2007: Year of transition for real estate

Most housing markets last year experienced a decline in home sales, following the boom levels of the previous two year. However, this year is expected to be a year of transition with growth emerging in many areas, according to economists at the National Association of Home Builders.

The earlier boom can be attributed largely to excess demand generated by historically low interest rates, coupled with aggressive mortgage lending practices. It's a combination that made home ownership more affordable but also attracted investors and speculators into many markets. These factors put inordinate upward pressure on home sales, prices and production. Major downward corrections occurred in housing markets during the past year and further adjustments have extended into the early part of this year.

“Because the boom and correction cycle has largely been driven by national rather than local factors, most regions have experienced some degree of over-heating and correction,” said NAHB's chief economist David Seiders. “We expect this year to be a time of transition in most regions, with the number of housing starts bottoming out in the early months before transitioning to recovery paths.”

Housing markets with the biggest booms during 2004 and 2005 are generally expected to be the slowest to return to normal levels of activity, and those that showed more restraint will be the first to show growth, it was noted.

Growing opportunities for real estate investors

As most people know, real estate is a cyclical industry. Last year's downturn in sales activity has motivated some real estate investors to turn away from more property acquisitions. However, some astute analysts say this is a very opportune time to invest, or start a real estate investment program.

“Owning some income-producing real estate, in addition to having a solid portfolio of other investments, can be a very good thing,” said Dave Ramsey, author of the book, “The total Money Makeover.” For investors willing to invest for the long term, owning properties can be a path to financial freedom for many, he noted.

Single-family homes make very good first properties because they don't entail the same hassles and headaches association with multi-unit apartment buildings. Homes can be easily turned into rentals and are also much more affordable than, say, multi-family units like duplexes and triplexes, according to Robert Sheehan, economist for the National Apartment Association.

Home sellers are now more realistic with pricing, so the current housing market offers a lot more choices for buyers who get more for their money. That translates to more and better opportunities for investors.

New mortgage-related regulatory bill approved

The new Regulator Reform Bill legislation that would overhaul the oversight of government-sponsored enterprises (GSEs) – Fannie Mae, Freddie Mac and the Federal Home Loan Banks – has been approved by a vote of 45 to 19 by the House of Representative's Financial Services Committee.

The law would create a new, independent regulator, the Federal Housing Finance Agency, to regulate the GSEs. Also, the bill creates an Affordable Housing Fund to support rental housing and home ownership for low-income families by using contributions from Fannie Mae and Freddie Mac, based on their total outstanding mortgages annually. The program would continue for five years.

New rules set by Freddie Mac

Beginning in September, Freddie Mac will change its policies regarding the purchase of subprime adjustable-rate mortgages. From that point, loans with little down and very small payments up-front will undergo much tougher guidelines. It will not buy subprime loans unless the borrower is qualified to pay for the loan at its fully-indexed and fully-amortized rate, not merely a short-term, low-ball rate.

Also, there will be stronger required proof of financial capacity. For most borrowers this will mean showing tax returns and W-2 forms, and they will require lenders to collect money each month to assure that property taxes and insurance are being paid.

Green homes – an emerging trend

“Green homes” – those with special features to increase the home's energy and resource efficiency – are becoming more popular with buyers and builders. Homeowners who now have a new “green” home are happier with their homes than with their previous non-green homes, and most of them enthusiastically recommend “buying green” to others. That was revealed in a recent survey conducted jointly by McGraw-Hill Construction and the National Association of Home Builders.

“Though it's still a small number, builders are now getting it when it comes to the value of real green homes, and it appears homeowners are too,” said Harvey Bernstein, a McGraw-Hill vice president. Last year, about 2 percent of the residential construction market had at least one green building element, such as energy-efficient appliances, he noted. “It's also powerful to find that people are really starting to commit to building truly green homes, moving away from just adding energy efficient appliances or another single aspect that's green. They're paying attention to the holistic benefit of green.,” he said.

The survey and study revealed the following:

-- The average new owner of a green home is affluent and well educated, in his or her mid-forties and married, and more likely to be from Western or Southern states. Women are most likely to be green homeowners.

-- Home operating costs are a major concern for these owners. About 60 percent report lower operating and maintenance costs as the key motivation behind buying a green home. Also, nearly 50 percent report environmental concerns and family health as motivators.

-- The lead obstacles to specifying green features in a new home are lack of awareness about them, higher costs, and scarcity of needed components and availability of green homes. The biggest obstacle noted by current green home owners was lack of education about green homes and their benefits.

It's interesting to note that more green products are now being purchased and used in home remodeling projects. Nearly half of the overall homeowner population has recently done some renovation work on their home, and about 40 percent of that population is doing so with some green products, according to the study.

Mike Nagel, chairman of the NAHB Remodelers Council, made this statement: “The only way to bring green into 120 million existing households is through remodeling. Americans spent over $230 billion last year in home remodeling, with energy efficient and sustainable products representing an increasing share of the market.”

Condo sales rebounding

The building of new condominiums is on the rebound. Condo builders and developers are reporting improved market conditions, according to a report from the National Association of Home Builders.

“The condo market is coming back toward balance following a period when the pendulum swung from red-hot to seriously cold,” said David Seiders, NAHB's chief economist. “What we are looking for, and likely to find this year, is a healthy and sustainable level of condo production that will fall short of the unsustainable levels during the earlier boom period. But that will meet our current market demands.”

Condos have long been the preferred residential property type for many young married couples, singles, and retirees. An increasing number of upper-end condos have been offered in downtown areas of metro districts, close to points of employment. These luxury units, either new construction or converted from rental apartments, have been particularly popular with business executives.

One special problem facing today's condo builders and developers is the rising cost of insurance. More than 70 percent of those surveyed report a significant increase in property insurance premiums. Just over half of builders reported up to 24 percent increases in premiums. About 18 percent said their increases were between 25 and 49 percent, 3 percent reported premium increases between 50 and 99 percent, and 8 percent said they received increases of 100 percent or more. Such increases can have a serious impact on affordability, Seiders noted.

Subprime mortgages draining home ownership rate

Subprime mortgage lending is turning out to be a drain on the rate of home ownership, according to a study by the Center for Responsible Lending.

The study shows that while the subprime market produced more than $2 trillion in home loans over the past nine years, these loans have led (or will lead) to a net loss of home ownership in the nation of almost a million families.

The reason for this net loss is that only 9 percent of subprime loans went to first-time home buyers (from year 1998 through 2006). However, over 15 percent of subprime loans ended, or will end, with borrowers losing their homes through foreclosure, CRL reported.

Another leader targeting high-risk mortgages

The Federal Housing Commissioner Brian Montgomery is joining others in clamping down on high-risk mortgages.

“Many first time and minority home buyers face significant challenges when trying to purchase a home,” he said. “In recent years, such difficulties have resulted in many of these individuals assuming risky, adjustable-rate, subprime loans. The impact on minorities is particularly profound. There needs to be a mortgage alternative that will qualify a wide swath of borrowers and simultaneously provide them with the loan option they need – a modernized and reinvigorated FHA.”

Single women: a growing segment of home buyers

Single women are becoming a more important segment in the home-buying market. Married couples still constitute 60 percent of home buyers, but that proportion has been dropping in recent years. It was 70 percent 12 years ago, according to the National Association of Realtors.

It's also interesting to note that unmarried women accounted for 22 percent of sales last year – up from 14 percent in 1995. Single men, on the other hand, accounted for just nine percent of home sales last year. That's unchanged from the mid-90s. Experts say the trend is ripe with opportunities for condominium builders, Realtors and sales agents who specialize in the smaller, low-maintenance homes that single women prefer. Builders are already targeting women when decorating many of their model homes, emphasizing the lighter colors they believe women favor and showcasing upgrades in rooms such as the kitchen. Realtors are emphasizing a neighborhood's safety and the security of attached garages when talking with single women interested in buying a home.

This home-buying phenomenon is rooted in societal changes, including the fact that women are waiting longer to get married, analysts report. Married women who get divorced also are less likely to remarry, and remarry less quickly than men, according to a study by Rutgers University 's National Marriage Project.

Another factor is the gains college-educated working women have achieved. “They are a solid majority of the college students in America today,” said demographics expert Peter Francese. “They have substantial money-making capabilities and that will continue far into the future.” A Harvard University study last summer found that unmarried women are buying about one million homes per year. Between 2002 and 2003 they spent $550 billion on residential real estate.

The study showed that single women prefer homes in the city to the suburbs and tend to shy away from new construction. Most women buy smaller homes or less expensive condos that give them a stronger sense of safety while requiring less maintenance.

More rental apartments coming

The building of new rental apartment buildings will surge over the next two years, due to increasing consumer demand for rentals. This follows a depleted supply or rental units, largely due to so many conversions of rental apartment buildings to condominium ownership units in recent years. That's the forecast of economists at the National Association of Home Builders.

“We are forecasting that the rental and for-sale sectors of the multifamily market will make a major adjustment over the next couple of years,” said. David Seiders, NAHB's chief economist. “Last year, the for-sale market had grown to include almost half of all multifamily construction starts. That's a record share and a correction now is under way.”

Builders are particularly optimistic about the rising level of construction in the moderate-rent and low-rent apartments. The planning of more low-rent units reflects the improved Congressional climate for funding affordable housing.

Great Depression homes vs today's homes

People who grew up during the Great Depression bought homes in the 1940s and `50s replete with one-car garages, Formica countertops and vinyl floors. In recent years, baby Boomers have been much more picky. Armed with greater wealth, they often demand 10-foot ceilings, high-end appliances, a clubhouse concierge and live theater performances. Major builders who know how to deliver that lifestyle are enjoying brisk sales, even as today's housing downturn continues.

The over-55 market is growing and becoming a much more important sector in the home buying market. In 2005, the U.S. Census estimated that there were 67 million people age 55 and older. That 55-plus population will grow at more than two percent a year during the next decade and reach 85 million by 2014, it was estimated by the National Association of Home Builders. It was also predicted that someone 55 or older will head 40 percent of all households by 2012.

Baby Boomers have a substantial share of the nation's wealth -- about $2.8 trillion or 36 percent of total household income.

Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers – along with freelance features.  Reproduction of this report, in part or entirety, is prohibited without the express permission of the author. E-mail: storyjim@aol.com.