Items of Interest - May 13, 2006

NAR ECONOMIST REMAINS UPBEAT: The housing market is settling but should experience its third-best year in 2006, with job creation and a growing economy offsetting some of the effects of rising interest rates, according to the National Association of Realtors (NAR). Says David Lereah, NAR's chief economist: "Coming off a prolonged period of record sales, housing is taking something of a breather this year. Even so, interest rates remain historically low, we've added about 2 million jobs over the last 12 months and the economy continues to grow - that will sustain healthy levels of home sales in 2006, but they'll stay below the peaks experienced during the last two years." Lereah predicts the 30-year fixed-rate mortgage will rise to 7.0 percent this summer and hold at that level during the second half of the year. Existing-home sales are likely to fall 6.4 percent from a record 7.08 million last year, he says, adding that new-home sales are projected to drop 11.6 percent from last year's record. Housing starts should decline 3.7 percent to 1.99 million this year compared with 2.07 million in 2005, according to Lereah, who says the national median existing-home price for all housing types is expected to rise 5.7 percent this year to $232,200 and the median new-home price, 2.2 percent to $242,500.

HIGH GAS PRICES AFFECT SOME CITIES MORE THAN OTHERS: An independent research organization called SustainLane.com has released a list of 50 cities ranked by how well prepared they are to handle rising gasoline prices, according to Inman News. The outfit looked for metros that have strong public transportation systems, readily obtainable and locally produced food, and available wireless networks for telecommuting. New York City was considered the best-equipped city; Oklahoma City the worst. Washington, D.C. just missed out on being in the top fifth of urban areas: It ranked eleventh on the list. To find the lowest prices in the area, visit the following Web site and enter your zip code: autos.msn.com/everyday/gasstations.aspx?zip=&src-Netx. It's updated nightly.

WOULD YOU LIKE A BED WITH THAT OUTDOOR ROOM: Having persuaded consumers to spend billions on outdoor "rooms," moving everything from living-room entertainment centers to full-blown kitchens into their backyards, some companies are betting Americans will go even further, notes the Wall Street Journal. This spring, they're pushing mattresses, daybeds and even night stands for outside slumber - or, at the very least, a nap. Home Depot has its first outdoor daybed - a $900 aluminum platform with a mosquito net and woven PVC that promises to repel water and mildew - on the cover of its spring Outdoor Living catalog. Lowe's has a $99 swing that folds out into a bed. Tuuci, primarily an umbrella manufacturer, just rolled out a canopied daybed with a retractable sunroof and "Roman drawn privacy panels" (read: fancy curtains). And Janus et Cie's Daydream line of beds has optional headboards and even wind chimes to help you drift off to sleep. These beds can cost several times more than traditional outdoor seating. At Berks, a high-end outdoor retailer, daybeds cost between $3,000 and $8,000, and chaises range from $249 and $2,499. The extras can add up, too: Those wind chimes from Janus et Cie cost $193. The daybed push follows years of huge growth in spending on outdoor living spaces. In 2003, consumers bought $4.6 billion of outdoor tables, seating and umbrellas, up 130 percent from $2 billion in 1994, according to the American Home Furnishings Alliance. Last year, wholesale shipments of domestically manufactured outdoor furniture to retailers hit $2.5 billion. But while outdoor kitchens appeal to people who want to entertain friends, getting people to sleep outdoors is a tougher sell. There's nature to contend with: rain, wind, critters. And since they're designed for harsher conditions than your boudoir, many of these beds sacrifice some comfort for durability. Nappers on Armani/Casa's Oceano daybed, for example, lie on a single layer of waterproof woven nylon straps, not unlike the plastic strips on folding chairs. And then there's security: "If you fall asleep outside, you might wake up with your wallet gone," says Lyle Ecoff, who owns Berks. Of course, after spending so much money on one of those beds, the wallet may well be empty.

AND SPEAKING OF OUTDOOR ROOMS: You can get rid of ants inside by, among other things, planting mint around the outside of your house, according to a Knight-Ridder piece in the Washington Post. And make mint juleps from the herb too! Other remedies include spraying home-made solutions of peppermint, cinnamon, lavender, citrus or Citronella oils on windows and thresholds, spreading diatomaceous earth in vulnerable areas and pouring boiling water on anthills.

NEW-HOME BUILDERS ARE ENCOUNTERING MORE CANCELLATIONS: As the housing market cools, builders are reporting that more people are walking away from contracts and from tens of thousands of dollars in deposits, says the Washington Post. Wall Street analysts say the Washington market is among those seeing the highest percentages of buyers abandoning ship - more than double last year's rate, according to one research firm, and perhaps as high as one in three new-home buyers in some places. And nationally, some big builders are beginning to report cancellation rates upward of 25 percent. Hanley Wood Market Intelligence, a home-building research firm, this week said that its latest survey of builders showed that the cancellation rate for the Washington area in March more than doubled from a year earlier, jumping to 12.7 percent from 5.1 percent. "But 10 to 15 percent of people deciding to cancel is not going to be unusual most of the time," said Jonathan Dienhart, Hanley Wood's director of research. "It's just that in the last couple years when we had unusually high demand, where people could just buy a property and flip it, there were fewer cancellations. It's not a cakewalk anymore." The survey shows the cancellation rate locally to be highest in Fairfax County, at 30.9 percent, compared with 0.8 percent a year ago. Half of condominium buyers there canceled compared with no cancellations a year ago. When the statistics are looked at by a single county or type of housing for one month, however, the number of transactions is small. People who are buying for investments rather than residences are the most likely to bail out, experts said. Gopal Ahluwalia, director of research for the National Association of Home Builders, said his group's surveys show cancellation rates increasing nationwide, but not as much as others have estimated. His April survey of builders found that 5 percent reported a "substantially" higher cancellation rate in March than a year earlier and 14 percent a "somewhat higher" rate. Seven percent said they were seeing fewer cancellations. Twenty percent of those surveyed reported cancellation rates of more than 6 percent. Credit Suisse First Boston stock analyst Ivy Zelman this week said big builders nationally are reporting cancellation percentage rates in the mid- to high 20s compared with the mid- to high teens of a year ago. Executives from Pulte Homes, for example, said in an April 27 conference call with analysts that cancellations reached 27 percent in the most recent quarter versus 18 percent a year ago. Zelman expressed confidence in the Washington market in the long term because of its job growth and limited availability of land but said: "It will take some time to blow out this inventory. . . . People have got to lower their prices." Other analysts have also said the Washington market is in stronger shape than most urban centers because of low unemployment; strong job creation; and house prices that are low compared with California, New York and Boston. "It is true that the resale market has softened and that the number of listings jumped to nearly triple what it was last year," said Kenneth Wenhold, director of Metrostudy's Virginia-Maryland division. "However, last year was an unusual situation, with very few units listed for sale, resulting in bidding wars on properties. Now sales are still strong, but buyers have more choices." He said, "Metrostudy's most recent first quarter 2006 research indicates that the new housing market is still performing very well and is almost as healthy as spring of 2005."

IF BLACK-EYED SUSANS ARE YOUR BANE, TRY THIS: And who isn't plagued with their spread into unwanted areas? If you are so cursed, Washington Post columnist Joel Lerner suggests that you pull them up by hand – your hand – mow weekly, and apply Weed-B-Gon.

SOMEONE HAD A BRAINSTORM THAT STIRRED THINGS UP: Cookware manufacturers are increasingly collaborating with designers not usually seen in the kitchen, says the Wall Street Journal. It has not proved to be an inspired idea. For example, Royal VKB worked with Dutch designer Jan Hoekstra, creator of stationery and store displays. Their Cookware line ($250 for three pots and a saucepan) landed in stores in January, featuring lids with spouts for straining liquid. In February, T-Fal brought out a series with Bakelite handles by London-based Marc Newson, who is often associated with futuristic-looking chairs. And Sambonet USA introduced Spot in April, for $120-320. The pieces, designed by Milan-based architect and product consultant Rodolfo Dordoni, resemble truncated wine buckets. The sets are just hitting U.S. shelves as cookware-industry sales are strengthening to pre-9/11 levels, after a slump in 2002. Cookware sales rose 3.4 percent in 2005, to $695 million, according to market-research firm the NPD Group. T-Fal's pieces by Newson are about four times more expensive than the company's other offerings. Well, of course! If you can design a chair or stationery, why shouldn't you be able come with a winning idea for a pot that will fry off the shelf? Yeah, yeah, that's the ticket. Shockingly, some retailers have seen a cool reception to the new lines. Euro Kitchen in Laguna Beach, Calif., has not sold any T-Fal pans since their debut, and the Terence Conran Shop in New York hasn't had any buyers for the Royal VKB series.

IMMIGRANTS UNDERPIN THE CONSTRUCTION WORKFORCE: No surprise, but the National Association of Home Builders estimates that 20 percent of the construction workforce - about 2.4 million people - is foreign-born, reports the Chicago Tribune in Realtor magazine. While it's impossible to know how many are undocumented, some estimates put the number at 50 percent or more. According to estimates by the Pew Hispanic Center, a non-partisan research organization based in Washington, roughly 1.4 million undocumented aliens are at work in the various construction trades, accounting for about 12 percent of the industry's workforce. Nationally, immigrants make up one-third of all construction laborers and 22 percent of all carpenters, the two most prevalent construction-trade occupations. Immigrants also make up a significant portion of the country's drywall installers (40 percent); roofers (33 percent); painters and masons (32 percent); and carpet, floor, and tile installers and finishers (29 percent). "These are not bottom-rung jobs, and we still have trouble filling them with people from any country," says Michael Fink of the Leewood Real Estate Group in Trenton, N.J. "But in my experience, native-born Americans are not willing to gain the skills necessary to get them."

NO-COST MORTGAGES ARE ON THE HORIZON: At least one major lender has a totally no-cost loan on its radar screen, notes Realty Times. Said Bank of America's Floyd Robinson: "I truly believe that's where the market's going." Robinson, who is president of consumer real estate and insurance services at Bank of America, said the myriad of closing costs and fees now attached to home loans serve only to confuse borrowers. He maintained that the bank's no-fee loans would have the same annual percentage rates at those with fees so borrowers could readily see there would be no hidden charges. Robinson added that the bank is considering offering to refinance its customers' mortgages without charge. "All they'll have to do is call the servicing department and it's done," he said at the National Association of Real Estate Editor's annual conference. Last May, the bank introduced its Mortgage Rewards program, which re-engineered the lending process and promised to knock about $2,000 off the cost to close a $200,000 loan. The savings is higher or lower, depending on the amount of the mortgage, the location of the property and other borrower choices. With Mortgage Rewards, Bank of America waives the origination, application, lender closing, appraisal, flood determination, tax service, credit report and courier fees. Borrowers also receive a $200 credit on their closing statements plus a one-year insurance policy that "cancels" up to six principal and interest payments if the borrower loses his or her job involuntarily and wipes out the balance altogether if the event of accidental death. For the bank, it's all about building a relationship that will pay off in other ways. Sounds like win-win.

TO DECLARE A HOME OFFICE OR NOT: The home office deduction is one of the most misunderstood tax loopholes, observes Realty Times. There are three rules to get this deduction: 1. You must have a business; 2. You must have a space in your home that is used exclusively for the business; 3. You must regularly do some kind of business activity in that space. You don't need to have a separate entrance or see clients in your home office, but you need to do some sort of regular business activity (phone calls, emails, filing) in the space. You can have another office and still take the deduction for your home office. This space can be a spare room or even the corner of a dining area. If you receive a Form 1099 as an independent contractor, you have a business. If you have a part-time activity in which you make money (or in which you plan to someday make money), you have a business. If you're spending your time working, even if it's part-time, you have a business. So says the publication. The home office deduction is calculated as a percentage of the business square footage of your home applied to the total square footage. In other words, if your home office is 200 square feet and your home is 2000 square feet in total, then 10 percent (200 divided by 2000) of your home expenses are deductible against your business income.

LOAN APPLICATIONS SLIP FOR THE WEEK ENDED MAY 5: Volume declined by 5.8 percent on a seasonally adjusted basis from one week earlier, reports the Mortgage Bankers Association. On an unadjusted basis, the decrease was 5.2 percent compared with the previous week and was 27.1 percent compared with the same week one year earlier. Seasonally-adjusted, purchase applications went down by 3.9 percent from the previous week, and refinancings fell by 8.8 percent. The refinance share of mortgage activity decreased to 33.8 percent of total applications from 35.2 percent the previous week, which is the lowest share since June 25, 2004. The adjustable-rate mortgage (ARM) share increased to 28.5 percent of total applications from 28.3 percent the previous week.

PACK YOUR BAGS IF YOU BELIEVE THIS: It might be said that the best cities have affordable housing, low crime, high-quality health care and lots of cultural amenities, according to a story in Realtor magazine. Taking into account these and other factors, Kiplinger Personal Finance magazine worked with Bert Sperling, co-author of Cities Ranked & Rated, and somehow concluded that Nashville was tops because of its affordable homes, mild climate and a "phenomenal" entertainment scene that goes far beyond country. Following in order were Minneapolis-St. Paul, Albuquerque, Atlanta, Austin, Kansas City, Asheville, Ithaca, Pittsburgh and Iowa City.

THE HOUSING SLOWDOWN MAY BE SPEEDIER THAN KNOWN: There are signs a housing slowdown that has gripped certain high-growth markets during the past few quarters is now spreading nationwide, says the Wall Street Journal. Preliminary reports from builders Hovnanian Enterprises and Toll Brothers, whose quarters ended April 30, indicate demand is falling faster and more sharply than previously thought and that the pullback is no longer confined to hot markets that had seen sharp home price run-ups in the past few years. Hovnanian's orders fell 20 percent in its fiscal second quarter and Toll's declined 32 percent. On top of this, builders such as Centex and Hovnanian have started taking writedowns in connection with land options. In general, when builders take writedowns to walk away from land options, it is a sign that either land values are falling or demand in that market has dried up. In past cycles, declining land values often were a sign that a market was falling fast. Until now, home-building executives said the pullback in demand was largely confined to markets where sales had been overheated and home prices had skyrocketed during the past few years such as Washington, D.C., parts of California, Phoenix and parts of Florida. They blamed speculative buyers for much of the pullback, saying investors had exited the market, causing less overall demand and more inventory. Majestic Research analyst John Tomlinson found sales fell year over year in every market during February and March, with the average decline being 25 percent. Washington, D.C., Los Angeles/Long Beach, Tucson, Ariz., Sacramento, San Francisco and Phoenix saw the biggest declines, with sales falling 22 percent, 50 percent, 50 percent, 46 percent, 30 percent, and 37 percent, respectively. However, even markets that hadn't been weak previously - such as Philadelphia, Dallas, and Las Vegas - softened in the quarter, with sales falling 30 percent, 15 percent, and 13 percent, respectively, he said. So far, builders' efforts to offer more incentives and discounts have "failed to move the needle" in driving sales, Tomlinson said. As a result, he said some may need to resort to bigger price discounts. "That's the million-dollar question," he said. Despite the softening trends nationwide, Fitch Ratings analyst Bob Curran said he still believes the housing sector is heading for a soft landing - not a crash - and that the current housing slowdown is temporary and will likely rebound by late 2006 or early 2007. He said economic data for job growth and consumer confidence has been positive. "It would be highly unusual for housing to go into a multiyear tailspin when the general economy is holding up," he said.

HIGHER RECORDATION/TRANSFER TAX APPROVED FOR D.C.: Council members agreed to increase the deed recordation and transfer tax for residential and commercial properties from 1.1 percent to 1.45 percent, with residential properties valued at $400,000 or less exempt from the increase, says the Washington Post. With congressional approval, the increase from 1.1 percent for all sales – paid by seller and purchaser for a total of 2.2 percent currently – takes effect Oct. 1. On a $500,000 transaction, the increase of the total 0.7 percent will amount to $3,500. The Council allocated $7 million from the tax, which has been a key revenue source during the recent boom in the real estate market, to pay for 100 more police officers. The additional new revenue also went to fund affordable housing initiatives recommended by the city's housing task force.

HOUSING COSTS GIVE D.C. A DUBIOUS DISTINCTION: A new report that adjusts the poverty line to reflect housing costs says New York, California and Washington, D.C. have the highest percentage of residents living in poverty, surpassing traditionally impoverished regions like the Deep South, according to the New York Times. The report took into account the high rents and utility rates in major cities such as Los Angeles, New York and San Francisco and adjusted the national poverty line, about $19,000 for a family of four, accordingly. The results showed all three regions with significantly higher poverty rates than the Census Bureau reported in the fall. Washington, ranked fifth poorest by the government, vaulted into the top spot, according to the report, with 21 percent of residents in poverty. New York, 12th by government standards, was second in the study, with 16.3 percent below the poverty line, while California went from 15th to third, at 15.7 percent. Nationwide, 12.7 percent of Americans, or 37 million, lived below the poverty line in 2004, according to the Census Bureau.

IT'S FUN AND IT'S FREE: It's the 26th annual Old Town Fine Arts & Crafts Fair at Alexandria's market square this weekend. The event featuring the work of more than 70 artists runs 1-6 p.m. on Saturday and 10 a.m.-5 p.m. on Sunday. More info at 703-836-2176.

UNSURPRISING NEWS FROM REALTOR GROUP: A new survey of second-home owners by the National Association of Realtors shows that baby boomers continue to dominate the market. It also finds that a growing number of second homes - more than one-in-ten - are owned by minorities. A majority of respondents own multiple properties in addition to their primary residence. "Middle-aged, middle-income households are the driving factor in the second-home market, with favorable demographics providing a solid fundamental demand in this sector for the next decade," commented NAR Chief Economist David Lereah. "Boomers believe in diversifying their assets, and most second-home owners see their purchase as being a better investment than stocks. A surprising majority of survey respondents hold multiple properties, and they are interested in purchasing additional homes." About six in ten respondents own two or more homes in addition to their primary residence. The typical vacation-home owner is 59 years old, earned $120,600 last year and purchased a property that is 220 miles from the primary residence, but 34 percent were less than 100 miles and another 34 percent were 500 miles or more. Half of vacation homes are within the same state as the owner's primary residence. Eighty-three percent of owners are married couples. Three-fourths of vacation-home owners purchased for personal use, although one-third also wanted to diversify investments, and 18 percent intended that the home would become a primary residence in retirement. Only 13 percent of vacation owners listed rental income as a reason to buy. The typical owner spends 39 nights per year at their property, and three-quarters do not rent out. Of those who do rent their vacation home, the median number is 12 nights per year. Six out of ten investment properties are within metropolitan areas. Half are single-family homes, 21 percent are a duplex or apartment in a two-to-four unit structure; 13 percent, condos in a building with five or more units; 8 percent, a townhouse or row house; 3 percent, a mobile or manufactured home; and 2 percent, a cabin or cottage; and 4 percent were other.

MORTGAGE RATES ARE MIXED: The 30-year fixed-rate mortgage (FRM) averaged 6.58 percent for the week, down from last week's 6.59 percent and up from 5.77 percent last year at the same time, according to Freddie Mac. The 15-year FRM this week was 6.17 percent, down from 6.22 percent last week. A year ago, it averaged 5.33 percent. Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) were 6.22 percent this week compared with last week's 6.21 percent and last year's 5.21 percent. One-year Treasury-indexed ARMs averaged 5.62 percent this week, down from 5.67 percent last week and up from 4.23 percent last year. "Less-than-expected job growth in April helped mortgage rates to level off this week. Even ARM rates were little affected by the Federal Reserve's increase in the federal funds rate," said Frank Nothaft, Freddie Mac vice president and chief economist. "However, next week's release of the April Consumer and Producer Price Indexes may lift mortgage rates higher if the figures show acceleration in inflation."