Speculators Seeing Gold in a Boom in the Prices for Homes
March 1, 2005 "The New York Times", By Motoko Rich
Sunny Isles, Fla., Feb. 25 - Within six months last year, Carlos and Betti Lidsky bought and sold two condominiums. Then they bought and sold two houses. They say they will clear a half-million dollars in profit, and none of the homes have even been built.
Now Mr. Lidsky, a lawyer, and his wife, a charity fund-raiser, have put down a deposit on a fifth property, a $1.3 million condo in a high-rise under construction, and are planning to sell before the deal closes, without even taking out a mortgage.
"It is much better than the stock market," Mr. Lidsky said. "This is an extraordinary, phenomenally good result."
In several metropolitan areas, from Miami to Riverside, Calif., where the real estate market is white hot, rapidly rising prices are luring a growing number of ordinary people into buying and selling residences they do not intend to occupy, despite warnings from some economists that prices cannot continue to rise as steeply as they have in the last few years.
According to LoanPerformance Inc., a San Francisco mortgage data firm, about 8.5 percent of mortgages nationwide in the first 11 months of last year were taken out by people who did not plan to live in the houses themselves, up from 5.8 percent in 2000. In some markets, that proportion is much higher: in Phoenix, more than 12 percent of mortgages were taken out by investors; in Miami, the figure is 11 percent.
The National Association of Realtors, a trade organization that represents real estate brokers, said in a study being released on Tuesday that the percentage of homes bought for investment might be as high as one-quarter of the 7.7 million sold last year.
"Americans are treating real estate as a viable alternative to stocks and bonds," said David Lereah, chief economist at the Realtors association. And some are buying at least two properties at a time.
Like the day traders of the 1990's dot-com boom, people are investing in a market that seems to just go up. Promoters use Web sites to attract investors, promising quick profits. One site is run by a pair of investors who offer online training for $197. On their home page, they say people can earn over $100,000 in six months investing in unbuilt real estate.
Some economists say the influx of investors into the real estate market could have negative consequences.
"Investors are now seemingly buying based on the expectation that house prices are going to grow as rapidly as they have in the recent past, long into the future," said Mark Zandi, the chief economist at Economy.com, a private research group. "How quickly and high fixed mortgage rates rise will determine whether the speculative fever in the market just goes flat or whether it caves."
For now, low interest rates are helping to fuel the frenzy. Sometimes, homeowners borrow equity from their primary residence to finance down payments. These buyers, some of whom lost money when the stock market crashed five years ago, believe real estate is a safer bet.
Rita Lawrence, a construction business owner in Phoenix, has bought three houses in the last two years. Ms. Lawrence and her husband rent out two of them, and they hope to sell the third - which they are buying for $195,000 - for $249,000, after a quick renovation.
Taxes can take a sizable part of the profits in these deals. Investors who sell within a year of purchase face federal short-term capital gains taxes of up to 35 percent, and 15 percent if they wait a year.
Still, investors have been seduced by the steady upward march of house prices over the past few years. Since 2000, the national median price of a house has increased by 33 percent. And in the fourth quarter of last year, out of 129 metropolitan areas covered by the Realtors, 62 markets showed double-digit price rises over the same period a year earlier.
Demand for investment properties has risen in markets with the most spectacular price increases, according to brokers. As buyers were priced out of Los Angeles, they moved into San Bernardino and adjacent Riverside County, where prices rose by 35 percent last year. Nancy Overgaag, a mortgage broker at Financial 2000 in Redlands, Calif., said about one-third of her customers were looking to invest in real estate.
Even in Manhattan, where average sales prices topped $1 million last year, investors are piling into the market, brokers say.
Some investment buyers are willing to rent out their properties at a monthly loss, anticipating future sales price rises. Dru Finley and her husband, Hsiao-Li Pan, who live in Brewster, N.Y., bought a one-bedroom condominium in Battery Park City in Lower Manhattan last summer for $499,000. They rent it out for $2,225 a month, about $1,000 less than their mortgage and maintenance costs. The couple hope to make up the shortfall when they sell the condo in a few years. "It seems that real estate always goes up," in the long term, Ms. Finley said.
Many homeowners are tapping the paper wealth in their own homes to buy more real estate. Mark Purnell, who manages internal technology for a software company in Southern California, said the four-bedroom house he bought eight years ago in Rancho Santa Margarita, south of Los Angeles, had quadrupled in value to $800,000. Last year he took out a $150,000 home equity loan and, with his brother, bought three houses in Phoenix.
Mr. Purnell, 36, who is renting out those houses, said he would buy more in Phoenix but could not find anything. So he is turning his attention to Palm Springs, Calif. His Phoenix real estate agent, Kim Martin of Re/Max Achievers, said that investors had helped deplete inventories of available properties from about 25,000 this time last year to about 8,000 now.
In a backlash against speculative investing in some popular markets like Phoenix and Las Vegas, some homebuilders now prohibit renting or selling houses for at least a year after closing. As a result, investors have started to back off in Las Vegas, where the pace of the price rises started to ease towards the end of last year.
But in Miami, the speculative craze is promoted in part by developers and brokers who help buyers to resell quickly.
Brokers in Miami work overtime to get their clients into V.I.P. sales events before developers start pitching buildings to the public.
The Lidskys were heading out of town early last year when they got a call from Michelle L. Judd, a sales associate at Ocean IV, a high-rise being built in Sunny Isles by a consortium led by the Related Group of Florida, the same company that built the condo where they have lived since 2003. Ms. Judd was offering to sell them a second unit, but only if they would put down a deposit that day.
Shortly before their flight, Mr. Lidsky drove to the sales office and without viewing any floor plans, ended up writing deposit checks totaling $159,380 for a $479,900 two-bedroom condo, and an adjoining four-bedroom unit for $1,113,900. The money came from a bank line of credit not secured by their current home. Within three months, Ms. Judd called again: she had buyers for the two-bedroom willing to pay $625,000 and $1.425 million for the four-bedroom.
Such get-rich-quick stories have increased demand for preconstruction condo units in and around Miami. While many buyers do intend to move in to their homes, as many as half the original buyers of some condos resell them before they are built. Of the 280 units at Ocean IV, Ms. Judd said, nearly 130 had resold.
Thomas Daly, a principal investor with the Related Group in 18 condo projects, said the company did not "encourage investors" but that once a project was initially sold out, the developer would help buyers resell their properties quickly "to accommodate our purchasers."
Developers of some projects do not allow buyers to resell before closing, because they fear this could artificially inflate prices.
One of those projects, Arté City, a 202-unit condo complex being built in Miami Beach, is still attracting investors, although they are those who are willing to wait longer to sell. Jaime Nack, a 29-year-old event producer in Santa Monica, Calif., bought a one-bedroom unit at Arté City for $270,000, financing the down payment with a second mortgage on her one-bedroom condo in Santa Monica.
Ms. Nack plans to rent out the unit for a couple of years before selling. Because of its proximity to the beach, "I think it will be safe even if the market drops a bit," she said.
Some real estate watchers in Miami wonder whether that drop will come soon. With more than 60,000 units in some phase of development in the Miami area, "the supply may be greater than the ultimate demand," said Michael Y. Cannon, managing director of Integra Realty Resources-South Florida, a market analyst. A similar situation in 1986 sent the market spiraling, and it took seven years to recover.
For now, investors like the Lidskys are still buying. They intend to buy at least one more unit - their sixth in less than a year - in another condo. But the couple, who acknowledged being "killed" in the stock market five years ago, sounded a note of caution.
"Maybe we won't lose money, but I just think it is not going to keep up," Ms. Lidsky said . "At some point there are just going to be too many apartments in this area."