Items of Interest - April 8, 2006

ECONOMISTS DEVELOP NEW WAY TO VALUE A HOME FOR SALE: Having guided two years of research into "the bubble," professors Gary and Margaret Hwang Smith of Pomona College conclude that the Los Angeles region was not in a bubble and that many markets called overpriced probably were underpriced, according to the New York Times. In a paper the two presented at the Brookings Institution, "Bubble, Bubble, Where's the Housing Bubble?" they said that even though prices had risen rapidly and some buyers unrealistically expected the trend to continue, "the bubble is not, in fact, a bubble in most of these areas." They argued that the value of a home is determined by the rent it could fetch. Calculate the future rents, subtract mortgage payments, taxes and other costs, factor in a good annual rate of return of 6 percent or more, and one should be looking at the proper price of a house or condo. Their bottom line: "Buying a house at current market prices still appears to be an attractive long-term investment." Richard Peach, a vice president at the Federal Reserve Bank in New York who studies home prices and their relation to income, echoed that view, saying, "This is an important paper." Karl E. Case, a Wellesley College economics professor who has been studying real estate prices for more than 25 years, calls the paper's method "absolutely the correct way to think about it." Analogous to stocks, the intrinsic value of a house is the rent that it can generate. "It's not that houses are like stock," Gary Smith said, "but if you think about them as you do stocks, you start thinking about it correctly." The Smiths' solution was to look for "matched pairs" of similar houses, one rented, one owned, but both in the same neighborhood. They did this in 10 cities in which they could find enough real estate data and matched pairs. Once they had established what rent was for a certain house, they used software they created to compute the flow of rents over time, factoring in the outflow of mortgage payments, maintenance costs and taxes. Then they had to determine what those future payments would be worth today, which economists call the net present value. If the net present value is a positive number, the house is worth the price. If the result is a negative number, the buyer would be better off renting it. One-third of taxpayers do not itemize their deductions and many more are getting hit with the alternative minimum tax that removes some of the advantages of home ownership, said Christopher Mayer, a professor of real estate at the Columbia Business School. Still, he agrees with the Smiths that there is not a housing bubble and he was impressed by the effort they made in finding matched pairs of houses. But he also said that they lacked an understanding of what drives the economies of cities. For instance, he says, Indianapolis looks undervalued because, unlike the Northeast and West Coast cities, land there is inexpensive. The supply side of the supply-demand relationship that determines prices seems to be overlooked. In some cities, zoning and other restrictions limit the building of homes. Elsewhere it is relatively easy to build houses when demand rises because most of the cost of a home is in construction. That is one reason there is a greater expectation of price appreciation in California than in a place like Indianapolis, he said.

FREE RENT CAN BE AVAILABLE . . . IF YOU ARE: In Atlanta, an online ad offers a room in exchange for "sex and light office duty," notes the Associated Press in Realtor magazine. In Los Angeles, a one-bedroom pool house is free "to a girl that is skilled and willing." And in New York City, a $700-a-month room is available at a discount to a fit female willing to provide sex. On Craigslist.org, some landlords and apartment dwellers looking for roommates are offering to accept sex in lieu of rent. And in most states, prostitution laws apply only if the ads are followed by e-mails, phone conversations or other acts that advance the proposition. "The mere posting itself is absolutely not illegal," said Anthony Lowenstein, a defense lawyer in San Francisco, "unless the guy who posts it or the person who answers it does something that makes it a little closer to happening."

MANY RETIREES CHOOSE TO STAY IN METRO AREAS: Most retirees don't end up relocating after all, says the Wall Street Journal. In fact, even among those who do make a move, most usually choose to live in a major metropolitan center, loath to give up the cultural attractions and other conveniences that are hard to find in more placid settings. Said Elinor Ginzler, director for livable communities at AARP: "The reality is . . . most people don't move. Community is incredibly important to our older citizens. They feel connected to their community." A quieter part of a major metropolitan area anchored by a large city, often in a warmer climate, is a popular relocating-retiree choice. "Generally, people are moving from metropolitan counties where there are dense populations to other metropolitan counties that are less dense," said Ron Manheimer, director of the University of North Carolina's Center for Creative Retirement in Asheville, N.C. Seventy-one percent of people age 60 and over who have relocated to another state in the five years leading up to the 2000 Census settled in metropolitan counties, Manheimer said, citing statistics from a forthcoming book that he edited: the second edition of "Retirement Migration in America," by Charles Longino. "People want all the amenities of the big city; they just don't want to live in it," Manheimer noted, saying that the availability of shopping, major airports, cultural attractions and medical services figure into the decision on where to relocate. Retirees who do relocate often seek warmer climes. Of those 60 and older who moved to a new state in the five years before the turn of the millennium, the top 15 counties nationwide in terms of net migration of those older folks all were in Florida, Arizona and Nevada, according to Longino, also a professor of gerontology at Wake Forest University, in Winston-Salem, N.C. Other retirees choose to go back to their hometowns. In 2000, 17 percent of Americans over age 60 who had moved across state lines in the previous five years had moved back to their earlier hometowns. Still, most retirees don't move. Over the five-year span, 76.1 percent of those 60 and older stayed put. Of the rest, 18.5 percent moved within their states, 4.6 percent moved to other states and 0.8 percent moved abroad.

YOU, TOO, CAN HAVE A PIECE OF A SCANDAL: Conseco, the insurance company that guaranteed its executives loans, thus triggering a scandal three years ago, is still trying to unload properties with which it got stuck, according to the Wall Street Journal. In Miami Beach, Fla., the company is selling a 9,800-square-foot mansion for $13.9 million that belonged to Ngaire E. Cuneo, a former Conseco director and executive vice president. The sale follows the conclusion of a court battle that just ended in December. The details are sealed. And not far from its headquarters in the Indianapolis suburb of Carmel, Ind., Conseco is hoping to sell the 25,500-square-foot home of Stephen C. Hilbert, who purchased it in 2000. Among its amenities is a separate 15,000-square-foot replica of Indiana University's gymnasium, home to its famed basketball team. The property's on the market for $20 million.

TAKE A BREATH – NOT: Massachusetts has become the latest state after Vermont, Connecticut and New York to require carbon monoxide detectors in homes. The trend is expected to spread to all 50 states, says Doug Troutman, government relations counsel for the National Electrical Manufacturers Association. Although the movement to require detectors began about five years ago, it really didn't gain momentum until the last three years. Currently, nine states require carbon monoxide detectors in all homes, and a number of others, such as Connecticut, require carbon monoxide detection equipment in newly constructed single-family homes and in multifamily units. "We're beginning to see an increasing number of states and municipalities introducing similar legislation," says Debbie Hanson, director of External Affairs for First Alert, a manufacturer of detection equipment.
WHAT'S IN NAME: These days, it may not be much, as some high-end developers are learning, according to the Wall Street Journal. Daniel Libeskind, famed for his plan to rebuild Ground Zero, designed an angular, 56-unit building in downtown Denver, yet the project hasn't recorded a sale in seven months, leaving 15 apartments unsold. Architect Robert A.M. Stern's name tops the marketing brochures for a high-rise in Stamford, Conn., but half of the 91 apartments remain available 18 months after sales began. And after two years of high-profile promotion, the newest Manhattan tower by Richard Meier, architect of Los Angeles's Getty Museum, has sold just 15 of its 31 units (not counting five bought by its developers). Two years ago, developer Frank J. Sciame hired Pritzker Prize-winning Spanish architect Santiago Calatrava to create one of the most highly stylized apartment houses ever envisioned for New York. The building in lower Manhattan would consist of 10 cube-like apartment units, each 45 feet high, cantilevered one atop each other around a central axis. Yet none of the units - asking $29 million to $45 million each - has even received a bid, let alone sold; construction hasn't started. Other high-profile Manhattan projects have been scrapped outright, including costly condos that were to be designed by architects Frank Gehry and Zaha Hadid. In Miami, a tower designed by Meier also hasn't broken ground. Real-estate brokers with knowledge of the development say the 101-unit structure, Beach House, may soon be canceled because of a lack of preconstruction sales. Despite the languid market, however, more architect-linked apartments are in the works. Astor Place developer Related Cos. has begun working with Mr. Gehry on a 50-story condo complex across from the architect's Disney Concert Hall in Los Angeles. Phillip Johnson and the Swiss firm Herzog & de Meuron, which designed London's Tate Modern museum, have been hired for condo buildings in Manhattan. Mr. Libeskind has signed on to design condos in Covington, Ky., and Sacramento, Calif. And Mr. Stern's firm has apartment projects under way in Dallas, Atlanta, and Los Angeles.

REAL ESTATE FUNDS OUTPERFORM OTHERS IN THE FIRST QUARTER: They returned 13.74 percent on average, easily beating every other category of domestic stock fund tracked by market research firm Morningstar Inc., according to the San Francisco Chronicle in Realtor magazine. Since early 2000, real estate funds have posted a cumulative return of 237 percent, handily trumping the S&P 500 stock index, which has lost 2.82 percent in that time span. While most real estate funds invest the lion's share of their assets in real estate investment trusts (REITS), some also invest in publicly traded home builders and mortgage REITs that purchase securities backed by home loans. These funds rose to prominence following the market crash of 2000 that saw many investors shy away from tech and growth stocks in favor of commercial real estate investments. On the downside, REIT dividends average 4.5 percent today compared with 7.71 percent at the end of 2000, prompting some investors to be concerned that REITs are overpriced.

WILL THE LAST ONE OUT OF THE ROOM, TAKE NOTE: Does it cost more to turn the lights off when you walk out of the room than it does to leave them on? The Wall Street Journal says it is smart to turn off lights when you're not using them. Incandescent bulbs, the cheapest but least efficient kind, do last longer if they're left on but burn through enough electricity to make it worth flipping the switch. With fluorescents, especially the bulky institutional tubes, you'll save less but turning them off won't cost you anything. Switch to bulbs with a lower wattage where you can. Halogen bulbs are more efficient than traditional incandescent ones and compact fluorescent bulbs cost 10 to 20 times more but last 10 to 15 times as long and use far less energy. Many electronic appliances - DVD players, stereos, video-game consoles - draw power even when off. You can cut down on the draining of "idle" energy by hooking your appliances to a power strip and flipping the power switch on the strip when you turn your gizmos off. There are even "smart" power strips that cut the power automatically. Although you may be tempted to leave you computer on since most now come with a sleep mode, even in sleep mode, your computer will use 30 percent of the energy it uses when active. Or buy Pepco.

INSURANCE COMPANY SEES WIDESPREAD RISK OF PRICE DECLINES: Forty-eight of the nation's 50 largest metropolitan statistical areas (MSAs) face a greater risk of declining home prices this quarter, PMI Mortgage Insurance said. But it suggested that the once red-hot housing market will cool gradually. Appreciation has slowed in nearly half of the MSAs as compared with last quarter. A study by the company additionally shows that between 1986 and 2005, based on the home price index provided by the Office of Federal Housing Enterprise Oversight (OFHEO), owning a home in one of the 50 largest MSAs generally resulted in a positive return on investment, with the chance of a positive return increasing the longer the home was owned. "What we found was that across the nation's 50 largest MSAs, owning a home for 10 years or more resulted in a positive return in 100 percent of the cases," explained Mark Milner, Chief Risk Officer of PMI Mortgage Insurance Co. "This dropped to 95 percent with a seven-year ownership term and to 92 percent with a five-year ownership term - still a pretty impressive rate." U.S. Market Risk Index scores increased for all of the top 50 MSAs except Chicago, IL, for which the decline was one point, and New Orleans, which was not scored. Fourteen of the top 50 MSAs now have risk scores above 500, meaning they face a 50 percent or greater risk of home price declines in the next two years, up from 11 MSAs last quarter. The average score has increased from 261 last quarter to 287. The biggest change was in Minneapolis, which gained 90 points, taking it to a score of 350 and up two spots in the ranking to No. 19. Other MSAs that saw significant increases in risk were Virginia Beach, (+65 points to 274), Baltimore. (+62 to 279), Newark, N.J., (+61 to 427), New York, (+58 to 506), and D.C., (+56 to 401).

WILL HE EVER STOP: Real estate mogul Donald Trump is in the process of establishing Trump Mortgage LLC, a new company that will make both residential and commercial mortgages, reports New York Newsday in Realtor magazine. The Manhattan-based firm is expected to complete $3 billion in loans this year, with an eventual goal of issuing $100 billion in loans annually within the next decade. The plan is for Trump Mortgage to offer loans that range from $30,000 home equity lines of credit to commercial mortgages for as much as $300 million. The new company has already signed on to work with 60-70 banks, with more expected to be added soon.

YOU CANNOT TRUST THE STAR: Unfortunately for millions of energy-conscious Americans, these ratings can be meaningless, according to the Wall Street Journal. The reasons run from outdated test procedures to a simple lack of policing of the program. A SmartMoney investigation found that the Energy Star label often is little more than a marketing gimmick. Ask an appliance salesperson what the Energy Star designation means, and he or she may well tell you that it's issued by either the Environmental Protection Agency or the Department of Energy and is awarded only to the most energy-efficient products. The truth is a little hazier. While participation in the program is voluntary, more than 1,400 appliance makers submitted test data on their products in 50 categories last year - some 32,000 in all. It's easy to see why: Products bearing the Energy Star logo sell better than others and often fetch a higher price - as much as 20-30 percent more. Although the designation was originally supposed to apply to the 25 percent of products in any category that were most energy-efficient, the label is on 85 percent of all new dishwashers and 98 percent of desktop computers, suggesting the testing takes place at Garrison Keillor's Lake Wobegon, where all children, too, are above average.

HOW DO YOU SPELL LOW INTEREST RATES: Sales of vacation homes and investment homes set new records in 2005, with the combined total of second-home sales accounting for four out of 10 residential transactions, according to the National Association of Realtors (NAR). The annual report, based on two surveys, shows that 27.7 percent of all homes purchased in 2005 were for investment and another 12.2 percent were vacation homes. All together, there were 3.34 million second-home sales in 2005, up 16 percent from 2004. The market share of second homes rose from 36.0 percent of transactions in 2004 to 39.9 percent in 2005. Vacation-home sales increased 16.9 percent last year to a record 1.02 million, while investment-home sales rose 15.7 percent to a record 2.32 million in 2005 Commented David Lereah, NAR's chief economist: "To begin with, the baby boom generation is driving second home sales . . . [While] vacation-home buyers are making lifestyle choices and purchasing primarily for their own enjoyment, investment-home buyers are seeking rental income and portfolio diversification, although vacation-home buyers also mentioned diversification." The median price of a vacation home in 2005 was $204,100, up 7.4 percent from $190,000 in 2004. The typical investment property cost $183,500 last year, up 24 percent from $148,000 in 2004.

YOU CAN, IN FACT, CREATE A SILK PURSE: Ranch-style homes, Cape Cods and split-levels wooed people from cities to suburbs after World War II, but now those homes often lack the open floor plans and convenient amenities that buyers demand, notes Realtor magazine. As a result, "vintage" homes stagnate on the market, even in neighborhoods that offer extensive services and an easy commute. Some Midwestern communities are seeking to make these homes more appealing to buyers by bringing 21st-century lifestyle features to vintage designs. A regional coalition of 19 local municipalities in Missouri and Kansas is leading the way, publishing a book filled with modern solutions for decades-old homes. The publication, called First Suburbs Coalition Idea Book, shows adaptations for four common vintage home styles. Designed to look like a set of blueprints, the oversized folio was created by Eric Piper of Piper-Wind Architects, a planning and design firm in Kansas City, Mo., for the First Suburbs Coalition of the Mid-America Regional Council. Revamped interiors feature more open designs, updated kitchens, main or second floor laundry areas, and large decks. Garages are expanded to accommodate two cars while new baths turn bedrooms into master suites.

LOAN APPLICATION VOLUME RISES, BUT REFINANCINGS ARE OFF: For the week ended March 31, it went up 7.2 percent on both an unadjusted and seasonally adjusted basis from the previous week. Unadjusted, applications dipped 4.6 percent compared with the same week one year earlier. Purchase applications increased by 8.4 percent from the prior week. Although refinancings grew by 5.3 percent on a week-to-week basis, their share of mortgage activity decreased to 36.6 percent of total applications from 37.3 percent the previous week. It was the lowest share since the week of July 30, 2004, when 35.8 percent of applications were for refinancing. The adjustable-rate mortgage (ARM) share of activity decreased to 28.5 percent of total applications from 28.7 percent the previous week.

LOOK INTO THIS TREND: With mirrors making a comeback in interior design, a handful of designers and companies are starting to reflect on a new niche: How to convince homeowners their looking glasses need an upgrade, observes the Wall Street Journal. The products and services range from $35 do-it-yourself kits to $1,000 in-home consultations. MirrorMate, a two-year-old company based in Charlotte, N.C. has kits in 28 styles such as Charlotte Gold Leaf and Cherokee Marbled Maple; buyers glue frame pieces onto the glass and they set almost immediately. Owner Lisa Huntting says sales reached $600,000 last year, triple her 2004 levels. In Boca Raton, Fla., seven-year-old Mirr.Edge says sales of its mirrored and woodgrain-finished frame strips are growing about 40 percent a year. The trend comes as mirror sales are rising - part of the decade-long building boom. Unframed mirror sales totaled $337 million in 2005, up 15 percent over five years earlier, partly owing to an increase in the number of bathrooms in homes, according to research firm Leading Edge Group in Commack, N.Y. You didn't see that coming, did you?

JOIN THE CROWD: Be among the anticipated 8,000-10,000 folks who visit the 2006 Design House at the Washington Design Center now through June 24. The work of 10 local design firms will be on display for this latest semi-annual event at 300 D St. SW. Admission is free, and hours are 9 a.m. to 5 p.m. weekdays and 10 a.m. to 3 p.m. Saturdays. More info: merchandisemart.com/dcdesigncenter.

SI USTED HABLA ESPAŅOL, USTED PUEDE LEER ESTO: Actually, if you speak any of 12 languages besides English, the Missouri Association of Realtors is translating all of its listings into Spanish, Brazilian Portuguese, French, Italian, German, Polish, Russian, two Chinese dialects, Japanese, Korean, and Vietnamese. Une bonne idée, n'est-ce pas?

MORTGAGE RATES KEEP ON CLIMBING: The 30-year fixed-rate mortgage (FRM) averaged 6.43 percent for the week, up from last week's 6.35 percent and 5.93 percent a year ago, according to Freddie Mac. The 15-year FRM this week was 6.10 percent compared with 6.00 percent the previous week and last year's 5.48 percent. Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 6.11 percent, up from last week, when it averaged 6.02 percent and 5.33 percent last year. One-year Treasury-indexed ARMs were 5.57 percent this week, up from 5.51 percent. At this time last year, the one-year ARM averaged 4.23 percent. "In the first quarter of 2006, it appears that economic growth picked up relative to the last three months of 2005. There is concern that the continued high level of energy cost may lead to inflation in other sectors of the economy," observed Frank Nothaft, Freddie Mac vice president and chief economist. "And fear of inflation leads to higher mortgage rates, like the ones we see this week." He added that Freddie Mac's forecast for the year as a whole is for economic growth of 3.8 percent in 2006, above the 3.2 percent in 2005. That "may warrant even more Fed rate hikes than previously expected," Nothaft continued. If that is the case, mortgage rates may continue their gradual upward trend."