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Tuesday, March 23, 2004

Mesa, Arizona's Real Estate Market Heats Up

by Blanche Evans

Low interest rates and rising home prices have combined to make sellers happy in Mesa, and buyers anxious to get in before prices or rates go higher, say local Realtors.

"Mesa Arizona is a great place to live," says Realtor Pam Stevenson, "there are many nice neighborhoods. Mesa is an established community with many services, restaurants and recreational activities. Located 12 miles southeast of Phoenix, Mesa is the third-largest city in Arizona. With a population of 450,000 and growing, Mesa continues to attract thousands of newcomers each year.

"Affordable housing is one of the attractions to Mesa," suggests Stevenson. "Most of the new home building is in North Mesa and East Mesa. Mesa's shopping, recreational, educational and cultural amenities are some of the most extensive in the Valley. Many 'snowbirds' migrate to Mesa in the winter months to enjoy the sunshine, golf courses and desert living."

Say Realtors Wally and Patricia Neal, "Mesa has several communities in the Northeast that are near-new, with some still under construction, and there are significant sections of open land and citrus groves for future development. But most Mesa structures are several decades old, with a very wide variety of renovation and remodeling that has been applied. As a result, even on the same block, very similar homes can vary greatly in price."

They add, "A very positive factor for Northeast Mesa is the substantial progress of the 202 Freeway, which is operational almost to Power Road and the new-home communities being built there."

"The home market in Mesa is hot," says Realtor Gregg Beeson, "The resale market has increased by 19 percent in 2003 over 2002 and the median price has increased by 7 percent. Both of those numbers signify a hot market that benefits both the seller and the buyer. Looking at basic supply and demand the market is tilted slightly to the seller, but there are many great opportunities for the buyer."

Beeson advises, "Buyers, the sooner you buy a home the sooner you will take advantage of the appreciation of this great market. Home prices is about many things like location, age of home, shopping, freeways, views and many other factors."

Published: March 23, 2004
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Blanche Evans is the publisher of Agent News and the associate editor of Realty Times, the Internet's largest independent real estate news service. She is the author of two best-selling real estate books: The Hottest e-Careers In Real Estate, Real Estate Education Company, an Internet marketing primer for real estate professionals, and homesurfing.net: The Insider's Guide To Buying And Selling Your Home Using The Internet, Dearborn, a consumer homebuying and selling guide. In 2000, she was recognized by the editors of REALTOR(r) Magazines as one of the "25 Most Influential People In Real Estate," and in 2003 when the "Most Influential" list was updated, she was recognized as one of nine "Notables." She is also a frequent contributor to "Your Money" on CNN fn.
E-mail Blanche at: blanche@realtytimes.com

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Copyright © 2004 Realty Times. All Rights Reserved.

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Strategizing A Real Estate Purchase

by Clifford A. Hockley

Dr. Joanna Flores is a successful medical practitioner. After 10 years in the business she is tired of paying commercial rent and wants to purchase a building for her practice and share it with a group of other doctors.

She is nervous. She knows nothing about real estate and does not want to make any money-losing mistakes. One of her clients, a real estate broker, mentioned to her that he offered a basic "introduction to owning real estate" class. She decided to attend the class; this is what she learned.

She discovered how to obtain comparable sales information as well as income and expense information. This information helped her get over her concern that a property could keep demanding cash from her. She found out that parking and handicapped access are important features for a medical building. In addition she learned about property inspections to ensure that the building was in good condition. She also learned about the virtues of location. Good location may cost more, but it will be easier to lease to potential tenants.

She had questions about property management and was told that in a smaller building (maybe under 7000 sq. ft.) her staff could probably handle the management themselves, but with a large building she might want some help from a professional management company. Outside management would guarantee that someone is available to take care of her tenants 24 hours a day 7 days a week, and would also provide assistance in finding new tenants in the event of tenant turnover. As most landlords don't like asking their tenants for rent, the management company additionally makes sure rent is collected, mortgages and other bills are paid, and monthly financial reports are prepared.

As part of the real estate class, the broker also outlined different partnership styles: Limited Liability Companies, Limited Liability Partnerships, Partnerships, Subchapter S Corporations, and Tenancies In Common. These were options she might want to consider as she approached friends and other doctors to share in the investment of a building. He suggested that she meet with her attorney and CPA to get a handle on any potential taxation or tax shelter issues.

Joanna was getting excited about the idea. She wanted to know if they could start looking for a building immediately. The broker cautioned her that she needed to consider an exit strategy before she purchased a building. He told her nothing lasts forever, and that she should have a long-range vision. He added that she ought to know why she was buying the building and what she wanted to do with the cash residual once she sold it. He also mentioned that she should look at a 5-10 year window of time and make some realistic assumptions. He asked her to consider whether she would want a bigger building, or if she wanted to pay it off and lease it to another doctor for retirement income. He also offered that perhaps she will want to sell it so she can trade the equity into a duplex at the coast when she retires, or maybe she could trade the equity into another building, see it grow in value, and potentially provide some cash flow income.

They also discussed the nitty gritty: where the financing was going to come from to help her buy the building. They reviewed interest rates, term of loan, loan fees, and closing costs. He encouraged her to talk to her banker, but to also look into SBA (Small Business Administration) loans. He also suggested meeting with at least two or three other mortgage bankers to see if they could offer a better deal such as a lower (or no) prepayment penalties, higher or lower down payments, no required environmental inspections, or maybe no fees at all.

Finally they discussed the tax implications of her purchase, including the 39.5 years of depreciation and capital gains taxes (state and federal) she would be subject to when she sold the property if she did not use a (tax deferred) 1031 exchange to trade up to another property. They also talked about insurance to pay the mortgage should something happen to her, and estate planning should she want to leave the building to her children, or her favorite nieces and nephews.

By the end of the presentation, her head was spinning. "This is too complicated," she complained, "maybe I should just continue leasing." The real estate agent said, "You need to be educated in order to make the right decisions, and buying real estate where you are the tenant is the best way to not only pay off a building, but to also invest in your retirement at the same time."

Epilogue

Joanna bought a building. Because she used more than half of the building for her practice, she qualified for a SBA loan which she obtained through her personal banker. Ten years later she sold her practice, but not the building, and used the revenues from both to fund most of her retirement.

Published: March 23, 2004

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Clifford A. Hockley is the President of Bluestone & Hockley Realty, Inc., a leading brokerage and property management firm in Portland, OR. The property management department manages 1,.800 units, including commercial properties, apartments, condominium associations, single-family homes, and small plexes in the Portland/Vancouver Metro area. The brokerage department handles leases and sales of investment properties throughout Oregon and Washington.
Clifford has a Bachelors Degree in Political Science from Claremont McKenna College and a Masters in Management from Willamette University. He is a Certified Property Manager and Bluestone & Hockley Realty, Inc. is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM). Cliff serves a member at large on the Portland IREM board.

Copyright © 2004 Realty Times. All Rights Reserved.

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HUD Pulls Controversial RESPA Plan

by Lew Sichelman

To the surprise of practically no one and the relief of almost everyone, Acting Secretary Alphonso Jackson of the Department of Housing and Urban Development has yanked the Bush Administration's controversial proposal to reform the Real Estate Settlement and Procedures Act.

In taking back the proposed rule, Sec. Jackson said HUD remains "strongly committed to efforts to simplify, improve and lower costs associated with obtaining home mortgages."

But because of strong bi-partisan concern in Congress about the proposed changes -- which have yet to be revealed by HUD -- as well as solid opposition from nearly all quarters of the housing sector, he took the rule back from the Office of Management and Budget (OMB).

Yesterday's withdrawal was met with immediate and virtually unanimous applause.

"This is a great day for American consumers," said A.W. Pickel III, president of the National Association of Mortgage Brokers. And Kurt Pfotenhauer, senior vice president of government affairs at the Mortgage Bankers Association, called the move "a win for consumers and the housing industry."

However, Sec. Jackson had little choice. After he had sent the plan to OMB in mid-December, more than 250 lawmakers wrote the budget office asking that the proposal be returned to HUD for further review.

The lawmakers had threatened to delay Jackson's confirmation hearing, and it wasn't even his rule. It was the handiwork of his predecessor, Mel Martinez, who resigned to run for the Senate in his home state of Florida. But it was Jackson who sent the proposed rule along to OMB only a few days after Martinez stepped down.

Many housing organizations and consumer groups, including the American Land Title Association, National Association of Home Builders, National Association of Realtors, Consumer Federation of America, National Association of Consumer Advocates, National Community Reinvestment Coalition and the National Consumer Law Center, also have voiced concerns, not just with the rule's suspected content but also with the process by which it was issued.

Although the groups commended HUD's efforts to simplify the mortgage process, they asked that it not publish a final rule unless they got a second shot at it "in order to prevent harm to consumers, the housing industry and the housing markets."

The magnitude of the changes suggested by HUD, they argued, posed significant risks to the housing and mortgage finance systems. Therefore, it is imperative that HUD get the details of RESPA reform right the first time.

In his letter of withdrawal, Sec. Jackson said he believed it "prudent for HUD to reexamine the RESPA rule before it is made final."

He said he would revise the proposal "if necessary" and then re-propose it with requests for additional comments. HUD had received more than 40,000 comment letters on the original RESPA plan, the most on a single topic in the department's history.

"After the rule has had a complete vetting," he also wrote, "I will sent it back to OMB for review."

OMB, which was working on a 30-day extension of its review procedures when it received HUD's withdrawal notice, agreed with Sec. Jackson that the rule "would benefit from additional consideration."

When the rule was first proposed, the budget office sent HUD a post-review letter highlighting aspects of the rule that it believes required additional analysis. In particular, OMB said it was concerned with a Federal Trade Commission finding that new forms, intended to make more comprehensible lenders' estimates of loan costs, could be even more confusing to consumers than the forms they were intended to replace.

HUD has undertaken additional consumer testing as a result of the FTC findings. But, in its response to Sec. Jackson, the budget office urged the department to ensure that the final forms enhance consumer comprehension.

OMB, worried, as are many congressman, about the impact changes in RESPA could have on small businesses, also called on HUD to further refine its analyses of what the new rule would do to the origination and settlement service sectors.

In addition, it asked the housing agency to consider whether Federal preemption of state laws is needed to ensure that consumers receive the full benefits intended by the proposed rule. And it told HUD to expand its analysis of how various alternatives to package settlement services into a all-in-one-price option would facilitate comparative shopping and consumer savings.

HUD first proposed significant changes to the 30-year-old RESPA two years ago, with the aim of creating an incentive for settlement service providers to offer packaged services at a single price so that consumers could more effectively shop for the best deal.

Published: March 23, 2004
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"The Washington Window"

Lew Sichelman has been covering real estate from his home base in the Nation's Capital for more than 30 years. He writes a weekly consumer column that is distributed to newspapers throughout the country by United Media. He also is a regular contributor to numerous shelter magazines and housing and housing finance industry publications.

Copyright © 2004 Realty Times. All Rights Reserved.

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Have We Paid Too Much For Real Estate?

by Peter G. Miller

According to The Economist, a well-regarded British journal of opinion and analysis, "house prices are at record levels in relation to average income in America, Australia, Britain, Ireland, the Netherlands and Spain. The prices of British, Irish and Dutch homes are now 50 percent above their 30-year average relative to incomes. By the same gauge, property is 'overvalued' by 23 percent in America, by 33 percent in Australia and 68 percent in Spain." (See: "Homing in on trouble," March 13th-19th, 2004)

Looking at research from the Bank for International Settlements, the magazine says home prices typically peak two years after stock markets. For us, it's now year four since the last Wall Street crash, the one that saw investors lose equity worth some $5 trillion.

What's happened is that as interest rates have fallen people have taken on more debt. People have also been able to buy larger and more expensive homes with a given amount of income. The question is whether people have taken on more debt than they should by bidding up home prices unrealistically. If the answer is "yes" then forecasters argue that prices should fall.

For instance, if you borrow $250,000 at 7 percent interest over 30 years the monthly cost for principal and interest is $1,663. If interest levels fall to 5.5 percent -- about where they are now -- that same monthly payment could finance $292,936.

The fear is that if interest rates rise home prices will decline while home sales tumble.

How realistic are such predictions? What would be their impact?

One historic fact is this: According to the National Association of Realtors, home prices nationwide have risen on a cash basis every year since 1968. A second historic fact is this: That home prices have increased each year on a cash basis does not mean they have increased in value after inflation. In other words, if dollars buy less it takes more dollars to buy a given item. Also, that prices have risen nationwide does not mean they have risen in all locations. Some local communities have seen price declines that have lasted for years.

There has never been a shortage of forecasters who believe that real estate is overpriced. While such prophecies have typically been wrong, real estate is a commodity, commodity values can rise and fall, there is always risk in the marketplace and there are no guarantees that real estate values will always rise, everywhere and forever.

No less important, it's difficult to figure local home prices. For instance, if home sales this year include a larger percentage of small homes or condos than last year, it's likely that average home prices will appear to fall even though actual values have remained stable or perhaps risen.

So what are we to make of the latest predictions?

Imagine what would happen if home prices fell 20 percent nationwide over a year or two.

If you have an adjustable-rate mortgage (ARM), then higher indexes will lead to steeper rates and larger monthly payments. For those on the cusp of affordability, such increases can lead to foreclosure and bankruptcy. The $250,000 loan at 5.5 percent interest today may cost $1,420 a month for principal and interest, but at 7.5 percent the cost rises to $1,748 -- and most ARMs allow interest increases of up to 2 percent annually.

If you have a job and monthly mortgage costs rise, then it's likely that new and higher payments can be met. That said, you will have fewer dollars for other purchases or savings.

If you bought a home 10 years ago at $150,000 that is today worth $250,000, you're ahead. If you have to sell at $200,000 you're still ahead. If you bought with 5 or 10 percent down you have done astonishingly well on your cash investment.

If home prices fall owners will have less equity -- that means less ability to use financing secured by real estate to pay off consumer debt, expand a small business or pay off car loans.

Higher interest rates and less equity would reduce mortgage origination activity, meaning we would have fewer loan officers and lenders.

Higher interest rates would reduce home sale activity, meaning fewer brokers and smaller national association memberships.

Leverage works both ways. Owners who have bought with little or no cash may be "upside down" if they are forced to move; that is, they may owe more than the property is worth. In such cases, selling and moving may be impossible.

Bankruptcy rates -- now at record levels according to the American Bankruptcy Institute -- will grow larger, not good news for anyone.

If you have a comfy fixed-rate loan then rising rates will not be a mortgage issue for you.

If you're not selling, then home prices changes are not an immediate concern.

If you're not refinancing, then new rates and falling equity are distant issues.
No one knows what will happen in the future, but is it unreasonable to believe that interest rates will rise? Given higher rates, would anyone be surprised if home sales slowed and values in some communities, at least, declined?

As to a reduction of 20 percent or so, that seems unlikely. Why? Because most of the housing stock is not for sale; much of the housing stock has been and is being refinanced at low rates; and an overwhelming proportion of the population is employed.

Still, are there steps you can take to protect your interests just in case rates rise or home values slacken?

Sure. Get a fixed-rate mortgage at the lowest possible rate. Reduce consumer debt -- that can't hurt whether interest rates rise or fall.
For more articles by Peter G. Miller, please press here.

Published: March 23, 2004

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Mr. Miller welcomes your questions, comments, and news releases via e-mail at peter@ourbroker.com.

Copyright © 2004 Realty Times. All Rights Reserved.

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