a dozen executives quit or were fired with no discernable damage to Freddie's business or its stock price.

Critics of Fannie and Freddie will argue that the recovery of Freddie's stock and the "buy" ratings for Fannie shares reflect one of the things that is fundamentally wrong with the two government-chartered mortgage companies.

Fannie and Freddie are "too big to fail," they argue. The government can't afford to let them go under because their collapse would disrupt the entire housing finance system. Home buyers would have trouble getting loans and would pay higher interest rates. Investors holding the billions of dollars worth of bonds and other securities backed by Fannie and Freddie mortgages would suffer losses that would strain the world financial markets.

For the very same reasons, Wall Street has decided Fannie and Freddie are too big to bail out of. Investors have lost a few billion dollars since Fannie's stock started to skid, but that is nothing compared with the losses that might occur if the majority of analysts turned against the stock.

A batch of "sell" recommendations could trigger a stampede that would trample not only Fannie's stock, but also Freddie's and very possibly the stocks of other big mortgage lenders, triggering a market crash. Telling investors to bail out of the stocks would also signal them to dump Fannie and Freddie's mortgage securities, causing a crisis that could disrupt world financial markets and drive up interest rates.

Wall Street can give plenty of good reasons for holding onto Fannie's stock, but investors also need to realize there's a bad reason for doing so: what might happen if Wall Street said, "sell."

Sprawl May Harm Health, Study Finds

2007-05-05T18:52:00.000-07:00

By Rob Stein

Washington Post Staff Writer

People who live in sprawling communities tend to suffer more health problems, according to the first study to document a link between the world of strip malls, cul-de-sacs and subdivisions and a broad array of ailments.

The study, which analyzed data on more than 8,600 Americans in 38 metropolitan areas -- including the Washington region -- found that rates of arthritis, asthma, headaches and other complaints increased with the degree of sprawl. Living in areas with the least amount of sprawl, compared with living in areas with the most, was like adding about four years to people's lives in terms of their health, the study found.

"Suburban sprawl affects your health," said Roland Sturm, a senior economist at the Rand Corp. of Santa Monica, Calif., who led the study, which is being released today. "That's really the take-home message."

As suburbia has spread across the American landscape, health experts have become increasingly concerned that the fast-food, car-dependent lifestyle may be contributing to a host of health problems. Previous studies have linked sprawl to an increased risk of being overweight and obese and certain related health problems, such as high blood pressure. The new study, published in the journal Public Health, is the first to directly examine the relationship between sprawl and a wide spectrum of chronic illnesses.

"This is the first one where we assess a whole set of conditions," Sturm said. "That's the new angle."

The increase in health problems is presumably due to the fact that sprawl discourages physical activity, increasing the chances of being overweight or obese. In addition, sprawling communities tend to have more air pollution, Sturm said.

"This really seems to be due mainly to air pollution and physical activity," Sturm said.

Sturm and colleague Deborah Cohen analyzed data collected by Healthcare for Communities, a survey that in 1998 and 2001 questioned a nationally representative sample of 8,686 adults in 38 areas about a range of health issues. The researchers then examined whether there was an association between 16 health problems and the amount of sprawl where participants lived, using a scale that includes such measures as population density, street patterns and proximity of businesses and workplaces to residences.

The least compact community was the Riverside-San Bernardino area in California, while the most was Manhattan. The Washington area ranked 15th most sprawling; Baltimore ranked the ninth least sprawling.

People living in areas that scored highest on the sprawl scale reported the most problems, with the unhealthful effects appearing to disproportionately affect the poor and the elderly. The association was particularly significant with arthritis, respiratory problems such as asthma, stomach problems, headaches and urinary tract infections. But the researchers also found some evidence of an association with heart disease and high blood pressure.

Very spread out places, such as Atlanta, had about 100 more health problems per 1,000 people than areas that were less so, such as the Greensboro-Winston Salem area of North Carolina. Washington had about 50 more health problems per 1,000 people than Baltimore, Sturm said.

Although some researchers have speculated that the social isolation that can occur in sprawling communities may also lead to more mental health problems, such as depression, the new study failed to find that link.

"We find a strong association on the physical health side, but surprisingly not on the mental health side," Sturm said in a telephone interview.

Other researchers praised the study, saying it adds to evidence that suggests the physical attributes of where a person lives can have a significant impact on their health.

"It's the first study to aggressively assess systematic relations between health outcomes and the built environment," said Lawrence D. Frank of the University of British Columbia, who studies sprawl.

"This is still a very new field of research, but every significant study that has come out so far has reached a similar conclusion," said Don Chen, executive director of Smart Growth America, a Washington-based advocacy group. "This may be a promising way to begin addressing some of these chronic health issues."

But critics dismissed the findings, saying the study was flawed and the link between sprawl and health was tenuous at best.

"I remain a skeptic of the research, in part because the results they find are weak," said Samuel R. Staley, a senior fellow at the Reason Foundation, a Los Angeles-based libertarian group. "This study seems particularly prone to spurious results -- results that are statistically related but really don't tell us much about causes."

Peter Gordon, a professor in the school of policy, planning and development at the University of Southern California in Los Angeles agreed, calling the study "junk science." The areas studied, for example, are so large they could not distinguish important neighborhood differences, he said.

"Describing places this large via a simple ad hoc 'sprawl' index is nuts," Gordon wrote in an e-mail. "People have been suburbanizing for a very long time. Yet, life expectancy keeps getting longer."

Fannie Mae Takes New Approach in Crisis

2007-05-05T18:51:00.000-07:00

By Jeffrey H. Birnbaum and David A. Vise

Washington Post Staff Writers

Fannie Mae, one of Washington's largest and most influential companies, is facing a serious crisis. Federal regulators have accused the mortgage-finance giant of cooking its books, in part to make room for huge bonuses for its top executives.

When confronted with emergencies in the past -- legislative efforts to tax the company or to end federal ties that give it a competitive advantage -- Fannie Mae has used a brass-knuckles approach. Its political machine, comprised of hired lobbyists, executives and directors of both political parties and grassroots groups nurtured by donations from its foundation, has long been able to run over its adversaries.

But this time, Fannie Mae is acting differently. While whispering to Wall Street that all the fuss is nothing more than a difference over accounting interpretations, the company's board has commissioned an independent probe led by former Sen. Warren Rudman (R-N.H.), making it clear that the directors want to put the matter behind the firm even if it means throwing some top executives overboard.

"I don't think they have ever faced a crisis like this. Political muscle is not going to fix this problem," said Washington attorney Bill Lightfoot, who tangled with Fannie Mae over tax issues while a member of the D.C. Council.

Fannie's chief executive Franklin D. Raines, chief operating officer Daniel H. Mudd and chief financial officer J. Timothy Howard have the most at risk, with regulators from the Office of Federal Housing Enterprise Oversight telling the board they are not sure they have confidence in current management's ability to make the broad changes needed to fix the accounting problems. The agency also prompted the company to change the employment contracts of those top three executives, to make it easier to fire them.

There are signs the gilt-edged resumes, and political futures, of three former Fannie executives have already been tarnished, because of findings they profited from manipulation of financial results in 1998. Former Fannie Mae chief James A. Johnson, who holds a top post in the Democratic presidential campaign and headed the Kennedy Center and the Brookings Institution; Smithsonian Institution Secretary Lawrence M. Small, who was Fannie Mae's chief operating officer; and Washington lawyer Jamie Gorelick, a former Fannie vice chairman, who has served as deputy attorney general, the Pentagon's top lawyer and a member of the 9-11 commission, joined Raines and Howard in receiving sizable bonuses that year. Regulators allege they were paid after the company improperly deferred other expenses.

Johnson, who headed the vice presidential selection process for Sen. John F. Kerry (D-Mass.), could be the first to feel the fallout. Democratic Party insiders say that Johnson is no longer considered the leading candidate for treasury secretary in a potential Kerry administration. His role as leader of Kerry's transition planning for the White House might also be in jeopardy unless the regulators' allegations are convincingly disputed, they add. "It strikes me those are the most likely outcomes for Johnson," said a senior economic adviser to Kerry, who sought to remain anonymous for fear of reprisals within the campaign.

Johnson declined to respond to requests for a comment.

Small's mention in the OFHEO report is another in a series of personal missteps that have come to light recently. Earlier this year a federal judge sentenced him to two years' probation and 100 hours of community service for the purchase and possession of 206 art objects made with the feathers of protected species. As the director of the nation's largest complex of museums, Small was also ordered to write a public letter of apology and explanation for his actions.

Small, who was Fannie's chief operating officer for eight years, declined to comment on the regulators' report.

Gorelick has told friends that she would seriously consider an offer some day to serve as defense secretary, an aspiration that could be harder to achieve if OFHEO's allegations pan out. In an interview, she said, "I have no desire to go back into government in the near term." She added that she had "knocked herself out" on the 9/11 commission and for the time being is "very happy" working as a D.C.-based partner of the law firm Wilmer, Cutler, Pickering, Hale and Dorr.

At the same time, Gorelick might be spared because, unlike many of the other former or current officers, her responsibilities at Fannie did not specifically include financial matters.

Raines is in the most difficult predicament. In the wake of the regulators' study, Fannie's stock fell 13.4 percent in three days More than any other time in its 36-year history, the District-based company with 4,100 employees in the area finds itself under the microscope.

Besides the board-ordered independent internal probe by Rudman, the Securities and Exchange Commission has begun an informal inquiry. Members of Congress have promised to look into the matter. And OFHEO has hired Stanley Sporkin, a former federal judge and senior SEC enforcement official, to help them in the continuing examination of Fannie Mae.

Raines, budget director in the Clinton White House and chair last year of the Business Roundtable's committee on good corporate governance, now finds himself being criticized by regulators for permitting a corporate culture that made the accounting problems possible.

Until last week, Raines had held his company out as the shining opposite of Freddie Mac, its smaller rival in the housing finance business. Several top officers of that Virginia-based company were ousted last year in the wake of accusations by regulators that it had smoothed earnings improperly. Now Fannie is also accused of using accounting maneuvers to do the same thing, though regulators said they could not yet estimate the magnitude or even whether the results overstated or understated Fannie's bottom line.

By the account of one well-placed Fannie insider, the company's directors were becoming restless because of the lackluster performance of the stock price even before the regulators' report. Raines also had clashed behind closed doors with part of his board over the best approach to deal with Republicans' calls for stiffer regulation. Raines favored fighting such efforts, at least on a few key points, while a number of directors said he should accede to the proposals because in the long run they would help the company's standing with the investing public and on Capitol Hill.

Although a senior company official said the Fannie board wants to deal decisively and swiftly with the allegations of accounting manipulations, two directors who spoke publicly about the probe defended current management. In a written statement, lead outside director Ann McLaughlin Korologos, one of three outside directors on the committee that hired Rudman, said, "Frank Raines is handling this situation just as you would expect a first-class CEO to do -- with honor and absolute integrity. Frank's strong leadership and his commitment to the company's mission are appreciated by every member of the board."

Director H. Patrick Swygert, president of Howard University, said his board colleagues have not taken Raines to task on either regulation policy or the company's stock price. He added: "No one should draw an implication that we are moving to a change in management."

The current crisis is already renewing calls to beef up regulation of Fannie and Freddie, which buy home mortgages from banks and other lenders and package them into securities for sale to investors. Together they help finance about half the home mortgages in the country.

Federal Reserve Chairman Alan Greenspan and Treasury Secretary John W. Snow have long campaigned to impose tougher oversight on both companies. Greenspan and Snow have warned that serious troubles at either company could threaten the nation's entire financial system. And lawmakers who were defeated this year in overhauling the regulatory system plan to try again next year.

Fannie has faced -- and beaten back -- vigorous challenges before. The reason: its lobbying is arrayed broadly and cleverly, its alliances with community-based groups are potent and secure, and its personal connections reach into the highest levels of both political parties.

Fannie's use of contract lobbyists and its campaign contributions are also extremely aggressive. Last year it retained nearly two dozen lobbying firms and laid out $8.7 million to reach almost every interested constituency in Congress.

The company has been careful to layer its corporate suite with both Republicans and Democrats. Its top lobbyist, Duane Duncan, is a former chief of staff to Rep. Richard H. Baker (R-La.), a longtime company critic who chairs the House's subcommittee overseeing Fannie and Freddie. The company's most senior communications executive, Charles V. Greener, and its executive in charge of regulatory policy, Michele Davis, are longtime Republican operatives.

The company also employs Democrats other than Raines. Thomas E. Donilon, Fannie's executive vice president, for example, served as chief of staff to the secretary of state during the Clinton administration.

Fannie's board (part of which has been appointed by the President of the United States) and its former executives represent a bipartisan Who's Who of Washington's elite. The current board includes Kenneth M. Duberstein, a lobbyist and former chief of staff to President Ronald Reagan; Frederick Malek, an investor and former aide to President Richard Nixon; and Korologos, a former secretary of labor under Reagan. A recent former board member is Stephen Friedman, who is President George W. Bush's top economic adviser. Robert Zoellick, the current U.S. trade representative, is a former general counsel of Fannie Mae.

"Once you find serious internal control weaknesses at Fannie Mae and Freddie Mac, if that is established, then there is considerable political risk for members of Congress standing in the way of a reasonable regulatory package," said Thomas Stanton, author of a book on the potential risk the companies pose to American taxpayers, and a teacher at Johns Hopkins University. "I think Fannie Mae's political clout melts away in front of members' realization that they could be held accountable."

Notwithstanding its problems, Fannie has a powerful array of assets to call upon to fight restrictive legislation.

Rep. Baker said: "It is not going to be an easy thing to pass a bill to create a regulator of prominence."

No Road to Ruin

2007-05-05T18:49:00.000-07:00

By Daniel McGinn

Newsweek

For anyone who drools over home-makeover shows, visiting the KB Home studio in Las Vegas is like a child's trip to Disney World. The showroom is filled with granite counters, oak cabinetry, sleek appliances and young couples tricking out their dream home. This is where customers of KB, the nation's largest builder of entry-level homes, choose accessories, from superinsulated windows to built-in surround-sound speakers. The average buyer spends $25,000 on these options, but it seems painless thanks to the handy chart that studio director Miguel Hutton hands out at the door. The chart, with a sliding arrow pointing to the current mortgage rate, shows that $25,000 in upgrades will add just $145 to a monthly mortgage payment, or, as Hutton explains it, just "$35 a paycheck." Such is the power of low interest rates, which have helped fuel the biggest run-up in home values in a generation. For years experts have debated whether skyrocketing home prices—up 9 percent nationally in the last year—have gotten out of hand. By now you're probably familiar with the arguments. Bears say Americans' disenchantment with the stock market has made them irrationally exuberant for real estate, leading to speculation. They see rents falling, and too many people taking out adjustable-rate mortgages to stretch to buy a home. Housing bulls note that nationwide home prices have never fallen year-over-year, that demand for housing exceeds supply in many markets and that low rates have helped keep homes affordable.

What's new in this debate is that interest rates have begun to climb: while 30-year mortgages are still below 6 percent, economists predict they'll be at 6.25 by December and higher next year. Some say they're hearing the housing bubble's first hiss of a leak. Home sales dipped in July; in some markets, real-estate agents report rising inventory and slower sales. In this environment, KB Home, which built 27,331 homes last year, is a canary in the coal mine. The reason: its mostly first-time buyers are thought to be especially sensitive to rising rates, since they typically have small down payments and stretch to buy as much house as they can. "First-time buyers are going to evaporate first," says John Talbott, author of "The Coming Crash in the Housing Market." "When interest rates increase, they're not going to qualify [for a mortgage], and when they disappear the impact will be felt throughout the market."

Back at KB headquarters in Los Angeles, Bruce Karatz has spent many hours disputing that logic. "I never stop trying to think what better way there would be to explain [it]," says Karatz, KB's chairman. While interest rates clearly affect home sales, he argues that jobs, income growth and demographics are far more important. "Events drive home buying, not interest rates," he says. Even if mortgage rates soared to 9 percent, people would continue having babies and moving to take new jobs—life changes that compel them to buy regardless of where rates are. That's especially true for first-time buyers, he says. Young families look at home buying as a rite of passage that's as much emotional as financial, so they'll forge ahead even if rates are high. If anyone is likely to be deterred by higher rates, he says, it's trade-up buyers, who can more easily hold off buying.

Las Vegas newlyweds Shane and Mai Boxrz agree with his view. Eight weeks ago they had their first child, Kaden. They now live in a two-bedroom town house with stuff stacked everywhere. So they recently ordered a home in a KB development a few minutes from the Strip. For $250,000, they'll get a Spanish Colonial with three bedrooms and a loft. What happens if rates rise before they close next March? "We need a larger home—that's just the fact of the matter," says Shane, an emergency medical technician. "I can't determine what goes on with interest rates." Somehow, they'll make the numbers work.

Families around Las Vegas appear to be making the same calculation. Prices here increased 50 percent last year, and at the 48 KB subdivisions currently rising from the desert, prospective buyers continue to sign on to waiting lists. Still, with Vegas starter homes now well over $200,000, KB is hedging its bets by building its first local condo community. With more units per acre, prices start at just $177,900; that could appeal to buyers squeezed by rising rates.

At every KB community, workers don't start hammering until the company's got a buyer and a deposit. That's a big change from the early 1990s, when companies "spec built" homes, then looked for buyers. When the market turned south, empty homes would languish, dragging down the values of existing homes. Today large home builders like KB, Pulte and Centex build nearly one in every four new U.S. homes, and their build-to-order methods limit inventory and reduce risk, making housing more stable.

Not everyone buys these arguments. Just look at the stock market. Home-building stocks like KB trade at extremely low price-to-earnings multiples because investors worry they'll get dinged by rising rates. Karatz, however, insists that the obsession with interest rates represents "a clear misunderstanding of what happens when markets turn down." Other housing bulls say that even if conditions soften, they'll do so mildly. "There is no national price bubble—never has been, never will be," says David Lereah, chief economist for the National Association of Realtors. "We can't sustain record-setting prices forever, but the level we'll come down to is still a healthy level." As the stock and bond markets idle, homeowners can only hope the value of the walls around them keeps going through the roof.

Would You Pay a Million Dollars for This?

2007-05-05T18:47:00.000-07:00

With everything from modest homes to million-dollar dumps now commanding princely sums, it's no wonder that Boston's hospitals, colleges, and biotech firms are seeing so many job offers rejected. Who can afford to live here?

By Neil Swidey, Globe Staff

SO THIS IS WHAT it has come to: a two-bedroom ranch with a shallow backyard, sitting on a well-traveled road in Brookline not far from the hum of Route 9, with white Formica countertops in the kitchen, powder-blue carpeting in the living room, and pink tiles in the bathroom. The musty basement family room, which abuts a two-car garage, has walls decorated with narrow mirrors set alongside some kind of bulletin- board material, and the sunroom has a sliding glass door. That sticks

It just sold for a million bucks.

Walking around this solid but defiantly outdated house in a nice section of town is like stepping back into your grandmother's house after a long absence. The lemon-yellow draperies in the living room, the wooden TV console in the den, the cafeteria-style linoleum squares in the family room. All that's missing is the clear plastic covering on the sofa.

So, sit up straight, be careful not to spill, and lower your expectations. Dramatically.

This 2,000-square-foot house may evoke warm memories from childhood, but it also reveals the cold realities of the current metro-Boston housing market. At some point when we were all too busy marveling at the rapid appreciation of our own modest homes, we missed the complete erosion of one of the most enduring symbols of real estate: the million-dollar mansion. Forget stately Georgians, forget sweeping staircases, forget rolling grounds. Over the last year, some communities have seen everything from ordinary postwar ranches and Capes to shag-carpet split-levels sneak into the $1 million price range -- and in surprising number. The overheated Boston market is blurring two time-honored iconic images: your grandmother's house -- sturdy, simple, inviting -- and the million-dollar home -- august, luxurious, exclusive. Who knew Grandma could be comfortable in this crowd?

Houses here cost so much because there are too few of them for all the people who have been drawn to Boston because it's such a great place for great minds to do great things. But that reputation, which has kept Boston competitive all these years, is beginning to buckle under the weight of absurd home prices. Even in a recession, Boston's world-renowned hospitals, higher-education institutions, and biotech firms admit they are seeing their job offers turned down like never before, largely because of housing costs. If prices get so high that it becomes less desirable to move here, how long before it becomes less competitive as well?

Home prices in Massachusetts are six times what they were in 1980 -- by far the largest spike in the country. But salaries here are only about three times what they were in 1980, creating an enormous imbalance between what we're earning and what we're paying for our houses. There's no way this can continue.

Squeezed by property taxes?

2007-05-05T18:45:00.000-07:00

Homeowners see property tax increases, again. There are a few things you can do to cut your tab.

By Sarah Max, CNN/Money senior writer
BEND, Ore. (CNN/Money) – While some homeowners have been cashing in on rising property values, many have been feeling the squeeze of higher property taxes.

"Obviously, many homeowners expected an increase due to higher property values," said Pete Sepp, senior vice president of communications for the National Taxpayers Union, an group that advocates lower taxes. "But many homeowners have had serious sticker shock."

For state and local governments, property taxes represent the single largest source of tax revenue. Nationally, property tax collections totaled $297 billion in 2003, according to the Census Bureau, after a 5.7 percent annual increase for each of the last five years.

For homeowners, however, property taxes represent the single largest home-related expense outside of their mortgage. And while all-time-low mortgage rates have allowed homeowners to cut their monthly payments in recent years, spiraling property taxes have negated much of that savings for some.

"This is a back door way of increasing taxes," said Richard Roll, CEO and President of the American Homeowners Association (AHA), adding that homeowners in some cities have seen increases of 20 percent to 50 percent over the last few years.

65,000 tax calculations

According to estimates released by the District Columbia in August, homeowners in the largest cities in the 50 states and D.C. with property valued at about $255,000 paid an average of $2,836 in property taxes in 2003.

But property tax bills vary significantly from city to city. Owners in Bridgeport, Conn., paid $8,605 for this hypothetical property, according to estimates, while owners in Birmingham, Ala. paid just $988.

Though states have their own laws regarding how property taxes are levied, local governments have quite a bit of say in what tax rate is applied and how property is assessed. In fact, more than 65,000 governmental units have taxing authority, along with their own rules and procedures for levying taxes, according to the AHA.

To calculate property taxes, local jurisdictions generally multiply the tax rate, or mill levy, by a home's assessed value. For example, a town with a mill levy of $20 for every $1,000 of assessed value might charge a homeowner $2,000 for taxes on a house assessed at $100,000.

It's not always that simple, of course. Some jurisdictions base their assessments on a home's market value, while others take only a percentage of a home's market value. Still others base their property taxes not on market value but on replacement costs.

One solution to a high tax bill

According to the National Taxpayers Union, in fact, as much 60 percent of all taxable property in the United States may be over-assessed. Yet, only about one in 50 owners challenge their assessments.

Errors are common, according to Roll, because assessors often use trending or indexing to calculate home values. For example, an assessor might assign values to hundreds of houses at a time based on general characteristics, such as square footage, without actually seeing the property. This isn't exactly accurate if the houses around you have been remodeled while yours is circa 1960.

"Make sure you're not being put into a class of comparables that you shouldn't be," Roll said.

Simple errors are also to blame. Often, your assessed value is incorrect because it was based on incorrect data. Your assessor may have based the calculation on four bedrooms, when really there are only three. Or, he might have missed or miscalculated your square footage or overlooked a defect on your property, such as a leaky roof or cracked wall.

If you suspect this could be the case, make an appointment with your town or county's assessment office. (This information may also available online.) There, you can check your property card for errors, compare your neighbors' property cards with your own and get a clear explanation for how the value of your house was calculated.

To appeal your assessment you will need to do some research and possibly hire an appraiser, but you do not need a lawyer. The AHA recently published a Property Tax Reduction Toolkit, available free online if you register for a trial membership with the AHA. The National Taxpayers Union charges $6.95 for its booklet on fighting property taxes.

"You can determine whether you have a case in the space of an afternoon,"said Sepp. "Your chances for success are pretty good."

Hearst Crown Jewel May Stay Unspoiled

2007-05-05T18:44:00.000-07:00

California Hopes It Has Agreement That Will Protect Undeveloped Coast

By Rene Sanchez

Washington Post Staff Writer

SAN SIMEON, Calif. -- As the morning fog lifts across Highway 1, the splendor of one of the last untamed stretches of California's coast comes into view.

There are no sprawling golf resorts in sight, only a few elephant seals frolicking on rocky beaches. No jumble of surf shops or seaside condos, only green pastures, rare wildlife and the sound of ocean waves roaring to the shore.

The two-lane scenic highway winds for miles through the heart of the Hearst Ranch site, a natural wonder of the West Coast. Unlike so much else of California's ever more crowded coastline, it has not been overtaken by development.

And now, it probably never will be.

After decades of debate, California and the Hearst family, which has owned the land since the 1860s, have reached agreement on preserving nearly all of it. The conservation deal is one of the most significant in the state's history.

It is also a sign of the extraordinary steps that the state and environmental groups are taking to try to save what little is left unspoiled along the coast.

As part of the plan, California intends to give the Hearst Corp. $80 million in cash and $15 million in tax breaks for title to 13 miles of beachfront, and for guarantees that 80,000 acres of ocean bluffs and rolling grasslands in the shadow of the famed hilltop castle that the late media mogul William Randolph Hearst built in the 1920s will never be developed.

In exchange for giving up rights to build as many as 400 homes on the ranch, Hearst could erect a 100-room hotel in San Simeon Village. It already has a few commercial structures, as well as 27 homes on five-acre lots and 600 acres of vineyards and orchards in valleys east of Highway 1, which runs along the coast.

That's a far cry from what the fate of the ranch once appeared likely to be. In the 1960s, there were plans to build a city for 65,000 people. Seven years ago, Hearst proposed creating a 650-room resort, convention center and golf course alongside the ocean.

"What we're paying for that magnificent landscape is a heck of a deal for the state," said California Resources Secretary Michael Chrisman. "That's the crown jewel of the coast, and we finally know it's going to stay that way."

But the long struggle over the Hearst Ranch may not be over. Some environmental groups in California, including the Sierra Club, are objecting to details of the deal and could derail it.

The state's complicated agreement with Hearst over the prized coastal property, detailed in more than 500 pages of documents made public this summer, is dividing conservationists in ways that few issues do.

Some are calling the deal a dream come true, or at least a better bargain than they ever believed could be struck to spare the ranch from the kind of development that is pervasive along California's coast. But others contend that the fine print of the pact could harm sensitive wildlife habitats and limit public access to the beachfront that will remain in Hearst's hands.

Carl Zichella, a regional director of the Sierra Club, said that important elements of the deal are vague, secret or appear to be difficult to enforce.

"They're overselling this," he said. "It doesn't do what they say it will do. It's not a balanced deal."

Zichella and other activists are urging the state to renegotiate an assortment of arcane provisions in the deal before it gets finalized this fall. Others want to start from scratch and say they would prefer that California buy all the land or bar development on it.

The Hearst Ranch, which is about 250 miles north of Los Angeles and considered a gateway to the rugged majesty of the state's isolated Big Sur coast, has stirred passions in California for decades.

It also has become a destination for travelers from around the world, many of whom come to gawk at the Hearst Castle. Since the castle's construction, almost nothing about the surrounding land and its spectacular vistas has changed. It is home to about 1,000 plant and wildlife species, some of which exist nowhere else.

The Hearst family donated the extravagant estate to the state in the 1950s after William Randolph Hearst's death and uses the property only for limited cattle grazing. State officials have rebuffed every attempt that the family-controlled Hearst Corp. has made to develop the site.

An overflow crowd of more than 400 people attended a raucous public hearing near here last month on the proposed conservation deal. Many of them, including former foes of Hearst, voiced strong support. One speaker even called the environmentalists opposing it "brain dead." But some pleaded for revisions.

Stephen T. Hearst, great-grandson of William Randolph Hearst and a vice president of the family company, sounds weary of the squabbling.

"We think this is a marvelous transaction. It's an incredible win for all the parties involved," he said in an interview. "I can't tell you what it means to stand on this property and finally have a solution that has so much support."

Hearst scoffed at complaints that important elements of the agreement are not being disclosed. And he said that he has no interest in making substantial revisions to the deal, which has been negotiated over the past three years.

"We have enough momentum to complete this," he said. "I won't start over."

He might have to. Earlier this month, California's nonpartisan legislative analyst, a fiscal watchdog on state issues, issued a report that lent credibility to the complaints some environmental groups are making.

The report criticized several provisions in the agreement, concluding that there may not be enough protections in place for wildlife on the ranch and that the land appraisal on which the price tag of the deal is partly based may be inflated. The report urged state officials to examine the deal more closely before approving it. California's Coastal Commission also is expressing reservations about how the agreement will affect public access to five miles of beach.

"These are reasonable concerns," Zichella said. "We want this to happen. Let's just get it right."

The emerging campaign to block or revamp the deal is angering its supporters. They say that conserving most, if not all, of the ranch is an imperfect but compelling opportunity to save it from development -- and perhaps their last chance. If the deal collapses, and future appointees to state boards and coastal agencies support more growth on the coast, Hearst could revive its resort plans.

Chrisman said he is confident the deal will survive scrutiny and win the backing it needs in the next few months. It cleared an important hurdle this month when the state's Wildlife Conservation Board tentatively approved the agreement and said it probably would authorize spending $34 million to help pay for it.

There are two more obstacles before the deal is sealed: The Coastal Conservancy, a state preservation agency, and public works officials have to approve it, too.

"We still have some issues that we're working through," Chrisman said, "but we're bound and determined to make this happen."

The monster house next door

2007-05-05T18:43:00.000-07:00

5 Tips: Preventing a "McMansion" next to your bungalow.
August 20, 2004: 3:52 PM EDT
By Gerri Willis, CNN/Money contributing columnist

NEW YORK (CNN/Money) - For many Americans, bigger is better when it comes to their homes. The facts speak for themselves: According to the Census Bureau, the average home size has swelled 40 percent since the early 70's.

According to National Association of Homebuilders, 19 percent of homes built in 2003 were 3,000 square feet or more. But the appetite for larger and larger homes has run afoul of some. Namely those who've watched super-sized structures crop up next door.

How can you fight "McMansion" expansion where you live? Here are today's 5 Tips.

1. Find out what needs fixing.

As land becomes scarcer in desirable neighborhoods, teardowns and extreme renovations have become more common. 55,000 teardowns take place every year, and often, what crops up isn't pretty.

But the downsides aren't just related to aesthetics. Critics say the "bash and build" tactic leads to a scarcity of starter homes. And soon a "one class" community emerges.

When you buy a home, you're investing in a community. If zoning laws aren't in place or up to date enough to protect your investment, you could find yourself living next to an ugly house.

Investigate the zoning restrictions in your town. Your first stop should be your town's zoning and planning office. Is there a waiting period before residential tear downs can happen? Are there restrictions designating how close homeowners can build to their property lines or how big new homes can be? Once you have answers to these questions, you can plot a course of action.

2. Strength in numbers.

If you are worried that a "bigfoot" home could muscle its way into your neighborhood, you may have an ally in your neighborhood homeowners association.

These groups generally try to protect their communities, their unique characteristics and address quality of life issues. Adrian Scott-Fine of the National Trust says some of these groups are ad-hoc; with people getting together in each other's living rooms.

Others, in sub-divisions and planned communities, are more sophisticated -- with elected officers, written mission statements and bylaws. These groups even place restrictions everything from fence heights to the kind of vehicles you can park in your driveway.

If you don't have a neighborhood homeowners association, you may want to look into starting one. Talk to your neighbors. Find out if they're concerned about what structures could be built in your area. Build a consensus about aspects of your community that you want to protect.

A collective voice among stakeholders can give you leverage and credibility when you approach local officials about zoning issues. For more information on homeowners' associations visit Community Associations Institute at www.caionline.com or American Homeowners' Resource Center at www.ahrc.com.

3. Deal the monsters a setback.

Most city zoning codes stipulate a minimum distance that new houses must be set back from the street. These rules may not be consistent with building patterns on the actual street. So you may need to talk to your zoning commission about bringing the two standards in line with each other.

Once front setback lines are set, side and rear ones can be determined. These standards can be used to limit the size of a new house.

Many communities also require that a certain percentage of a lot be maintained as "open space." Clarifications are often needed to define whether driveways and porches qualify as open space.

As a concerned resident, you may want to update or clarify language about garage and driveway size and placement.

4. Play the waiting game.

A demolition moratorium makes it illegal to demolish properties in a community or neighborhood during a defined period, usually from six months to a year.

These delays establish a required waiting period before "demolition permits" are issued. These delay tactics can buy time for residents and local governments to negotiate alternatives and potentially limit teardowns.

According to the National Trust, in Newton, Massachusetts, a one-year demolition delay period was instituted to slow the pace of teardowns. In Highland Park, Illinois, the delay period is specifically used to determine whether a property merits preservation.

5. Meet in the middle.

In the end, there may be little that can be done to prevent a "bash & build" situation on your block.

But the cosmetic damage can be minimized. You may be able to work with your zoning board to come up with certain design standards that would force newer and bigger homes to blend in better with their existing neighborhoods.

According to Marya Morris, Senior Research Associate at American Planning Association, these standards can include stipulations about roof height and type, architectural style, building materials -- even paint colors.

Zoning boards can designate these measures as guidelines, meaning they're strictly advisory. Or they can be ruled binding standards, and become law.

Monster homes may not be all bad. Morris says property values can rise community-wide and on blocks where teardowns have been replaced by trophy homes.

Other proponents say they represent "smarter growth" because undeveloped areas aren't being bulldozed to make way for new homes and sprawl is minimized. For more information on fighting teardowns, visit www.nationaltrust.org.

Is It a Bubble If It Never Pops?

2007-05-05T18:42:00.001-07:00

The enduring strength of the housing market is confounding the conventional wisdom and may keep doing so for quite a while

So much for the housing bubble. As overheated as the real estate market may seem in certain parts of the country, it has thus far defied expectations of slowing down on a national level, let alone popping like a balloon. Most measures of housing activity -- from average sale prices to existing home sales to new residential construction -- are at or near record levels, even as mortgage rates have ticked up. In June some housing data, along with a slew of other indicators, showed signs of slowing. But the Aug. 17 report on July housing starts pretty much dispensed with concern for the time being. They jumped 8.3% in the month, more than making up for June's 7.7% drop, according to the Commerce Dept. Residential units are being constructed at an annual pace that remains near a 2 million clip, just a slight dip from the record 2.067 million annual rate of December, 2003.

"It is now clear that the June drop in starts was an aberration," concludes research firm ActionEconomics. Mike Englund, its chief economist, now expects July figures on new and existing home sales, due out later in August, to be strong as well.

"FAVORABLE FACTORS." Despite a flattening in prices at the highest levels in the past year, the median home price has also kept climbing. On July 26 the National Association of Realtors (NAR) reported that the median sale price of a single-family home rose to a record $191,800 in June, 10% higher than the prior year. And on Aug. 9 the NAR upped its forecast for 2004 home sales to a record 6.45 million, up from 6.1 million in 2003.

"The bottom line is that mortgage interest rates have been lower than expected, the economy is improving, and jobs are being created in an environment of strong housing demand -- all favorable factors for record home sales," said NAR Chief Economist David Lereah in the release.

Earlier in the year the expectation was that mortgage rates would rise sharply in 2004, but that hasn't been the case. Even though 30-year loans are likely to average about 6.1% in 2004, up from 5.8% in 2003, that's still very low by historical standards. And home buyers who can't afford those rates have been able to jump into adjustable mortgages. Some housing experts believe rates would have to rise above 8% for the housing market to stumble.

RENTAL WARNING. On the supply side, homes available for sale nationwide remain at a record low inventory of just 4.1 months, according to the NAR. "Until the supply goes up, the increase in price is rational," says Prakash Dheeriya, a finance professor at California State University at Dominguez Hills, who's studying the Southern California real estate market.

Many bubble theorists worry that a flood of new homes will come up for sale at the first sign of weakness in home prices, crushing the market. But Dheeriya says his research shows prices won't drop suddenly even if mortgage rates climb, primarily because sellers who were trying to get out at the top of the market have already done so. "I don't think there can be a sudden onslaught of supply," he says.

That doesn't mean the housing market couldn't slow from here -- or that prices can't fall in some select areas. Dean Baker, co-director of the Center for Economic & Policy Research, points to a glut in rental housing, especially in some overheated markets like Seattle and San Francisco. If rental rates remain flat or decline while prices for comparable homes continue to rise, that will take the air out of the housing market.

"Eventually people will start saying that it's foolish to buy a home when you could rent instead," he says. He also thinks mortgage rates will rise in the next year to levels that will preclude many families from trading up to a bigger home.

GRADUAL COOLING? Mike Sklarz, chief valuation officer at Fidelity National Information Solutions, which provides real estate pricing tools to lenders, already sees some subtle signs of slowing -- such as a leveling off in home prices above $500,000 in many markets. He's hearing a lot more anecodotes of "for sale" signs going up in pricey neighborhoods, signaling that not enough affluent buyers may be available for all the high-end homes being built. "Overall, however, inventories are still at incredibly low levels, and this is not the kind of thing that can turn on a dime," says Sklarz.

The best hope of many economists is that the housing market will gradually cool down, preventing too many mini-bubbles from building up in overheated real estate markets around the country. In that sense, a few years of slower home-price appreciation would be welcome. But with supplies tight, and plenty of buyers able to afford homes, that's not even beginning to happen yet.

Million-dollar madness

2007-05-05T18:41:00.000-07:00

Average price in Manhattan hits $1m mark, with Boston proper right behind

By Tatsha Robertson, Globe Staff

NEW YORK -- The 900-square-foot bachelor pad on the Upper West Side may have a terrace overlooking the Museum of Natural History, but it also has a grumpy doorman, just one bedroom, and a hefty price of more than $1 million. And yet, seven potential buyers within an hour raced to view the apartment last Tuesday night.

On the Upper East Side, a feisty bidding war broke out last week around another apartment -- also listed for more than $1 million -- with one contender offering $10,000 above the asking price, beating out a would-be buyer waving cash for the 1,100-square-foot condo.

Even more shocking: This is what now passes for ordinary in Manhattan's real estate market, where, for the first time, the average price for a condo or co-op has surpassed $1 million. The $786 average price per square foot also broke a record in the three months ending June 30, said residential appraiser Miller Samuel Inc. and Douglas Elliman, a large Manhattan real estate brokerage.

And then there's this city, in that familiar pattern, chasing New York's heels.

In Boston's Midtown -- home to the Ritz towers -- the average second-quarter condo price was $1,018,630, with an average price per square foot of $707, according to the Listing Information Network, or LINK. In the Back Bay, the average condo is selling for $800,009, with an average price per square foot of $652.

In Manhattan, an improving economy, low interest rates, Wall Street bonuses, and the lack of inventory have driven apartment prices to the new benchmark of $1,047,938 in the second quarter, the Miller Samuel report found, all while the average size shrunk to 1,332 square feet.

Jonathan Miller, author of the study, said he looked at a number of indicators, including median sales price and the price per square foot, all of which broke records. "So what it is telling us is that this is not a fluke," he said.

Some real estate specialists have suggested a $45 million apartment that recently sold in the new Time Warner building overlooking the southern edge of Central Park may have skewed the numbers. "We checked it and it only affected the average sale price by $17,000," he said.

Boston has one of the most expensive markets in the country behind New York City and San Francisco, but it is difficult to compare it or any other place to Manhattan's real estate market, which is literally an island unto itself.

"When you buy in New York City you are buying a way of life," said Jacky Teplitzky, the real estate agent for the Upper East Side property. "If you go to New Jersey . . . then you are going to get more space, but some people are willing to pay to be in the heart of things, to be in the heart of the action."
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In Boston, $1 million doesn't go as far as it used to, said Dan Mullin of Daniel A. Mullin & Associates in Boston, but buyers generally get more than they would in Manhattan.

"For $1 million in New York you're in a high-rise, not in the toniest neighborhood," Mullin said. "But in Boston, you are in a great neighborhood that's very convenient and most people can walk to work."

On Beacon Hill, which has always been among Boston's most expensive neighborhoods, the average apartment now costs $561,737, according to LINK. For $1.5 million in that neighborhood, you can buy a whole single-family home -- three beds, two baths -- on Rollins Place.

Still, anyone from outside of Manhattan visiting open houses may question if the prices are really worth it.

Agents tell stories of shocked transplants who realize the money they paid for their three-bedroom house in cities like Minneapolis or Dallas will barely afford them a one-bedroom apartment in the West Village. For those not willing to settle for a larger home in Brooklyn, Queens, or northern New Jersey cities such as Hoboken, agents say a $1 million apartment in Manhattan will get them no more than 1,300 square feet in a moderate to good neighborhood. While some will have amenities -- like the Upper East Side apartment that boasted sweeping views, a community swimming pool, and gym -- many do not.

"There are fabulous places in Brooklyn, Jersey City, and Hoboken -- but they are not Manhattan," said Pam Liebman, chief executive of the Corcoran Group in Manhattan. "To some, once you live here, you have arrived."

All of this has fostered a bit of arrogance among Big Apple sellers. These days, New Yorkers are so confident that their small apartments will sell, said Teplitzky, that she has a maid on call to clean and organize closets before a showing.

And for their part, buyers desperate to be in New York will accept views of dumpsters, forgo amenities, and succumb to addresses in the far corners of the city. One real estate agent last week seemed confident that a one-bedroom listed for more than $1 million would sell, despite its modest size and scrappy doorman. Its location near restaurants and walking distance from Lincoln Center made it appealing, but the agent, Billy Pfaff, said it's the 900-square-foot landscaped terrace that drives the price.

So who's buying?

"Sometimes I am amazed," said Teplitzky. "You can have a 30-year-old bachelor who did very well in the stock market or made $150,000 and saved his money and is able to buy a $1 million apartment."

Reality bites for new Realtors

2007-05-05T18:35:00.000-07:00

A listless labor market has pushed thousands into real estate jobs -- but there are too many agents and not nearly enough listings

Kelly Zito, Chronicle Staff Writer

For the past three months, newly minted real estate agent Jerry Funk has been clocking about 60 hours a week, scouring the Web for homes, touring properties and sending letters about his career change to friends and family, with the hopes of landing a listing.

But Funk, a 56-year-old former contractor, has yet to sell a house.

"You don't just get your license and make a six-figure income," said Funk, of Oakland. "Just thinking you're going to stand on a corner and someone will list a house with you -- that's not going to happen."

That's because the corner is increasingly crowded. Thousands of Californians, faced with a listless job market and buoyed by a relatively low barrier to entry, have turned to a career in real estate, hoping to cash in on the state's booming market.

The result? Depends on where you sit. For new agents and old, competition is stiff, and money is harder to come by. For consumers, the glut of agents makes it easier to negotiate lower commissions. All told, if interest rates rise, and the market cools, the bursting ranks of agents could be thinned dramatically.

Since 1999, the number of Bay Area Realtors has surged 44 percent, according to the California Association of Realtors, from 21,700 in 1999 to the current 31,200 -- a figure equal to the population of Pleasant Hill. In the same period, DataQuick reports the number of home sales in the nine counties increased only about 10 percent, from 119,000 to 131,000 -- meaning there are about four transactions annually for every agent in the region, compared with nearly 5.5 deals per agent in 1999.

And the crunch is probably even worse than that, because data are available only for Realtors -- a quasi-professional, organized subset of real estate agents that represents only one-third of all licensed agents in the state.

Funk, who traded a hammer for a real estate license because of spiraling workers compensation and liability insurance costs, is confident he'll be among those left standing if the housing market flags. On the other hand, his wife may take on a second job to help support him during the first few years on the job. But even agents with just a few years under their belts say they have a distinct advantage over the newbies -- a track record.

In nearly four years as a San Francisco agent, Katharine Holland has polished her sales tactics to a high sheen. It's the little things, she says: Fresh flowers at open home tours, bottles of champagne for her clients at closing and the $240 she spends out-of-pocket to cover a buyer's one-year home warranty.

The former high-tech marketing executive says that edge will help if Bay Area housing sales decrease, which Holland thinks is likely if interest rates rise or the local economy slackens.

"With how competitive the market is right now ... buyers are throwing money (at houses)," Holland added. But if listings become scarcer, "right away you're going to lose (real estate agents) who can't survive." So far this year, Holland has sold nine houses worth a total of $5.5 million, all gleaned through referrals.

Tight competition for listings is nothing new.

But as housing continues to boom, and the Internet allows consumers to explore everything from commission percentages to 3-D house tours, agents are increasingly under the gun. In fact, many sellers interview up to five agents before signing a contract. In an industry where the saying "You list, you last" is a mantra, that can be a painful lesson for the uninitiated.

The struggle doesn't end with listing homes. For those agents representing buyers, the competition can be even more grueling.

In San Francisco's Richmond District, a duplex recently listed for nearly $900,000 garnered 22 offers. The victorious agent was no doubt pleased with the roughly $1.1 million final bid. But that left 21 agents who didn't get to crack open the bubbly.

"This is one of the toughest markets I've seen in 22 years," said Jim Hedges, a sales manager at Prudential in San Francisco.

On a recent evening, Hedges added that he had stopped by his San Francisco office around 10 p.m., and there were a handful of new agents working busily.

Real estate has become the new gold rush.

"The people who want to get into the business look at the people making big money," said Fred Martinez coordinator for the real estate education program at City College in San Francisco. "What they don't see is there are very few people making good money and there are a lot of people who are barely making it."

A small number of agents make $1 million a year or more, and many earn closer to $100,000 -- but new agents may bring in as little as $35,000 or less in the first few years, after splitting their commission with their broker and paying for advertising, health care and insurance, according to interviews with several local agents.

What's more, there is growing evidence that discount and online brokerages such as Emeryville-based Ziprealty are squeezing commissions. Although there are no local data available, Real Trends, an industry newsletter, recently found that the national average sales commission had dropped from 6 percent in the early 1990s to 5.12 percent in 2002.

Some new agents are so desperate for a sale, they'll accept 1 or 2 percent commissions, down from the customary 3 percent said Liz Lucero, a Castro Valley agent.

Amid such competition, Lucero, who started in real estate in 1998, adds, "Even I'm a little scared. I don't know if I have the following of someone who's been an agent here for 20 years."

Nevertheless, thousands of people are flooding into the industry. One reason is there are few barriers to entry. California requires candidates to complete a 45-hour class before taking the state real estate license exam. Within 18 months of passing the test, an agent must also complete two more classes at 45 hours each, bringing the total to 135 hours. In contrast, to become a hair colorist, one must complete 1,600 hours of training before taking the state cosmetology test.

The economics of the business also encourage brokerage houses to hire as many people as they can. That's because a broker, who oversees agents and who must sign off on each transaction, generally splits the sales commission (typically the seller's and buyer's agents split a fee equal to between 5 and 6 percent of the sale price) 50-50 with new agents (over time, agents get to keep more -- sometimes as much as 80 percent).

Hence, if a firm has 10 agents who each sells five $800,000 homes in a year, the brokerage could pocket $480,000 if the firm kept 40 percent of each 6 percent commission. If the brokerage has 50 agents who sell at the same rate, that firm now grosses $2.4 million.

The dynamics in a hot market are clear. But what happens if the housing market sags? Specifically, many experts predict housing demand -- particularly in high-priced coastal areas -- will downshift as interest rates rise. That could create an even larger surplus of agents.

In past slumps, the number of real estate licensees has dropped dramatically. Although comprehensive historical data for the Bay Area are unavailable, the number of statewide real estate licensees plunged from about 336,000 in 1995 to 295,000 in 1997 as home prices across California stagnated. By year's end, the state Department of Real Estate projects there will be 400, 000 active licenses.

"History tells us that at some point (the number of licensees) is going to peak, and it's going to start declining again," said Tom Pool, spokesman for the agency.

The hordes of mortgage brokers also are expected to dwindle. Since peaking at 4,000 statewide four months ago, membership in the California Association of Mortgage Brokers has dropped by 1,200, though it's not clear whether that's because of market forces or new management of the group's renewal program.

San Francisco mortgage broker Leon Huntting, who described as "order takers" many who jumped into the fray during the recent refinance boom, estimates the number of brokers could tumble by 25 percent or more, leaving behind yearly paychecks that, at the peak, soared into the millions.

Few pundits foresee an outright housing collapse in the Bay Area. However, Scott Anderson, a senior economist at Wells Fargo, recently wrote that if jobs and incomes were to languish, a 7 percent interest rate could crimp Bay Area home prices by about 11 percent, or an average of $60,000.

Among incurably optimistic new agents, however, those numbers mean little.

Amy Petras, another new agent who works with Funk at Windermere Real Estate in Pleasanton, just completed her first sale -- a $475,000 house in Concord.

Even if the economy stumbles, "people are still going to buy and sell homes" said Petras, 28, adding that further competition might push more part- timers and potential retirees out of the market.

Funk also has had some small successes, including last week meeting a Berkeley woman who is shopping for a home in the $1.25 million range.

At the same time, he's pragmatic about his prospects in an industry where conventional wisdom says 10 percent of agents conduct 90 percent of the business.

"I'm not considering that I'm going to fail," Funk said.

A few moments later, he added with a laugh, "But I hope you don't call back in a year, and they say, 'He's not here anymore. He's a successful street sweeper.' "

Dreamhouse in the trees

2007-05-05T18:31:00.000-07:00

More home offices, guestrooms, even entire residences are migrating skyward. The appeal is obvious: Not only are they a great escape, they make you feel like a kid again.

By Steven Barrie-Anthony, Times Staff Writer

It usually starts as a joke. Even you think you're kidding, at first. A treehouse? Grow up. But then fantasy overwhelms your rational instincts, bit by bit. "Doesn't everyone want a treehouse?" Kit Sickels asks. That's a common assumption among adult treehouse owners, who often have trouble pinpointing the exact nature of their fascination. "You'll know what I mean when you visit," they say.

Sickels, a San Diego real estate developer, and his wife, Karen, a retired schoolteacher, started talking treehouses while vacationing in Colorado. They followed their whim to an Aspen bookstore, where they bought two books by treehouse maven Peter Nelson.

Nelson's Seattle-based company TreeHouse Workshop has built more than 60 treehouses in the last six years, many of them for adults. The world's largest treehouse builder, Scotland-based TreeHouse Co., fields "far more enquiries from the States than from all other countries combined," says president John Harris, whose company will build more than 150 treehouses this year, up from 40 in 2000 and three in 1996.

In the past five years, home offices, libraries, guest rooms, even entire houses have increasingly begun migrating skyward, aided by a tightknit cadre of treehouse architects, carpenters, arborists and engineers who build treehouses full time.

Buoyed by the realization that plenty of perfectly sane people choose to spend time in the trees, the Sickelses arranged to meet Nelson in Seattle. In the weeks following, Nelson drew up a plan and a 32-year-old carpenter named Bubba Smith rigged himself a temporary home in a tree on the Sickelses' 70-plus acres in northeastern San Diego County. In June of last year, construction began on what would become one of the few full-amenity treehouses in the country.

For the central figure in the American treehouse movement, it all began 34 years ago in front of a tiny Dutch colonial house in Ridgewood, N.J. Eight-year-old Nelson — a lanky, blond, would-be hippie wearing colorful bell-bottoms — grabbed a hammer and began nailing two-by-fours into a nearby maple. First he built a ladder, then a platform sprouted in the elbow of the split-trunk tree, then a roof.

Over the next eight years, Nelson and his tomboy kid sister divided their time between trees and the ground. About the time he got his "driver's license and discovered the opposite sex," his arboreal gene went into "deep freeze," he says, but it resurfaced when he was 25 and working in Colorado as a carpenter.

"I imagined that there were some adult-size treehouses out there," says Nelson, who began photographing any he could find. To gain access, he told people he was working on a coffee-table book. "Treehouses: The Art and Craft of Living Out on a Limb," was published in 1994 — and still sells.

While swinging through palms in Hawaii, Nelson heard of a guy in Oregon who had just built his first treehouse — so he flew to Portland and drove to "the middle of nowhere" to Takilma, a former copper-mining town. There he met Michael Garnier, a man with an imposing French fur trapper mustache who had opened a bed-and-breakfast hundreds of miles from any potential guests.

"I started a bed-and-breakfast with a cabin, but nobody came," says Garnier, who decided to fulfill a fantasy that had taken ahold of him as he pounded an impromptu treehouse for his kids — hoping that with luck, it would jump-start his business. He eyed a sturdy redwood and grabbed his toolbox. "I was going to make the treehouse that I always wanted," he says.

Word spread about a treehouse bed-and-breakfast, and in the early 1990s people such as Nelson started arriving — people who say they are busy indulging their childhood dreams.

There was Charlie Greenwood, a former Silicon Valley engineer, and Jonathan Fairoaks, certified arborist. These men and others formed the nucleus of the American treehouse movement, and for the past eight years they have returned to Takilma each Columbus Day weekend to participate in the World Treehouse Assn. Conference.

Conference attendance has grown to about 60 and includes enthusiasts from Japan and Europe who seek workshops on treehouse design or engineering. Each year they toast breakthroughs such as the Garnier limb, an artificial branch that minimizes puncture damage to the tree while providing an anchor that can hold up to 9,000 pounds.

Today, Garnier's Out'n'About Treesort features 18 treehouses up to 37 feet in the air, connected by swaying rope bridges and treetop platforms. Families can opt for the Suite — replete with queen bed, loft, dining table and antique claw-foot bathtub — or Treezebo, a gazebo-style pad nearly 40 feet above ground. To get to Treezebo, follow the Mountain View Treeway: a spiral staircase and 135 feet of suspension bridges.

It's a veritable city in the trees — bed-and-breakfast, plus Treehouse Institute, where visitors with arboreal inclinations enroll in courses from Treeminology to Treehouse Construction 301.

The team goes to work

By the time Smith is sleeping in one of your trees, you'll realize, as the Sickelses did, that building a treehouse is no longer a summer afternoon filled with lemonade, two-by-fours and rusty nails. Three forces are at work here: you, the planners and carpenters, and the tree. And the tree, say treehouse builders, is always in charge.

Enter the arborist, who will stage an elaborate dance, kneeling to gauge soil quality, prodding and measuring roots and branches to get a feeling for the site. Enter the engineer, who will "assess the critical geometry of the tree or trees," explains Greenwood. Measure base dimensions. Taper. Wind mass. Sail area. Watch Greenwood plug data into the same computer software used to design the International Space Station.

Nelson patiently draws and redraws, Smith and another carpenter spend the next nine months hammering, and the Sickelses learn to go with the flow. For lumber, the team fells standing dead oaks on the property, and Nelson ships beautiful refurbished wood from old demolished buildings in Seattle. A brick fireplace? Skylights? Let's give it a shot! Finally: plumbing, electricity, heat and air conditioning. In the end, the house is 980 square feet, 10 feet off the ground.

Kit Sickels "got writer's cramp from signing checks" — around $350,000 worth — but few treehouses are so elaborate and expensive. Most treehouse owners willingly sacrifice the practical for the fantastical — why bother with a/c and plumbing when you can be like Andrew Fisher and build 40 feet in the air and install a zip line that zooms you directly to a homemade archery range?
Fisher, a San Francisco interior decorator, is a Napa-based Tarzan come weekends. He followed the whim, got the books, but Nelson was too busy to call back. So Fisher phoned Jonathan Fairoaks and soon the arborist was in Napa, climbing and examining bark. About four months later, in July 2002, Fairoaks and a crew of two put the finishing touches on a 400-square-foot room high in the swaying pines.

"I wanted it to gray out to nothing and fade right into the trees," says Fisher, and unless you're looking for it you're liable to miss this guesthouse and weekend hideaway ensconced in the boughs above. The end of construction was only the beginning for Fisher, who built "make-believe furniture" — such as an oversize "fantasy Indian daybed" — and upholstered the walls in gold lamé. He installed a gilded steel chandelier fashioned to resemble tree branches sprouting from the ceiling and mounted jasmine-filled planter boxes outside.

Treehouses "are just inherently dreamlike," says Fisher. He and his partner host cocktail parties, and sometimes offer the room to newlyweds who "find it extremely romantic." All's well until windstorms kick up and buffet the treehouse 2 feet from side to side: time to descend — or all part of the adventure, depending on your perspective.

Then there are the unwearied do-it-yourselfers. Inspired by a treehouse photo in Smithsonian magazine, Pasadena magician Mike Caveney scaled the giant willow in his backyard and "basically never came down." In 1997, he donned a mountain climber's harness, anchored himself to the trunk, and built a platform 18 feet up. Next, he spent two years in the garage fashioning redwood walls and a shingled roof. "I went as slowly as I could," Caveney admits. "I didn't want this to end."

When Caveney emerged, he and wife Tina Lenert, also a magician, staged a "treehouse raising" party. Friends and neighbors cheered as Caveney used a pulley system to hoist each piece into place. The Craftsman-style treehouse took less than an hour to assemble. Solar panels on the roof generate enough electricity to power reading lights and a small TV. Even so, Caveney and Lenert often find themselves just … sitting. Sometimes for hours.

Far from the ground, sheltered by fluttering willow fronds, the mind slows and turns inward. "Decisions get made up here," Lenert says. New magic tricks bubble from the deep.

An ancient inclination

Treehouse living reaches back to ancient times, says Harris, a self-appointed historian of the treehouse movement who enjoys putting this "treehouse revival" in context. Long ago, "humans used to live in trees," he says. "It was the most hygienic way to live." Eventually people descended, but throughout history they have built in the boughs again and again. In 16th and 17th century Europe, for instance, "any well-to-do person had a treehouse," he says. "They were the places that the landed gentry took their girlfriends."

Winston Churchill had a treehouse at Chartwell Manor, his country estate in Kent, England, as did John Lennon during his first years as a Beatle. Chances are, though, that they never had to deal with what Garnier calls "Legalitrees" — the, "Hey, you up there in the tree! That thing isn't up to code."

"One grouch can take all the wonderment and fantasy away," says Jeri Chiavetta, a Huntington Beach grandmother who in 2000 was forced to remove her Greene and Greene-style treehouse after a neighbor complained. Few cities have specific treehouse zoning regulations, so negative attention can be a death knell. Locals rallied with petitions and "Save the Treehouse!" signs, to no avail. Greenwood, the engineer, is working on a model treehouse code that may someday, he hopes, be adopted by city governments.

Until then, make friends with neighbors. Invite them skyward. Once people leave the ground, say treehouse owners, they are more likely to build their own hideaway than to nix yours.

Those wild neighbors

You're never alone in the trees, says Mike Caveney, who once flipped open the trapdoor of his Pasadena treehouse and encountered 10 glinting eyes.

He backed down the ladder and watched as a family of five raccoons filed down after him, one by one.

He can hear woodpeckers tap-tap-tapping, and the phone cable intersecting the willow is like a freeway for squirrels.

But beyond the colonies of bees that have twice taken up residence in his treetop birdhouse, Caveney doesn't mind keeping company with critters.

It is a tree, after all.
How do you put an earthbound price on something as blissful and Elysian as a treehouse? Well, you turn to the comps, of course. In the area of Pasadena where Mike Caveney and Tina Lenert built their treehouse, homes sold in June for a robust $412 per square foot. The treehouse is 196 square feet, which makes their tiny Craftsman-style addition worth about $80,752 in today's market.

The squirrels are probably negotiable.

What about the tree?

Treehouses can bring a hidden benefit to their living hosts by extending the lifespan of the tree, if the structures are installed properly. They can, for instance, make it more stable by lowering the tree's center of gravity and strengthen weak branch structures.

"Let the tree design the treehouse," says Jonathan Fairoaks, an arborist and treehouse builder who considers trees "very intelligent…. Their chemical makeup allows them to adapt to new stresses."

To cut down or eliminate damage to the tree, hire an arborist before picking up a hammer, major treehouse builders say, and follow this advice:

• Build below the tree's center of gravity.

• If possible, let two or three trees share the load.

• Puncture the tree as infrequently as possible, and drill holes at a distance from one another so that wounds don't coalesce.

• Use bolts and hardware designed for treehouses — this way, the "tree actually grows over the bolts, and connections grow stronger over time," Fairoaks says. Nails will be slowly expelled.

Rent a bough for the night

Stay in a treehouse without building one. Some options:

Out 'n' About Treesort: Takilma, Ore. $90 to $170 a night. http://www.treehouses.com .

Treehouse Cottages: Eureka Springs, Ark. $139 a night. http://www.eureka-net.com/treehouse .

Cedar Creek Treehouse: Ashford, Wash. $250 a night. http://www.cedarcreektreehouse.com .

Tree Houses of Hana, Maui: Hawaii. $100 to $130 a night. http://www.maui.net/{tilde}hanalani .

A 5-Day Treehouse Stay in Pristine Wilderness: Outside of Anchorage, Alaska. $880 for five nights. http://www.earthfoot.org/places/usak04.htm .

Is A Housing Bubble About To Burst?

2007-05-05T18:29:00.000-07:00

As rising rates send mortgage payments higher, demand may cool

How crazy is real estate getting in parts of the country? Ask Sierra and Corbin Stewart, who just bought a modest, 2,000-square-foot house in Pleasanton, Calif., for $730,000. Mortgage and tax payments will consume 55% of their income, forcing them to do without extras such as cable TV. Says Sierra, a 29-year-old marketer: "The other night we were doing our budget, and we almost called the real estate agent and said we want to get out."
It may not be long before the Stewarts -- and other recent home buyers paying exorbitant sums around the country -- wish they had paid attention to their cold feet. After an amazing four-year boom in residential real estate, the housing market could finally be topping out and heading for a downturn. The culprit: rising interest rates. House prices could flatten on a national level in the next year or so while taking a spill in overheated coastal markets. A downturn in housing would squeeze recent buyers who overleveraged themselves to pay top prices -- and risk slowing the entire economy by cooling consumer spending as well as housing construction, lending, and the real estate business.

It's always tricky to call the top of an overheated market, and the pessimists have been wrong before. Optimists argue that even if there is a correction, most homes will remain far more valuable than they were a few years ago. And they say immigration, second-home purchases, and boomers' inheritances will support housing. Says Angelo R. Mozilo, chairman and CEO of mortgage lender Countrywide Financial Corp. (CFC ): "I think [the market] will continue to rise."

MONTHLY PAYMENT JUMP
But this time something important is different: Interest rates are inching up. It was the Federal Reserve-engineered decline in rates that inflated the housing bubble. But starting with a quarter-point increase in the funds rate on June 30, the Fed has begun what promises to be a prolonged tightening cycle. Even if the Fed's hikes are measured, higher mortgage rates will inevitably make houses less affordable. If 30-year fixed-rate mortgages rise just one percentage point, to 7.2% from their current 6.2% -- well within the range of forecasts -- house prices would have to fall 11% to keep new buyers' monthly mortgage payments from rising. If fixed rates went to 8%, prices would need to fall 20% to keep payments level.

Rising rates will hurt more than in the past because the market is more dependent on heavily leveraged buyers. Mortgage debt has shot up even faster than home values since 2000, leaving homeowners' equity at just 55% of housing value, down from 72% in 1986, according to Federal Reserve data. Leverage intensifies the pain of falling prices. If, say, a buyer owes $450,000 on a house that's valued at $500,000 and the house's price falls 10%, the equity shrinks to zero.

Heavy mortgage borrowing since 2000 has enabled the housing market to dodge an iron law: House prices can't perpetually rise faster than incomes. For the past four years, they have. The ratio of house prices to median family income is a record 3.4, a figure that's 19% above the 1975-2000 average, according to data from the Office of Federal Housing Enterprise Oversight and the Census Bureau. As rates rise, a return to the long-term-average ratio would require housing prices to fall 19% -- or incomes to shoot up an implausible 24%.

A downturn in housing, if it comes, is likely to chill the economy. People will feel less wealthy, hence more reluctant to spend. Goldman, Sachs & Co. (GS ) economist Jan Hatzius, among others, argues that a decline in housing wealth dampens consumer spending at least twice as much as a same-sized loss in the stock market. Even homeowners who still feel like spending would have a harder time qualifying for home-equity loans or cash-out refinancings -- a major source of consumer liquidity for the past few years.

Rather than a sudden wallop, the economic impact would be gradual and grinding. Ian Morris, U.S. economist at HSBC Securities Inc. (HBC ), estimates that housing prices nationally will slide 5% to 10% over the next five years. That could cause economic growth to slow to 2% by the second half of 2005 from 4% now, he predicts in a report called The U.S. Housing Bubble.

Optimists on housing point to the National Association of Realtors' Housing Affordability Index, which shows that a median-priced existing house at $184,000 is easily affordable by a family with the median income of $55,000. But that's only because interest rates are so low, holding down monthly payments. The juice of cheap mortgages has made housing pricey by every other measure. They're high not only in comparison with family incomes but in relation to rental rates for similar properties and relative to the cost of new construction.

Federal Reserve Chairman Alan Greenspan has downplayed the danger of a national housing bubble, arguing in part that housing is a local market. Sure enough, prices are still reasonable in most of the Heartland, from Ohio to Texas to Arizona, because construction has kept pace with demand. But bubbles are appearing in enough markets that their impact, if they were to pop, would be felt nationally. Greenspan also asserts that the high cost of buying and selling houses dampens speculation. Nevertheless, some markets are seeing speculative behavior such as "flipping," in which people buy houses or condos before they're even built and then sell them for a profit a few months later.

The overheating is greatest in markets such as Los Angeles, San Francisco, San Diego, Washington, New York, and Boston. The takeoff in coastal real estate started around 2000 -- suggesting that the speculative fever of the late 1990s did not die but instead jumped from stocks to real estate. From 2000 through the first quarter of 2004, single-family home prices are up at an annual rate of 8.2% in the Pacific region, 8% in New England, and 7% in the Middle Atlantic region, according to the Office of Federal Housing Enterprise Oversight. Prices rose 18% in Los Angeles, 14% in Miami, and 13% in Washington in the year through the first quarter, says the agency.

The most troublesome aspect of the price runup is that many recent buyers are squeezing into houses that they can barely afford by taking advantage of the lower rates available from adjustable-rate mortgages. That leaves them fully exposed to rising rates. In fact, the rise in one-year adjustable rates since late March has already raised annual borrowing costs for new buyers by 25%. And data from the Federal Housing Finance Board show that the most expensive markets tend to have the highest share of buyers with adjustable-rate mortgages.

Today's housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken. Caveat emptor.

The Wright stuff

2007-05-05T18:25:00.000-07:00

Looking for that special house? A number of homes designed by Frank Lloyd Wright are for sale.

By Les Christie CNN/Money contributing writer

NEW YORK (CNN/Money) - Well-designed buildings make a big difference in people's lives, or so Frank Lloyd Wright believed. Many residents of homes designed by the famous architect agree.

The cost to get into a Wright house can be surprisingly low. His big Prairie-style houses from early in the 1900s can sell for well into seven figures, but many of his later designs from the 1940s and 1950s tended to be smaller, simpler structures. Many of these come on the market at very reasonable prices; a three-bedroom, two-bath may go for $300,000, or less.

Even the fancier houses from that era were, though never cheap, not unreasonably priced. Robin Ablin is a Bakersfield, Calif., realtor who grew up in one. He says his parents paid perhaps $85,000 for their house in the late 1950s. That's a sizable sum, but not bad compared to many of the larger, but otherwise undistinguished, homes being built at the time.

Living in a Wright house, "was so timeless and inspiring," says Ablin. "The light was always different. There was always something new to appreciate."

Earlier in his career, Wright developed his Prairie style, which incorporated Asian themes, such as steeply pitched roofs and flared eaves. Later, he moved away from neo-classicism and historic revivalism of any kind.

He called his ideal Usonian -- a distinctive American style free from previous architectural conventions -- that incorporated open floor plans, custom designed furniture, and numerous built-ins.

Ron Scherubel of the Frank Lloyd Wright Building Conservancy in Chicago says Wright's work can be distinguished by three main themes: use of natural materials like rock and wood; the open floor plans and glass walls that served to draw the outdoors into the house; and an intentional lack of clutter in which "the house itself is the decoration," says Scherubel.

Housing crunch revives old cities

2007-05-05T18:24:00.000-07:00

By Haya El Nasser and Paul Overberg, USA TODAY

The quest for affordable housing is fueling the explosive growth of suburban cities in the Sun Belt and even reviving some old industrial cities in the Northeast, according to population estimates out Thursday.

Census numbers for 2003 show that cities grow when jobs are plentiful and housing costs are relatively low compared with the rest of their regions.

"It's the scramble for value," says Robert Lang, urban expert at Virginia Tech and author of Boomburbs, an upcoming book on large, fast-growing suburbs. "People are finding back doors into the hot places."

The hottest places are still concentrated in the Sun Belt. Since 2000, eight of the 10 fastest-growing cities with more than 100,000 people are suburbs of Phoenix, Los Angeles and Las Vegas: Gilbert, Chandler and Peoria, Ariz.; Rancho Cucamonga, Fontana and Irvine, Calif.; and Henderson and North Las Vegas, Nev. The other two are Port St. Lucie and Cape Coral, Fla.

The hunt for affordable housing also has helped reverse declines in older cities within commuting range of strong job centers. Cities in New Jersey and Connecticut are enjoying some of the spillover from New York's prosperity. Immigrants who are first-time homebuyers often gravitate toward older areas that offer comparatively cheap housing and good transportation to major job markets.

The same trend is unfolding in California, where most growth is away from cities along the coast where housing is expensive. Growth is sweeping inland cities such as Palmdale, Fresno and Bakersfield, where median home prices range from $200,000 to $260,000, compared with $423,000 in Los Angeles and $635,000 in the San Francisco Bay Area.

"Housing affordability is having an incredible effect," says Peter Morrison, demographer at the RAND Corp. "It's driving growth outward."

The numbers also show that:

• Some of the nation's older big cities are losing population after gaining in the 1990s. Chicago, which gained more than 100,000 people in that decade, is now losing. So is Boston. But many of their suburbs are growing as families in search of good schools and cheaper and bigger homes move out. New York, while still growing, has slowed considerably. Cities whose losses slowed in the '90s now are losing at a faster pace, including Detroit, Philadelphia and St. Louis.

• San Antonio has replaced Dallas as the nation's eighth-largest city. "Big D" is landlocked; San Antonio keeps annexing land. "Our focus has not been, 'Let's pass Dallas,' but, 'Let's increase the quality of growth in our city,' " says San Antonio Mayor Ed Garza.

It Pays to Negotiate Your Agent's Commission

2007-05-05T18:23:00.000-07:00

By James R. Hagerty

June 22, 2004 -- After selling a home, real-estate agents often give clients a gift, such as a scented candle or decorative plate. Jeffrey D. Thomas received something more memorable: a check for more than $10,000.

Mr. Thomas is the kind of customer most agents don't want to meet. He believes commissions on home sales are way too high, particularly for people like himself who have bought and sold homes before and are willing to help steer the transaction. "It's not rocket science," says Mr. Thomas, a lecturer at the Massachusetts Institute of Technology.

So he found an agent, Bill Wendel, who works by the hour, instead of taking a percentage of the sale price as most agents do. With Mr. Wendel's help, Mr. Thomas bought a $537,400 home in Arlington, Mass., last year. The price included a 2.5% commission, or $13,435, for the agent representing the buyer. But Mr. Wendel, who has been experimenting for years with new ways to sell real estate, turned his cut over to Mr. Thomas. In turn, Mr. Thomas paid Mr. Wendel $2,960 for 29.6 hours of work at $100 an hour. That left Mr. Thomas with a net rebate of $10,475.

Unlike Mr. Thomas, most people who buy and sell houses still pay sizable commissions. Typically, the amount, split between agents for the buyer and seller, is around 5% of the sale price, though the going rate is as much as 7% in some areas. But as his experience shows, there are alternatives. Some traditional real-estate firms are becoming more open to negotiating a commission amount. Others openly compete on the basis of discounts. Meantime, a small number of firms, including Mr. Wendel's Real Estate Cafe in Cambridge, Mass., charge fees based on the time spent working for the customer or the services provided. Even the for-sale-by-owner market is seeing new companies that provide services that facilitate the selling process, including online ads and yard signs.

"The big secret is out: Real-estate commissions are negotiable," says Mary LaMeres-Pomin, president of Assist-2-Sell Inc., a Reno, Nev., company that franchises discount firms offering a variety of home-selling formulas, including flat fees.

When buyers approach a traditional real-estate agency, they are often assured that the agent's help is free. That's true in the sense that the home buyer doesn't normally pay the agent. But the service isn't really free because home sellers factor in the cost of commissions when they price their homes. In fact, some sellers are willing to lower the price if you show up without an agent.

Agents' Advantages

Still, the traditional system has its advantages. For one, you don't pay anything if the agent doesn't find you a home you want to buy and wrestle the deal all the way to closing. If you're paying by the hour, you could spend a lot of money even if you don't end up buying a home.

For sellers, agents also have compelling arguments. One of them: We know more than you do about marketing a house and will fetch a much higher price than you could on your own. That claim is impossible to verify but probably true in many cases. Another effective pitch: We screen the potential buyers, making it less likely that criminals will get a free tour of your home.

Good agents also can provide lots of information about neighborhoods, handle negotiations and ensure that environmental hazards are checked out and regulations followed. Most people want "someone who knows all the technicalities to walk them through the process," says Walt Molony, a spokesman for the National Association of Realtors, a trade group with about one million members.

That kind of hand-holding has grown increasingly expensive as house prices have soared. Real Trends, an industry publication, estimates that the average total commission -- split between agents for the buyer and seller -- is about 5.1%. On a $500,000 house, that means agents for the buyer and seller are divvying up about $25,500. The agents make the same amount whether it's a long and difficult transaction or a quick sale.

Such high prices are not set in stone, however. And the industry is opening up to different ways of doing business -- and of getting paid.

Ask for a Discount

Even for people who choose more traditional real-estate agencies, it's always advisable to ask for a discount. While some agents refuse to work for less than a certain percentage, others are hungry enough to compromise. Some Internet real-estate services, such as HomeGain.com Inc., Emeryville, Calif., allow you to solicit online pitches from a variety of agents and compare things like experience and commissions. Brad Inman, chief executive officer of HomeGain, says many people find it more comfortable to dicker over commissions online than in person.

Jeff Tuck, owner of Option 1 Realty Inc. in Richmond, Va., says the commission should depend on the circumstances. If a seller represented by his firm helps find a buyer during the listing period, the commission is 2.95%. If Option 1 finds a buyer, it's 3.95%. And if an outside agent provides the buyer, the fee could be as much as 4.95%, depending on the amount of compensation the seller is willing to give a buyer's agent.

Getting Something Back

Other agents are willing to give buyers a rebate on part of the commission they earn. Daniel Ruben Odio, who owns DROdio.com Realty in Falls Church, Va., gives a rebate of 2% of the purchase price on newly built homes and 1% on resale homes. He also runs a service called RebateReps.com, which locates agents in other parts of the country who are willing to offer rebates. INest Realty Inc., Bloomingdale, Ill., which is licensed in 18 states, offers 1% rebates on new homes.

LendingTree, a unit of Internet travel and marketing company InterActiveCorp, offers rebates or other rewards for people who use agents recommended by the company, which, in turn, earns a referral fee from those agents. LendingTree's offers include gift cards from Home Depot Inc. or American Express Co., valued at as much as $2,000, depending on the price of the home. LendingTree offers a rebate if you sign up with a real-estate agent through a service offered jointly by Costco Wholesale Corp. and LendingTree. It also offers mileage awards with several airlines, but customers must enter the program through those partners to qualify. Some states prohibit or restrict rebates.

Beyond Commissions

But even with a rebate, do commissions make sense?

John Tuccillo, an industry consultant and former chief economist of the Realtors association, notes that lawyers who draw up wills don't demand 6% of your net worth; their charges tend to be based on how many hours they have to work. Mr. Tuccillo says more real-estate agents will follow that example in the future, though he expects that commissions will remain the dominant form of payment.

The National Association of Real Estate Consultants promotes the fee-for-service approach and says it has about 1,200 members. Hourly charges by members typically range from $75 to $150, says Julie Garton-Good, founder of the association.

In fee-for-service arrangements, customers need to figure out how much help they require. Mr. Thomas looked at homes online and drove past the ones that seemed most interesting before calling on Mr. Wendel to get appointments to tour some of them. The agent also advised on market conditions and helped negotiate the offer, among other tasks. Mr. Thomas didn't find it necessary to have an agent with him during the inspection or closing.

Help-U-Sell Real Estate, Syosset, N.Y., runs a national chain of franchisees that charge fees based on the level of service required. The company says its franchisees typically charge a flat fee of about $2,950 to advertise a home for sale, provide yard signs, advise on the offering price, negotiate with potential buyers and guide the sale through closing. Under that plan, the sellers of the house, rather than a Help-U-Sell agent, show the property to prospective buyers. For an additional fee of around $2,950, Help-U-Sell agents also will show the home.

Meantime, for sellers who decide to do without an agent, there are companies that offer services to facilitate the process. New York-based ForSaleByOwner.Com charges fees for listing homes on its Web site and in its listings catalogs. Prices range from about $80 a month for a basic ad to $699 for a deluxe package, which includes yard signs and insertion into your local multiple-listing service, a database for real-estate agents.

"The consumer understands that 6% [in commissions] is crazy, and they want an alternative," says Colby Sambrotto, the company's chief operating officer.

-- Mr. Hagerty is a news editor in The Wall Street Journal's New York bureau.

Q&A Greg Spier, home builder, on housing trends

2007-05-05T18:22:00.002-07:00

Greg Spier will become president of the Home Builders Association of Massachusetts this week. For 20 years, the company he heads, Maystar Realty, has built custom homes in and around Foxborough. Globe reporter Chris Reidy spoke to Spier in a partially built four-bedroom Colonial home in a Foxborough subdivision called Stonehurst, where he discussed trends in homebuilding and the Massachusetts housing shortage.

Q. Tell me about this house. I assume it incorporates many of the latest styles.

A. People want something that looks old but is maintenance free. So the exterior is cement siding that looks like wood, and we use a lot of plastic and vinyl. That means an $8,000 to $10,000 exterior paint job will last 15 years instead of five.

Everybody wants a functional mudroom these days. Nobody uses the front door anymore or a formal living room. One thing we do is build a playroom off the family room so the family room doesn't get cluttered with toys. When the kids get older, you can turn it into a computer room or an office.

And everybody wants a walk-in pantry off the kitchen.

Q. What's the asking price of this house?

A. It's $825,000, and what you get for your money is 3,800 square feet of living space and an unfinished basement on a lot that's just over an acre.

Q. That's a lot of money. No wonder many first-time buyers are turning to the condo as the Massachusetts starter home of choice. Why are prices so high?

A. It's two things. One is a housing shortage. And the fact that land costs are so expensive. The builder's rule of thumb is that a house sells for about three times the price you pay for land. Today, in Foxborough, the cost of the land you need to build a house can be $250,000 or more.

Q. Will prices come down? Do you think the bubble will burst?

A. The last time we saw the market crash was in the late 1980s and early '90s. Part of the problem then was there was a lot of excess supply. The big difference today is there isn't a lot of supply. Things might slow down. But you're not going to see the bubble burst and prices come way down.

Part of what is keeping prices up is that the cost of supplies and materials is rising. Plywood, nails, steel -- the prices are going up.

One reason, we think, is China. Right now, China is just sucking up all these materials.

Q. Before you started your own business, you worked for companies that built commercial projects in Texas and Florida. Is the planning and permitting process different in Massachusetts?

A. In those states, the county does planning and it has professional people making decisions that impact the whole area. But here in Massachusetts, that's not the case. Planning is done on the community level, and, unfortunately, most of those planning boards are volunteers with no planning experience.

Consequently, we deal with a lot of people who just want to stop growth. Yet the big problem we have is a demand issue. Right now, the Romney administration has determined that we needed 30,000 units per year to meet demand. And last year, we developed about 19,000.

Q. How's your business?

A. Better than last year. 2000 was our best year when dot-commers were buying houses. In the last couple of years, the people we build houses for were losing their jobs. And last year we also had a tough winter. When the temperature gets too low, the nail guns don't work right and you have to think about shutting it down. This year, though, should be pretty strong.

How to Differentiate Agents From Brokers

2007-05-05T18:22:00.001-07:00

By James R. Hagerty
Special to RealEstateJournal

Question: What is the difference between a real-estate agent and a real-estate broker and what education and training is needed to enter these fields? If someone has a background in architecture, zoning and planning and wants to work in real-estate development, what can they do to find a job in this field?

--Andre, Indianapolis

Andre: In general, an agent works under the supervision of a broker, who has more experience and training. But the terminology can be confusing. In New York, for example, agents are commonly called brokers.

In most states, becoming an agent is pretty easy -- perhaps too easy. States usually require around 30 to 60 hours of instruction, followed by an exam, says Walt Molony, a spokesman for the National Association of Realtors. In New Jersey, people who want to become agents must complete 75 hours of course work. Obtaining a hairstyling license in New Jersey, by contrast, requires 1,200 hours of instruction.

To become a broker, an agent generally must meet certain requirements for experience, do further course work and pass another state exam. Requirements vary widely from state to state.

Succeeding as an agent is far more difficult than becoming one. The work is usually done on a commission basis, so if you don't complete any transactions, you don't get any compensation. Real-estate firms rarely provide such benefits as health insurance or retirement funds.

Some owners of real-estate brokerage firms say that around a third of the people who become agents give up within a year or so because they aren't finding enough customers to earn a decent living. It helps to have an engaging, cheerful personality to attract clients. You need a thick skin to endure the many snubs you will endure when approaching potential customers. Once you do find customers, you need loads of patience to cope with the ones who can't make up their minds or pull out of deals at the last minute.

Experience as an agent could be valuable for someone who wants to go into real-estate development. So would working for a real-estate developer. Knowledge of finance and real-estate law would be very helpful. Reading books by Donald Trump may not be necessary.

Can an expensive house appreciate?

2007-05-05T18:20:00.000-07:00

If I buy an expensive house, can it still appreciate in value or is it all downhill from here?
By Walter Updegrave, CNN/Money contributing columnist

NEW YORK (CNN/Money) - I'm considering buying a house for $799,000 in a highly desirable town in New Jersey. But with a price that high, I wonder whether it could possibly appreciate. Do you think the value will increase, or is it possible I could end up not getting my money back even if I stay for 10 years?

-- S. Joseph, New Jersey

You've got to be careful about how you use words like "high" when it comes to the price of houses -- or, for that matter, stocks or other assets. Is $799,000 high? That's hard to say.

When I was looking for a home in the suburbs of New York City twelve years ago, I thought the asking prices of $300,000 and up were astoundingly high. It was hard to imagine that people would be willing to spend much more than that for a home. Today, however, many of those same houses are selling for two to three times what they fetched back in 1992.

Home prices generally rise

Fact is, home prices do rise over time. Generally, prices rise at about one to two percentage points above the rate of inflation, although that increase can vary substantially from town to town.

In areas where there's plenty of land for new development and builders have an easy time putting up new homes, the rate of inflation tends to be lower than in places where there's little room for new homes or there are other barriers, such as tough regulation, limiting the supply of housing.

An area's rate of income and population growth also affect the path of housing prices. Not surprisingly, vibrant areas where incomes are growing and people are moving in tend to have higher house appreciation rates than areas where growth is stagnant and people are moving out.

And although house prices do tend to move up over time, that increase does not occur in a straight line. There can be periods where house prices climb at a slower rate than inflation, or even drop in value.

Outright declines in home prices are relatively rare, but they do occur -- and not just in deteriorating neighborhoods. Paradoxically enough, many areas where home prices have the most explosive moves upward also have the highest potential for prices to decline.

That's because consumers in some towns -- or neighborhoods within certain cities -- develop what Yale finance professor Robert Shiller has described as a "speculative attitude." Essentially, people view homes as a scarce asset that they've got to own at virtually no matter what the cost. Otherwise, they'll be priced out of the market.

This leads almost to a bubble mentality. While that leads to high rates of appreciation while the bidding frenzy is on, prices can also drop if they rise to the point where people begin to see them as absurd or if the number of people who can afford them declines significantly, perhaps because of a setback in the economy.

In fact, we saw such a phenomenon in some cities on both the East and West coasts where, after surging in the late 1980s, home prices slid by 10 percent or more and took seven to 10 years to recover.

Could there be another downturn?

Could we see a downturn in house prices again in the near future? Well, certainly the prospect of rising interest rates isn't a good thing for home prices, since higher mortgage rates will make homes less affordable.

That said, however, rates remain relatively low by historical standards, so unless we see them really zoom up, I doubt they'll precipitate any severe dropoff.

More importantly, though, there is no one housing market, as there is a stock market. Which means that while national economic factors can affect the general trend in home prices, prices can still react quite differently from city to city and even in different neighborhoods within cities. Housing, like politics, is local.

Get a sense of prices in the area

So before I put in a bid on a house in that "highly desirable" town, I would first try to get a sense of what prices have done over the past few years.

Have they ratcheted up many times over? Are homes selling within a few days well over the asking price? Is there evidence of a "speculative attitude," a sense that buyers are engaging in a feeding frenzy? Does the climb in prices show any sense of leveling off -- has the number of days a house is on the market increased or decreased recently? A real estate agent should be able to help you get a sense of what the situation is (although you'll want to keep in mind, of course, the agent has a vested interest in selling you a home.

The hotter the town is and the longer it has been hotter, the more careful you should be about buying. That's not to say you shouldn't buy. But you'll want to consider issues such as how much you'll want to bid, how much of your income you want to devote to purchasing a home and how long you're likely to stay there.

The longer you plan to stay, the less risk there is that you would end up selling at a loss. But in assessing how long you're likely to stay put, remember that factors beyond your direct control, such as a layoff or job transfer, could cause you to sell sooner than you expect.

To gain more insights into the current state of the housing market and how you might play it, I recommend you check out the Real Estate section of our site.

You should also read the special report on the housing market and real estate that appeared in MONEY's June issue, which includes stories such as "What is your house worth?" and "What's next for home prices?"

Of course, neither I nor anyone else can tell you exactly what's going to happen to prices in your area, or anywhere else. But the more you know about what drives home prices and how they tend to behave, the more informed a decision you can make about whether and what to buy.

Alarm over price of homes

2007-05-05T18:19:00.000-07:00

Kathleen Pender

Remember how the price-earnings ratio for stocks soared before the market crashed?

Well, the price-earnings ratio for homes in the Bay Area and greater Los Angeles is also skyrocketing, according to a forthcoming report from UCLA economist Ed Leamer. He says homes are so overvalued that prices are likely to fall when the Federal Reserve raises interest rates.

A P/E ratio shows how much investors are willing to pay for a dollar of earnings. It is one way to measure the public's enthusiasm for a particular asset class. The higher the ratio, the greater the zeal.

In the stock market, you calculate P/E by dividing a company's share price by its annual earnings per share.

In the housing market, you divide the price of a house by the annual rent it could fetch.

Leamer calculated the average P/E for homes in several California metro areas by dividing the median price for a single family home by the average annual rent for a 2,000- square-foot apartment in each region. (You can get more and better data for apartments than rental homes, and the two tend to track each other.)

His findings: In the Bay Area, the average P/E for a house shot up to 13. 8 in the first quarter of 2004, compared with 7.2 in 1999 and 2000. Today's ratio is more than a third higher than it was 1989, just before housing prices started a multi-year descent.

In Santa Clara County, the average P/E is 15.8 today, compared with 10.3 in 1989.

"We are in a situation that is more extreme than it was in 1989," says Leamer, director of the UCLA Anderson forecast.

In the Bay Area, P/E ratios are skyrocketing because rents are falling while home prices are escalating, Leamer says.

In San Francisco, the average rent has skidded to $22.01 per square foot from $31 per square foot in 2000, while the median home price has risen to $606,000 from $450,755.

In Southern California, where the economy is stronger and more diverse, rents are rising, but housing prices are rising even faster. As a result, P/Es are also rising, though not quite as far as in Northern California.

In Los Angeles, the price of a median home rose to $399,000 in the first quarter of 2004 from $215,652 in 2000. Rents rose to $19.35 per square foot from $18.07.

When the economy is booming, investors are willing to pay higher prices for stocks and houses because they think the earnings from these assets will grow faster than normal. Occasionally, they throw common sense out the window and start believing that earnings will continue upward in a never-ending spiral, untouched by forces like competition and economic equilibrium.

That is what happened to the stock market and tech stocks in particular in the late 1990s and early 2000. In March 2000, Cisco was trading at 192 times earnings. Today, it is trading at 35 times earnings.

When the economy cooled in 2000, stock prices started coming down, but housing prices continued to go up because falling mortgage rates had made homes more affordable.

"The elevated P/E ratio didn't come from the strength of the economy. It came from low mortgage rates. That's great if it is a permanent new condition. We know it's not true," Leamer says.

In a 2002 paper, Leamer warned about rising P/E ratios for homes, but did not see the bubble bursting "in the immediate future." But, he warned, "this could turn around rapidly if Mr. Greenspan decides to increase short-term interest rates."

In closing, he wrote, "Stay tuned. I promise to keep you informed of any breaking developments in this regard."

With the Fed likely to raise short-term interest rates this summer, Leamer says now is the time to worry about a bursting bubble.

On Tuesday, Federal Reserve Chairman Alan Greenspan downplayed the bubble theory, but told senators, "We perceive that the very strong expansion in new and existing home sales is now flattening out. And the really quite unexpected boom in home sales over the recent years is unlikely to be continued. Our forecast is generally flat, not in prices but in aggregate volumes. Where house prices go, I'm not sure, but I would be quite surprised if they showed continued acceleration on the upside."

Leamer says the best-case scenario for housing is that price appreciation slows or stops. This would require the economy to grow rapidly with relatively little inflation so people could still afford homes, even with a modest increase in interest rates.

In the worst-case scenario, "inflation starts becoming more apparent, and long-term interest rates elevate much more rapidly or substantially."

In this case, higher interest rates not only make mortgages more expensive, but also choke off the economy, leaving fewer people able to afford homes. Higher rates also make bonds and money market funds relatively more attractive than real-estate investments. As a result, housing prices fall substantially.

The most likely scenario, in Leamer's view, is that "we have another recession in 2006, with significant problems in the housing sector."

At a home-building conference in San Francisco Wednesday, Ken Rosen, chairman of UC Berkeley's Fisher Center for Real Estate and Urban Economics, called the current P/E ratio for Bay Area housing unsustainable.

He predicts that gradually rising rates will make purchasing a home less attractive than renting for many people. That will lower house prices, increase rental prices and bring the P/E ratio more in line with long-term averages.

Safe as houses?

2007-05-05T18:18:00.000-07:00

e afraid, be very afraid..? The Governor of the Bank of England has joined those warning over the property market boom. But did he tell us anything we didn't already know? By Mike Verdin

We live in an era of 24-hour news, of media receivers sited in briefcase and pocket as well as opposite the sofa and on the bedside table.

Yet despite such constant availability of fresh information, a statement of the obvious has a mystifying ability to steal the agenda.

Thus, a statement last night, that after a rise of 20 per cent in the past year the chances of a house price crash had increased and that house-hunters should consider the possibility of interest rate rises, has prompted uproar.

It was plain months ago that, after a long period of house prices growing more quickly than wages, the chances of a property downturn had been raised. Even major lenders, such as Nationwide and Halifax, who have an interest in the continued boom, have warned of a slowdown.

As for rising interest rates, if four increases in borrowing costs since November had not communicated the message, why should a couple of comments to a business dinner in Glasgow?

The answer is the identity of the man who made them, Mervyn King, the Governor of the Bank of England and, as such, the central banker with both hands on the levers of monetary policy.

When in April Tony Dye, a fund manager nick-named "Dr Doom" for foreseeing the end of the dot.com boom, forecast that property prices could fall by 20 per cent, markets listened.

When Mr King last night made more cautious observations, investors clamoured to sell shares in housebuilders, with the likes of Bellway shedding 4 per cent this morning, and mortgage banks, such as Northern Rock, also losing value.

All Mr King said was a statement of the obvious: "After the hectic pace of price rises over the past year, it is clear that the chances of falls in house prices are greater than they were."

As John Butler, an economist at HSBC, explained: "It is the nearest a central bank comes to saying the housing market is a bubble."

The bursting of the dot.com bubble, and collapse of the last property boom in the late 1980s, shows what impact such cataclysms can have.

So should homeowners be afraid?

They can take comfort in at least three points. First there is the failure in the supply of new homes to match demand raised by the increasing number of households. The rate of housebuilding, despite the Government taking steps to improve, has fallen this year, although it remains above the 2001 figure, which was the lowest since the 1940s.

The Royal Institution of Chartered Surveyors, in a report this morning highlighting the first fall in new buyers for six months, also noted that the number of unsold properties on estate agents' books was at its lowest level since 1979. "The number of houses for sale remains weak, putting upward pressure on prices," the institution said.

Without a surge in the numbers of properties for sale, the price of homes is unlikely to fall considerably.

The second point of comfort for homeowners is that Bank of England forecasts over the property market have often proved wrong. A prediction, made last year that price growth would fall to zero this year appears increasingly unlikely.

And the third point is that economic bubbles are identifiable only in retrospect. Mr Dye was predicting the dot.com boom's demise for years before its 2000 occurrence. Maybe he was bound to be right, eventually. Others were not so fortunate in their predictions: Jeffrey Vinik, the head of Fidelity's huge Magellan fund, warned of stock market "euphoria" in 1995 only to see the tech-weighted Nasdaq index soar by 45 per cent in 17 months. He resigned in 1996.

Certainly, houses appear expensive, but demographic factors are at work as well as mere speculation.

Mr King also noted in last night's speech the changing nature of the UK economy. A century ago, the ten largest UK businesses, by stock market value, were all railway companies. The UK built more ships than the rest of the world combined.

Divorce rates, the ageing population, immigration and two-income families have transformed to the fundamentals of the property market. Such changes are irreversible, as are the majority of the property price gains of the last few years.

Razing structures to build dream

2007-05-05T18:16:00.000-07:00

Cape conservationists target developed sites

By Jenn Abelson, Globe Staff | May 31, 2004

BREWSTER -- Spread over more than 2 acres near the western edge of Brewster, the Jolly Whaler Village's shuttered cottages with chipped gray and yellow paint have greeted motorists on Route 6A for the past few years. Across the road on part of the motel's land sit several RVs in a trailer park. To get rid of what many feel is an eyesore near the entrance to this Cape Cod town, Brewster residents shelled out nearly $1 million to buy the property next month, raze the buildings, and create a park. The recreational vehicles have been evicted and their owners are beginning to pack.

For decades, most conservation efforts on the Cape have focused on virgin woodlands and coastal areas. But now, more communities are turning their attention toward rundown buildings and deteriorating shacks, buying and bulldozing them to make way for public parks and scenic views.

The "undevelopment" effort is not popular with everyone. But especially in the densely built mid-Cape, preservation advocates and town leaders say they have no choice, given the lack of open space.

"We're not on some mission by God to take down buildings," said Mark Robinson, executive director of Compact of Cape Cod Conservation Trusts. "But some things just aren't suitable for redevelopment, and these projects can enhance the beauty of a community through open space."

For Jim Maddocks, who lives less than a mile from the Jolly Whaler, the change is long due.

"It's going to be a wonderful way into Brewster and reflect what the rest of the town really looks like," said Maddocks, a member of the Brewster Conservation Trust who is helping to design the park.

Ostracized across the Cape for being home to the gaudiest stretch of Route 28, Yarmouth has led the way in the undevelopment movement, spending hundreds of thousands of dollars to purchase a dilapidated motel, contaminated gas station, and other neglected buildings to turn an acre or two in each case into pocket parks.

Although residents and conservationists across Cape Cod have largely praised these projects, some have criticized the undevelopment approach, saying towns could get more bang for their buck buying forested woodlands or protecting wetlands.

Several residents at Brewster's Town Meeting last fall challenged the wisdom of permanently taking commercial properties off the tax rolls, town officials said. But the Jolly Whaler project squeaked through with 12 votes more than the needed two-thirds majority.

Historically, towns and conservation groups have not seriously considered reclaiming developed sites, thinking that preservation options are forever lost once ground has been broken, said Robinson, whose nonprofit organization published a brochure called, "Take Back The Cape: Discovering Opportunities for Undevelopment."

Although purchasing open land and acquiring donated properties have been effective in protecting untouched areas, Robinson said, the rapid encroachment of residential and commercial development has made it necessary for towns to find ways to create open space. Since 1990, development on Cape Cod and the Islands has increased at a faster rate than almost anywhere in New England, Robinson wrote in the brochure.
Page 2 of 2 --

Many of the undevelopment efforts across Cape Cod are funded by land banks, which are created by a 3 percent surcharge on local property taxes to preserve open space. In most cases, towns have found a way around regulations that restrict land banks from buying properties with existing buildings by negotiating with private groups or property owners to remove the structures.

"The purpose of the land bank is not to solely do these types of projects or even a lot of them," said state Representative Eric T. Turkington, a Falmouth Democrat, who pushed legislation that established the land banks. "Certainly, though, one of the priorities is getting rid of ugly things. I don't blame Yarmouth."

Along Route 28 in Yarmouth, aging motels, neon lights, and asphalt parking lots have swallowed much of the land. Residents such as Jack Mulkeen conceded that his popularly scorned town is "where everyone on the Cape points to and says, `We don't want this to come here.' "

For more than a decade, though, Yarmouth has worked to tear down structures that built that reputation. Verdant pocket parks with benches and water views have replaced a languishing motel along Route 28 and Rascal's Nightclub, a once-popular bar that Mulkeen said had fallen on hard times and burned.

The town also took control of a gas station and turned it into a small green oasis at one of the busiest corners in South Yarmouth. But the fallout from unanticipated contamination has added $146,000 to the price tag for a 4,000-square-foot patch of land. The state is now considering slicing off a piece to widen the road.

"It can never be Route 6A, but we can try to improve it," said Mulkeen, chairman of Yarmouth Land Bank.

Over the past few years, other towns across the Cape have followed Yarmouth's lead. Since 1998, the 15 towns have spent about $100 million to preserve 3,500 acres. Robinson estimated that undevelopment efforts account for between 10 and 20 percent of land acquisitions.

"It's an idea we're interested in and like," said John Lipman, deputy director of the Cape Cod Commission.

In Truro, Town Meeting approved $312,000 two years ago to buy a defunct Mobil gas station that was plunked down in a residential area on Route 6. Now it's an open space of sandy soil and scattered trees.

Several years earlier, the town purchased a metal warehouse and contaminated gas station where Route 6 and Route 6A converge. Brenda Boleyn, chairwoman of Truro's Open Space Committee, said these projects are key to preserving a greenbelt along Route 6.

Without undevelopment, town officials said, there are few options to create open space in Hyannis. Last year, the town of Barnstable spent $650,000 to purchase a contaminated Gulf station on 1.3 acres that had become an illegal dumping site. In 1999, the town bought an idle gas station at the intersection of Route 28 and Barnstable Road. It paid $310,000 to create a .36-acre park.

"There's not a lot of remaining space in that area," said Lindsey Counsell, chairman of Barnstable Land Bank. "Without some level of undevelopment, we're not going to get open space."

Dennis put up $220,000 to buy a Cumberland Farms gas station on a half-acre that had fallen into disrepair with missing roof shingles and peeling paint. The Dennis Port site along Route 6A, surrounded by a historic cemetery and Village Green, is currently in the process of an environmental cleanup.

"It's fairly expensive for a small piece of land, but it was a visual eyesore in an area that otherwise the community has great pride in," said Henry Kelley, chairman of the town's Land Bank.

Town officials expect to begin seeding the property by the summer, and final plans call for brick walkways, elm trees, and shrubs.

"A lot of people appreciate a sense of environmental protection through aesthetics," Robinson said. "People may not grasp all the underpinnings of conservation, but on a gut level they can appreciate open space."

Where's the best place to live in America?

2007-05-05T18:14:00.000-07:00

Don Taylor wasn't satisfied with life in Rhode Island. So he decided to search for something better beyond his state's borders — maybe way out West.

His quest ended in Los Alamos, N.M.

"The pace in New England is kind of stressful. It's almost claustrophobic," says Taylor, a photographer who moved to Los Alamos 20 years ago. "But here, it's different. It's relaxed. We've got wide open spaces, and the people are laid back."

Taylor's praise is reinforced by a new American City Business Journals study, which says that Los Alamos offers the best quality of life anywhere in America.

ACBJ used 20 statistical indicators to rate living conditions in all 3,141 counties and independent cities across the nation.

Topping the list is Los Alamos County, located about 30 miles northwest of Santa Fe, N.M. Rounding out the top five are Olmsted County, Minn., which includes the city of Rochester; the Colorado counties of Pitkin and Douglas; and Loudoun County, Va., a suburb of Washington, D.C.

Affluence plays a role in the rankings, which reward counties whose residents have large incomes, big homes and college degrees. But high scores are also given for qualities not directly related to earning power, such as racial diversity, short commuting times and the availability of affordable housing.

The top twentyBased on quality of life, these counties rank highest.
Based on quality of life, these counties rank highest.

Rank

County

Population

Median income

Median home value

Percentage college grads

1.	Los Alamos, N.M.	18,343	$78,993	$213,000	60%
2.	Olmsted, Minn.	124,277	$51,316	$114,700	35%
3.	Pitkin, Colo.	14,872	$59,375	$497,000	57%
4.	Douglas, Colo.	175,766	$82,929	$237,600	52%
5.	Loudoun, Va.	169,599	$80,648	$202,300	47%
6.	Washington, Minn.	201,130	$66,305	$156,200	34%
7.	Johnson, Kan.	451,086	$61,455	$149,300	48%
8.	Hamilton, Ind.	182,740	$71,026	$163,600	49%
9.	Howard, Md.	247,842	$74,167	$198,600	53%
10.	Fairfax, Va.	969,749	$81,050	$222,400	55%
11.	Juneau, Alaska	30,711	$62,034	$179,200	36%
12.	Nantucket, Mass.	9,520	$55,522	$583,500	38%
13.	Wake, N.C.	627,846	$54,988	$156,200	44%
14.	Dakota, Minn.	355,904	$61,863	$148,500	35%
15.	Summit, Utah	29,736	$64,962	$281,600	46%
16.	DuPage, Ill.	904,161	$67,887	$187,600	42%
17.	Chesterfield, Va.	259,903	$58,537	$119,300	33%
18.	Fayette, Ga.	91,263	$71,227	$170,200	36%
19.	Hennepin, Minn.	1,116,200	$51,711	$141,100	39%
20.	Stafford, Va.	92,446	$66,809	$155,100	30%

Los Alamos' No. 1 ranking is a reflection of its prosperity and stability. The county's largest employer is the Los Alamos National Laboratory, which developed the first atomic bomb during World War II. The lab's facilities cover 43 square miles, devoted primarily to nuclear, biomedical and energy research.

Its presence is the main reason that 68 percent of the workers in Los Alamos County hold managerial or professional positions — scientists, engineers, lawyers, doctors and teachers among them. That's the highest concentration of such top-level jobs in any U.S. county.

The median household income in Los Alamos, $78,993 per year, is surpassed by just four other counties in America. (Median is a midpoint, with half of the county's households earning more and half earning less.)

"I looked at those demographics before I moved here," says Taylor, owner of Memory Maker Portraits. "My business is kind of a luxury item. When families need to scale back, it's the luxury items that get cut, like portraits. But the average income here is high, and that makes a difference."

Olmsted County, Minn., which is No. 2 in the ACBJ study, also has a robust, high-profile employer, helping to generate strong levels of income and education. About 27,000 residents of the Rochester metropolitan area work at the famed Mayo Clinic.

Olmsted County is no stranger to success in studies of this type. Money magazine has rated the Rochester area No. 1 on three different quality-of-life lists since 1993.

"People expect us to say how nice life is here. After all, that's our job," says Gary Smith, executive vice president of Rochester Area Economic Development Inc. "So it's good to have these third-party endorsements, if you will, these objectively subjective ratings."

Third place in ACBJ's rankings belongs to Pitkin County, Colo., best known for its glitzy county seat, Aspen — once a booming silver-mining town and now one of the nation's most expensive ski resorts.

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Then comes No. 4 Douglas County, located between Denver and Colorado Springs. It has the distinction of being the third-fastest-growing county in America, according to a recent report by the U.S. Census Bureau.

Colorado, in fact, outperforms all other states in ACBJ's quality-of-life study, filling nine slots in the national top 50. Most of its outstanding counties can be found in the Rocky Mountains or the high desert in the western half of the state.

"A lot of the interest in this part of Colorado has to do with scenic values," says Lance Stewart, president of the Western Colorado Economic Alliance. "People moving to western Colorado are looking for opportunities to own a piece of property and work from that property — and have recreational amenities, as well."

Three other states claim at least five counties in the national top 50 — Virginia (eight), Minnesota (six) and Georgia (five).

Virginia's top representative holds fifth place overall. Loudoun County, which is northwest of Washington, lies directly in the path of metropolitan development — a point of contention between newly arrived commuters and those who remember Loudoun's placid, rural history.

And that's a key point. Even the counties at the very top of the list have imperfections — the lack of affordable housing in Pitkin County or the suburban sprawl in Douglas and Loudoun counties — even though their overall scores are strong.

ACBJ not only produced national quality-of-life rankings, but also broke down the results by population groups and individual states.

Fairfax County, Va., has the highest rating among counties with 500,000 residents or more. Other leaders are Olmsted County, Minn., in the 100,000-to-500,000 group, Juneau, Alaska, in the 25,000-to-100,000 classification, and Los Alamos among counties with populations of 25,000 or less.

ACBJ's report puts a twist on traditional quality-of-life studies, which almost always focus on metropolitan areas, thereby leaving out smaller communities. This study encompasses data for every county and independent city in the nation, generating ratings for all parts of America.

The results are naturally of interest to companies and individuals in search of new homes. But they won't outweigh critical economic factors, says Rochester's Smith. Companies still will be primarily concerned about the availability of workers and markets, he says, while individuals still will worry most about good jobs.

"Quality of life isn't the first thing they're asking about," says Smith. "It's not the biggest factor they'll base their decision on. But it can be one of those things that, in the end, can tip the balance your way."

American City Business Journals, Inc.