Smart Real Estate Investing

Home sales are slowing but the biggest and the most luxurious are still leading the charge.

Americans are buying homes that are bigger and contain more luxury features than ever. By some accounts, the million-dollar-plus home is now the strongest segment of many housing markets.

It is reported that a lot of money is going into high-end housing. Buyers just don't want to compromise their desires.

A lot of those desires have filtered down from the luxury home market to more mundane residences. That has contributed to a jump in single-family home prices of more than 13 percent this past year. The median U.S. home now costs about $214,000, according to the National Association of Realtors.

The largest areas of million dollar homes cluster in and around big coastal cities and posh beach and mountain resort communities. Among states, California had the highest percentage of million-dollar homes the last time the Census Bureau reported; 4.1 percent of all Golden State homes were worth a million or more at the end of 2003.

That was almost double the percentage of four years earlier. As housing continued to boom throughout 2004 and much of 2005, the number of million dollar homes in California has, undoubtedly, climbed considerably.

Other centers of high million dollar home ratios as of December 31, 2003 include Connecticut (3.3 percent), the District of Columbia (3.2 percent), and Massachusetts (2.2 percent).

Low million-dollar home areas were concentrated in the prairie states and the South. North Dakota had the lowest incidence, less than 0.01 percent, followed by Iowa (0.04 percent), and Arkansas (0.08 percent).

What buyers get for a million dollars varies greatly. In expensive Santa Monica, it might only buy a two bedroom teardown on a vest-pocket lot. In much more reasonable Dallas, on the other hand, it could buy a 5,000 square foot mini-estate with six bedrooms, five baths, in-ground pool and spa.

Mortgage rates took a break nearly across the board after consistent increases over the past five weeks

The average rate on 30-year fixed-rate mortgages decreased to 6.26 percent for the week ending Feb. 23, down from the prior week's 6.28 percent, a Freddie Mac survey said. In the year-ago period, the 30-year mortgage averaged 5.69 percent.

The average rate on 15-year fixed-rate mortgages fell to 5.89 percent, down from 5.91 percent. A year ago, the loan averaged 5.22 percent.

Five-year adjustable-rate mortgages averaged 5.96 percent, up slightly from 5.95 percent the prior week. The five-year loan averaged 5.05 percent last year.

One-year adjustable-rate mortgages averaged 5.32 percent, down from 5.36 percent from the week before. At this time last year, the one-year loan averaged 4.16 percent.

It is reported that tame core inflation figures and market confidence that the Fed will continue to keep inflation low kept mortgage rates in check this week. It is expected that over the long term, expect mortgage rates will bounce back and forth a bit, remaining near current levels. Based on applications for home purchases in November and December, home sales are also expected to slow to a more traditional pace in January and February.

Buying foreclosures once appealed mainly to the small group of hard-core real estate investors who were willing to dig into untouchable rehab projects and wrestle with deadbeat tenants.

But in recent years, scores of self-help books, Web sites, gurus and classes have sprung up, touting the notion that buying property from distressed homeowners is not only the surest path to real estate wealth but also within easy reach of anyone with spare time and gumption.

Now, with rising interest rates and softening prices threatening to derail homeowners who stretched to buy with risky loans, the message from this movement goes, this is the year for foreclosure bargains. Or is it?

Foreclosure investing has always been fraught with risks -- decrepit money pits, troubled tenants who refuse to clear out. But rather than creating more buys, the torrid market of the past five years has added a whole new level of risk by leaving fewer genuine deals available for thousands of eager new investors.

Armed with the time and the temperament, you can make money buying and selling foreclosures. But now more than ever, it's important to steer clear of the common misconceptions and learn from seasoned investors who've done it right.

Myth no. 1: A big spike in foreclosures is right around the corner.
If you've been waiting for the McMansions in your town to start going on the auction block, your wait isn't over just yet. Many homeowners who took short-term adjustable-rate loans or home-equity lines of credit a few years ago are already grappling with higher monthly payments, and more will be doing so next year.

Despite that, the foreclosure rate -- currently less than 1 percent of all loans -- isn't expected to change much in 2006, says Alexis McGee, president of listings Web site Foreclosures.com.

That's because in most of the country, anyone who has owned a home for even a year or two is likely sitting on enough equity to sell or refinance if the loan payments become unaffordable.

Another brake on foreclosures is that banks are no longer playing hardball with strapped homeowners.

Finally, the foreclosure process can be lengthy, ranging from a month to more than a year, depending on state law.

For example, in states that have recently lost industrial jobs, such as Ohio and Michigan, foreclosures rose significantly in 2005. So if the national economy sours this year, expect a big jump in foreclosures in 2007.

Another catalyst is overbuilding. Regions that have enjoyed a boom in new condominium development -- South Florida, for example -- could soon suffer a spike in foreclosures if investors are unable to rent or unload their condos for a profit.

Myth no. 2: Foreclosed houses sell for far less than their market value.
In a study of foreclosure sale prices in more than 600 counties nationwide in 2005, Christopher Cagan of data provider First American Real Estate Solutions found that, on average, foreclosed properties sold for about 15 percent less than comparable homes in the area that were not distressed. But in states where real estate prices have risen the most, including Arizona, California and Virginia, foreclosed properties sold for within 5 percent of full market value.
Bear in mind that his study looked only at homes that went into foreclosure, not those in danger of being seized, where you can often find better deals. But Cagan's numbers also don't take into account the inevitable costs of repairing the property, which are often far higher than expected.

Myth no. 3: Anyone can make money in foreclosures.
If you've read one of the many books touting the benefits of foreclosure investing, or attended one of the increasingly popular seminars, you've likely come away thinking that it's a snap.

Wrong. There are three ways to buy foreclosures: directly from a homeowner in trouble (pre-foreclosure), from a bank that has repossessed the home (real estate owned, or REO) or at public auction.

Each involves a different set of rules and regulations -- and challenges. Whichever method you choose, the chance you take right now is that you will overpay for the property. Few foreclosures are on the market, while the number of interested buyers has grown faster than Brangelina's brood.

Most experts say there's little point in looking at REOs today; lenders aren't repossessing many properties, and the few REOs that come up for sale usually command full market price.

If someone is still living in the home, you must handle the eviction. Moreover, auctions tend to be frequented by the most experienced investors, who know plenty of tricks to confuse the novice bidder.

If you want to try your hand at an auction, it's essential that you research state laws beforehand and come armed knowing what similar properties in the neighborhood are selling for. And don't forget the money. Most auctions require you to make a 10 or 20 percent cash deposit on the spot, with the balance sometimes due within a day. Finally, decide what price you're willing to pay and stick to it.

If you're willing to knock on doors and ask embarrassing questions, you may find deals among pre-foreclosures. For a $15- to-$50 monthly subscription, you can get listings from Web sites that search court filings and other public documents for homeowners behind on their mortgage payments. You can then contact the homeowner and try to negotiate a deal.

Trouble is, the listings on many of the Web sites are out of date -- and a lot of people are reading the same lists. That's why Pamela Smith, a part-time flight attendant and real estate investor, taps a network of realtor contacts she's developed and checks listings of borrowers in default in her county paper for leads.
Auctions are by far the riskiest way to invest in foreclosures. The public sales tend to be frequented by the most experienced investors, who know plenty of tricks to confuse the novice bidder.

Unusually warm weather led to a spike in home building in January, but most experts still believe the real estate market will cool off later this year.

Housing starts jumped 14.5 percent to an annual rate of 2.28 million last month, the highest since March 1973, the Census Bureau reported. Economists surveyed by Briefing.com forecast that housing starts would come in at an annual rate of 2.02 million in the month.

But part of the jump came from seasonal adjustments, since government number crunchers usually assume cold weather in January. Instead, the month was the warmest January on record in the United States, which prompted many builders to start work unexpectedly early.

Taking out seasonal adjustments, the raw number of housing starts rose 11 percent last month, making it the best January for housing starts on record since the bureau started keeping records in 1959.

Still, there have been numerous signs recently that the real estate market is cooling, and most housing economists expect both home sales and residential construction to slip from the record levels reached in 2005.

Good ... for January
Despite the strong "headline" number, economists said Thursday's did little to change their outlook for the full year.

"It's a very good number for January," said Phillip Neuhart, economist for Wachovia. "But should we get carried away with the seasonally adjusted number? No. We still expect a slowdown in 2006, no question about it."

Still, the report also shows some strength that can't be explained away by the weather.

Statistics from the South, which accounts for nearly half of new home construction in the country, and where weather and seasonal adjustments are less of an issue, showed a roughly 9 percent gain in housing starts.

Building permits seen as a sign of builders' confidence in the market, came in at an annual pace of 2.22 million in January, up 6.8 percent from December. Permits are much less affected by weather and seasonal adjustments than housing starts.

Much of the gain in the permits issued came from a 24 percent jump in multi-family home permits; single family home permits gained only 2.4 percent.

The January boom probably also got some help as mortgage rates edged lower. The average 30-year fixed rate mortgage rate was 6.15 percent last month, according to mortgage financing firm Freddie Mac, down from 6.27 percent in December and 6.33 percent in November.

California Boston Real Estate

It is reported that if you want to know where real estate prices are headed in California's Orange County, the man to talk to is Gary Watts. The Mission Viejo broker has 35 years of experience and doubles as a spokesman for the O.C.'s Association of Realtors.

In 1989 he earned the nickname "Scary Gary" by correctly predicting that the housing market in Southern California was headed for a tumble. Then, in 1996, he was one of the first to call the area's rebound. Since 1997, Orange County home prices have seen a 195 percent rise. Will the good times last another year? Gary doesn't hesitate. "Fifteen percent is pretty much in the bag for Orange County in 2006," he says. "It's impossible for prices to go down this year."

Head 3,000 miles east and talk to almost any broker in Boston, by contrast, and he'll tell you that business has slowed in the past several months. Consider John Ford. Just two years ago, five properties was the most he needed to show a prospective buyer before eliciting an offer. "And then it would be a bidding war," says Ford, who employs 30 agents in three Boston area offices. Today he's averaging 14 property tours before a skittish client is ready to buy.

Half a decade into the biggest real estate boom in our nation's history -- and a full two years after pundits began sounding alarms about its coming to a close -- the endgame is still unclear. Pick your cliche: Are we in a bubble that's ready to burst, or are we, as National Association of Realtors chief economist recently asserted, headed for a "soft landing"? The almost daily drumbeat of national statistics doesn't help sort things out. Is it more significant that we just had a fifth straight year of record home sales, or a third straight month of decreasing prices?

"No one really understands how these things behave," says a Yale economist who presaged the dot-com crash and has lately been spending much of his time studying real estate. "Looking for indicators is a little bit futile because we've never seen this kind of growth in housing before."

In fact, the best way to get a handle on where the broader housing market is headed is probably to ignore the national numbers and stay local, and always follow the inventory. With that in mind, FORTUNE decided to check up on two areas at opposite sides of the country that have seen spectacular run-ups in home prices.

Let's start in Orange County, which has caught a case of real estate fever as acute as that of any region in the nation. Yale's Shiller surveyed Orange County residents last year on what they expected home prices to do over the next ten years. The average expectation was a 23 percent return -- per year! That kind of unbridled optimism has caused buyers to stretch beyond their limits. Southern California has become a hotbed for "exotic" mortgages, such as interest-only loans.

Recently there have been some signs of weakness. The rate of home price growth has decelerated dramatically, from 25 percent in 2004 to 14 percent in 2005, according to DataQuick Information Systems. It's slowed down a bit since last spring and summer, says the director of research for First American Real Estate Solutions. The real question is whether it's more than just the seasonal slowdown.

Boston isn't quite so fortunate. In the city's suburbs, single-family homes have gushed onto the market. Inventory increased to 4,281 by January, 79 percent higher than a year earlier, according to MLS Property Information Network.

LINK, a company that tracks the downtown market, shows an inventory increase of 61 percent in the last year. And 2005 foreclosure filings were up 45 percent in Suffolk County, which includes Boston. Massachusetts was one of just three states in the union to lose population last year -- never healthy for real estate, which depends on population growth. Prices are still holding up, but there are no Gary Wattses in Boston guaranteeing another year of gains.

So what does this tale of two Real Estate arenas mean for everybody else? The good news is that although there are definite signs of a long-term slowdown in each, it appears to be happening gradually, and in each case guided largely by local economic factors. In other words, there's nothing to suggest a Nasdaq-like plunge, with one overheated city taking down every other all at once.

Housing markets have cooled a bit, but not before prices got even less affordable than ever.

It is reported that although many overheated U.S. housing markets lost steam during the third quarter of 2005, most still grew less affordable.

The cities where housing prices are most out of whack apparently Santa Maria CA 86%, Naples FL 72%, Modesto CA 71%, San Diego CA 70%, Stockton CA 64%
Riverside-San Bernardino CA 64%, San Jose CA 61%
Sacramento CA 59%, Vallejo-Fairfield CA 58%, Los Angeles-Anaheim CA 57%

Most undervalued markets are apparently El Paso TX -26%, McAllen-Edinburg TX -21%, Fayetteville NC -18%,
Memphis TN -18%, Augusta GA -17%, Little Rock AR -17%, Pittsburgh PA -14%, Indianapolis IN -14%, Dallas TX -14%, Houston TX -13%

Through the third quarter of 2005, 79 of the 100 surveyed markets had gotten more expensive, relative to what Local Market Monitor calculates as fair value.

At the top of the list for overpriced cities was Santa Barbara, Calif. at 86 percent overvalued. The average home there should cost $308,900, according to the Local Market Monitor. Instead it sold for $573,100. The survey found that only 16 of the markets had gotten less expensive.

Overall, 37 markets were found to be severely overpriced, which meant that they were at least 15 percent more expensive than they should be, and only 6 were underpriced by 15 percent or more. Fifty-seven were deemd to be farily priced.

Prices are flattening out
While the slowdown in price increases seem to indicate the market has peaked, some regions, especially in the red-hot Sunshine State, continue to experience accelerating home prices.

These included Naples, Fla. where prices increased 32 percent in the 12 months through the end of the third quarter. That's after more modest increases of 18 percent in 2004 and 9 percent in 2003.

Other still-booming markets included Phoenix (up 34 percent), Cape Coral/Ft. Myers, Fla. (33 percent), and Deltona/Daytona Beach, Fla. (27 percent).

The level of over-valuation matters in three ways, according to Ingo Wenzer, president of Local Market Monitor. The higher it is, the greater the risk of it correcting; the greater the correction can be; and the longer it will take to return to present-day prices after they fall.

Insurance isn't protecting homeowners like it used to. Today more and more insurance companies are refusing to write new policies in vulnerable areas and canceling other homeowner policies in order to help their bottom line.

These top 5 Tips tell you what you can do if you find yourself without coverage.

1. You have options
If your insurer refuses to renew your policy coverage, don't sweat it. The insurance industry is still rife with competition. If you live in areas outside of Florida or Texas, you'll have a lot of options. Some states have hundreds of insurers you may not know about. The Internet has opened up many more opportunities to find these players.

And if you do live in an area that has seen more than its fair share of natural disasters, chances are your state has set up a joint underwriters program are insurance pools that sell insurance to people who can't get coverage in the private market. But this should really be a last resort. These policies are expensive and don't give you as much coverage as a private insurer.

2. Get the blueprint
There are three basic ways you can get coverage. Of course you can go to one of insurance behemoths. Here you will work with one agent who will assess your situation and suggest policies within that company for you. You'll be paying commissions of about 15 to 18 percent generally. You can also go through independent insurance agents who can help you compare quotes from several large insurers, but you'll be paying about 20 percent in some cases. The cheapest option may be to call direct agents and avoid commissions altogether. Unfortunately, there aren't many homeowner policies that are sold directly by the seller.

3. Meet your needs
Make sure you know how much insurance you're going to need. Estimate how much it would cost to replace your home by calculating how many square feet you have and multiply that number by the local construction cost per square foot for homes in your neighborhood. To find out these construction costs, call your local real estate agent or builders association. If you have a rare art collection or you collect antiques or have expensive jewelry, you'll want to buy additional coverage. In most cases a homeowners policy will only cover jewelry for $1,000 to $2,000.

4. Shop around
Get quotes from direct sellers and Web sites. You always want to see what the smaller guys are offering before you go to a large insurer. This way you may have more leverage as a customer. You can also check in with your state's insurance commissioner if there are any complaints that have been lodged against the company.

5. Get flood insurance
We've all seen the headlines about how financially strapped the Federal Flood insurance program is. That shouldn't deter you from getting flood insurance.
And considering that flooding is the most costly natural disaster in the U.S., and only about 1 in 4 homes in high risk areas carry this kind of protection, you should think about this coverage.

U.S. mortgage applications fell for a second consecutive week, led by a decline in home purchase loans, as interest rates hit their highest levels since early December.

The seasonally adjusted index of mortgage application activity for the week ended Feb. 3 decreased 1.2 percent to 619.3 from the previous week's 626.8.

The seasonally adjusted purchase mortgage index fell 2.4 percent to 425.1 from the previous week's 435.7. The index is considered a timely gauge on U.S. home sales.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.25 percent, up 0.05 percentage point from the previous week's 6.20 percent, marking their second consecutive weekly increase. Rates were at their highest levels since the week ended Dec. 9, when they reached 6.28 percent.

The 30-year fixed-rate mortgage, the industry benchmark, is substantially above its 2005 low of 5.47 percent reached in late June of 2005, but below its 6.33 percent high reached the week of Nov. 11.

Fixed 15-year mortgage rates averaged 5.84 percent, up from 5.79 the previous week. Rates on one-year adjustable-rate mortgages (ARMs) were unchanged at 5.48 percent.

Analysts say an increasing number of borrowers have been converting their ARMs into new fixed-rate loans as the difference between adjustable and fixed mortgage interest rates narrow. This has been a factor behind the recent rise in demand for refinancing.

The seasonally adjusted index of refinancing applications increased 0.2 percent to 1,751.0, compared to 1,747.2 the previous week.

A survey covers about half of all U.S. retail residential mortgage originations. Respondents include mortgage bankers, commercial banks and thrifts.

Declines in worker productivity and rising labor costs push rates on 30-year loan to six-week high.

Mortgage rates jumped last week, pushed higher by signs of rising inflation, lifting rates on the 30-year loan to six-week highs.

The average rate for 30-year fixed-rate mortgages rose to 6.23 percent from 6.12 percent in the prior week.

In the year-ago period, the 30-year mortgage averaged 5.63 percent.

The average rate on 15-year fixed-rate mortgages rose to 5.81 percent, up from last week's 5.70 percent. A year ago, the loan averaged 5.14 percent.

Five-year adjustable-rate mortgages averaged 5.87 percent, up from 5.75 percent the previous week. In the year-ago period, the five-year averaged 5.00 percent.

One-year adjustable-rate mortgages averaged 5.33 percent, up from 5.20 percent the week prior. At this time last year, the one-year loan averaged 4.23 percent.

It is said that declines in worker productivity, coupled with accelerating labor costs, increase the threat of inflation down the road....still, to keep things in perspective, mortgage rates are currently only about one-half a percentage point higher than they were at this time last year.