Copy for Real Estate Guide Column for 6-24-05 (487 words)

REAL ESTATE PATTERNS
By Ken DuVall

Playing with House Money


A study in Money Magazine reveals there are 8.2 million households in the U.S. with a net worth (excluding their homes) of $1 million or more. That compares with only 4.9 million households in 1996. Growth in households worth $5 million-plus was even more robust. In 1996, 250,000 were in the $5 Mil Club. Now there are 720,000, a 35% increase. American millionaire households are projected to jump 52% in the next 4 years. Another interesting fact: The top 1% of American families now own as much as the bottom 95% combined, the highest gap among developed nations, telling us once again that America is for being rich, and maybe famous too is good. Remember J. Paul Getty’s Formula for Success: “Get Up Early, Work Hard, Strike Oil.” That's not rocket science, folks. The harder I work, the luckier I get!
AMERICANS TOLERATE
Americans put up with inequality precisely because we believe we can get ahead. In Sweden, known as an egalitarian (the “equalness” of everybody) society, income equality isn’t that much different than ours after you factor in their taxes and government assistance. It’s their government’s redistribution of wealth fiscal policy that evens things out. If we really wanted Swedish-style equality, we would vote ourselves a Swedish-style tax system. It could eventually happen here, but in fact, we’ve been doing just the opposite since the 60's- cutting taxes on the rich and raising the incentive for everyone to grab for the brass ring. Winning may not be everything, but losing is nothing! We all inevitably get what we've got coming to us based on our conduct and performance.
REAL ESTATE’S APPEAL
Real estate's the one investment which provides significant leverage. Buy a house with a 20% down payment that appreciates only 6% annually. In 5 years your cash investment will have grown by 169%. That’s the power of leverage. Consider this true story. Lisa and her family arrived here from Vietnam virtually penniless. Her mother worked as a seamstress, her father on an assembly line. So far, they’ve accumulated $5 million worth of properties with $2 mil equity. Four years ago, by living mainly on rice and soy sauce, they scraped together $25,000. Lisa, now 31, and her husband then began buying and selling homes They first bought a Northern Cal condo for $230,000, sold it for $400,000, netting a $50,000 profit after paying off their debts. Then they bought another condo where they’d moved to in Santa Barbara. Within a year its value increased by $125,000 so they borrowed against their equity to buy another, etc. Now they own 6 homes, a triplex, and are closing on a 30-unit rental property this month. Lisa says, “Basically, I started with that $50,000 profit, and I’ve been playing with the bank’s money (“House Money”) ever since.” Try doing that in Sweden! America: truly the Land of the Free and the Home of the Brave! I love it!

Ken owns Ken DuVall & Associates, Realtors at 3rd Ave. & Mangrove in Chico. Ken was the 2001 President of the Chico Assn. of Realtors and the 1995 Chico Realtor of the Year. See Chico MLS listings at www.KenDuVall.com and call Ken at 345-3700 for all your real estate needs. Free consulting.

Rich Have Good Year

The net worth of the 691 billionaires Forbes says is $2.2 trillion (vs. the $3 trillion worth of all California real estate), up $300 billion for the combined worth of the 587 people (104 new ones) listed last year. The World’s Richest Moguls now hail from 47 different countries. The newcomers include 69 Americans and 38 Europeans. More than half of them are entirely self-made. The gap between the two richest- Bill Gates and Warren Buffett- narrowed, with Gates still top dog for the 11th straight year. With real estate appreciation running from 21% to 34% all over the North State, you’d figure these Big Kahunas have investments here. That’s an incredible bang for the buck. We haven’t seen that kind of return in the stock market for 5 years- and a lot of those gains have since gone down the drain. Do you know of anyone in town that’s lost money in real estate lately?

CONDO TURN AROUND
Californians struggling to break into our housing market created a New Phenomenon last year. The appreciation for condos, generally the second choice of homebuyers, far surpassed that of detached homes. Attached homes posted a hefty 35.6% gain last year vs. 23.8% for detached housing. I remember the gag was that when developers needed “dough” they came up with a new “con”, and dubbed it the “condo”. Well, no more, as the median price common interest development home (a condo) in CA zoomed to $495K in ’04. Detached housing normally appreciates more quickly than condos. Last year’s reversal was the result of demand from first-time buyer’s that couldn’t afford the record high prices of detached homes.

YOU CAN’T WIN FOR LOSING
After Sacramento County enacted a plan to provide affordable housing for the poor, the Building Industry Association filed suit, calling it an unnecessary tax on developers driving up costs. A statewide first, the ordinance mandates that 3% of housing be built for society’s most destitute, such as a family earning less than $17,300 annually. Dennis Rogers, a BIA v.p., says, “Is it fair to ask some buyers to pay more so others can pay a drastically reduced price for the same home just because they make less money? We don’t ask, say Raley’s, to sell their products at below cost to some and then charge more to everyone else.” The issue is not so simple says Bill Kennedy of Legal Services of Northern California: “The building industry holds all the land (they do?) preventing the rest of society from buying a home, locking out over 50% of homebuyers.” Rogers responds: “We are bringing needed housing to the market, so why is it our responsibility to mitigate the lack of affordable housing?” Dilemma: 12,000 units are now hung up in the Sac permit pipeline that were previously approved.

Choose up sides here, folks.

The Energizer Bunny

It just keeps going and going… the real estate market, that is.
Interest rates, defying all predictions, are plunging. The benchmark 10-year T-note, which largely determines mortgage rates, dropped to under 3.9% last week, down from 4.7% a year ago. Analysts are now predicting 3.5% to 3.8% by year end. When the stock market gets scary, investors buy interest bearing bonds, which in turn ups their price and lowers their yield. That’s pushed back the 30-year fixed rate to just over 5% currently, the lowest in 40 years. That’s down from 6.3% a year ago. I'll guess with you. It’s a whole new world.

THE BOOM CONTINUES

California housing has generated $1 TRILLION in increased home equity in the last 5 years. For someone who plunked 15% down on the then median priced home of $230,000, the return on equity would be nearly 1000%. We now have a better feeling for how much new wealth home ownership has created. The median home price in CA just hit an unprecedented $509,000. Sales are up 5.1% over a year ago. The average U.S. home appreciated 12.5% in the first quarter versus the same period last year. California home prices are up 19.2%. The Pending Sales Index, homes put in escrow, has risen to the highest level on record, up 9.2% over a year ago. More and more builders are limiting sales to buyers who will occupy them to squelch speculation. Developers could sell their new homes in hours instead of days if they didn't. They are trying to create stable, family communities, not a commodity that investors buy, rent out, and later resell at a profit. Forget the flaky stock market. Real estate is where it’s at.

ONGOING

Meanwhile, pity the poor first time buyers who continue their struggle to get on board. All over the state young working couples are coming up empty as they reach for the American Dream of homeownership. Just when they think they can get in, it slips out of reach. The trade-up buyers are in great shape with their huge appreciated equities. Any Chico home now pretty much starts at about $250,000. Of the $87 million in current listings, the average price is $453,000, the median $379,000. There are 33 homes from $600,000 to $3.2 mil. Recently a S.F. home listed at $4.25 mil, after pulling multiple offers, went for $4.7 mil, all-cash, with a 3-day close. Simply extraordinary. Based on what’s happening now, I wouldn't be at all surprised if Chico home prices increased 15% this year. Our California Assn. of Realtor’s chief economist has already predicted 20%.

We are clearly in an incredible, unprecedented real estate boom of all time.

The true value of ownership

Say you bought your California home 5 years ago at the then median price of 227,000. In just that short space of time, its value has skyrocketed to the latest median of $485,000, a 107% gain. That’s an annual return of 20%, which is in itself an amazing gain under any circumstances. In fact, it’s nearly 3 times the National median return of 7% over the same time period. That return on your investment doesn’t even take into account that your home provides a place for you and your family to live, the improved quality of your life, your neighborhood, and the community overall. It all makes a lot of sense, an essential component of the American Dream.

THE TAX MAN
Along with home equity gains (debt reduction) and appreciation, there are other huge advantages here. If you sell, your profit is exempt up to $500,000, plus the annual loan interest and property tax deductions. Using the median price and an 80% loan for someone in a 25% tax bracket, your annual total tax savingsmoney in your pocket that you don’t have to pay to Uncle Sam- would be around $8000 (see your tax counsel for specifics on all this). Meanwhile, the appreciation meter keeps on running up your paper profit. Not too shabby, eh? Talking about taxes, the Fed takes in an extraordinary amount of money from the taxes we pay- hold onto your hats- $2 .5 trillion- a year. They then spend it for government services at the rate of $6.8 billion a day, or $4.72 million a minute! Hey, a billion here and a billion there- pretty soon you’re talkin’ real money!

PENDING SALES
I’ve mentioned The Pending Home Sales Index (PHSI) before, the new leading indicator for the housing market which tells us what the current sales pace is. A home sale becomes pending when the purchase contract has been signed but the transaction has not closed escrow, which usually (99% of the time) happens within 1 to 2 months. The current PHSI data out shows an April over March gain of 2.2% and up 10.4% over a year ago, indicating housing activity appears to be firming with a modest uptrend foreseen in the months ahead. Demand still appears to be stronger than supply, continuing to put upward pressure on prices, which are still increasing at the fastest pace in 4 years. Thirty-year interest rates have fallen back under 6% as I write because the stock market has been taking a walloping. We don’t see rates going through the roof, staying under 7% this year: not a deal killer. Kiplinger forecast: 7.4 million homes will sell in the U.S. in ’05, another way big year.