Issue 18-May 14

Feature News


Quick Tip

Do not let your greed get the better of you. A downturn in real estate values has the potential of making you lose your shirt. Set your goals and stick to them. It is a myth that property investment always gives high returns. Real estate investment is just like any other business and you should know your markup and be happy with it.


What They Said

“This has been the best training on real estate investing I have had. I did not expect to learn so much as an experienced investor. You made things easy for the beginners and at the same time help me learn a new things. This will help me generate another 60,000 within the next 30 days. Thank you so much!”

Carl D


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15-Year Mortgage Rates at New Low

Average rates for 15-year fixed-rate mortgages hit a record low of 2.56 percent this week, erasing last week’s record of 2.61 percent, according to the latest real estate market trends from Freddie Mac.  Average rates for 30-year, fixed rate mortgages were 3.35 percent this week – just .04 percent off the record low of 3.31 percent set in November of 2012.

Mortgage rates have trended down for five consecutive weeks in anticipation of disappointing economic growth for the first quarter of 2012, according to Frank Nothaft, chief economist for Freddie Mac, which was established by Congress in 1970 to provide mortgage capital to lenders.  The nation’s gross domestic product grew by 2.5 percent, but fell short of forecasts.

In other record real estate market trends reported this week, home ownership rates fell to historic lows.

Low mortgage rates may help boost GDP over the coming months, Nothaft said, as the housing sector becomes an increasingly important driver of economic growth. “Residential fixed investment added to overall economic growth over the past eight consecutive quarters and contributed more than 0.3 percentage points in growth over the past three months of the year.”

Scant inventor of available homes for sale may constrain home sales in 2013.

The National Association of Home Builders credits the housing sector for contributing roughly 15 percent of total economic growth for the first quarter of 2013.  “While the economy as a whole has slowed somewhat over the last year, the expansion of home building has picked up steam,” according to today’s Eye on Housing blog, a commentary on real estate market trends provided by the association.

In related real estate trends, mortgage applications increased a seasonally adjusted 1.8 percent in the week ending April 26, the Mortgage Bankers Association reported this week. Refinanced mortgages accounted for 75 percent of total applications, unchanged from the previous week.


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Real Estate Matters: How To Be a Smart Property Investor

Home buyers and real estate investors have been in a good mood for years, since around 2007, when the housing crisis began.

And why not? Historic low interest rates and home values that have dropped off anywhere from 30 to 60 percent are a potent combination.

But you know the tide is turning when home owners and sellers are finding something about the real estate market that makes them happy. In this case, rising home prices and still-low mortgage interest rates have meant distressed property is getting sucked up in waves, establishing a floor against which future real estate appreciation will be measured.

In other words, we’re finally at the tipping point, a place where interest in real estate has overwhelmed demand.

But that doesn’t mean there isn’t room for would-be investors to buy and hold real estate for the long run. And, no, you haven’t missed the bottom. Here are five ways to successfully invest in real estate:

1. Look for properties where you can build in value. Ilyce recently published a story on her MoneyWatch blog about properties you can purchase for $40,000 — about the price of a luxury car. These homes aren’t necessarily in move-in condition, but they’re not falling down either.

The goal is to find property that costs less than everything else in the neighborhood, even after you make the required repairs. In other words, let’s say you purchase a home for $100,000, when everything else in the neighborhood that’s not a distressed property (i.e., a foreclosure or short sale) is priced at $200,000. Your property needs, let’s say, $60,000 worth of work. When you add that amount to the purchase price, you still wind up with a property that has some sort of profit margin. You can either flip it or hold for the long run, renting it out to pay expenses and generate positive cash flow.

2. Buy a multi-unit property. We’ve known dozens (maybe hundreds) of folks who have bought multi-unit properties over the years, lived in one of the units and used the remaining units to defray their cost of living and leverage their investment.

How does it work? Let’s say you buy a four-unit building for $500,000. Each unit has two bedrooms and two bathrooms. If you live in one of the units, that allows you to rent out the other three apartments. If each of them brings in $1,500 per month, that’s $4,500 per month in income the property is generating, or $54,000 per year. The property may have $10,000 in real estate taxes, which leaves you with $44,000 to put toward the mortgage. That amount will certainly cover the mortgage and any upkeep the property requires.

Again, the goal is to find real estate that will allow you to maximize the leverage on your investment. If you could only afford to spend $150,000 on a single family property, but can actually afford a $450,000 property that generates some income, you might be better off buying the larger property. On a net basis, you might make more money than with a single family property appreciating at the same rate, and you might have bigger tax deductions and tax benefits over time.

3. Own a small business? Buy your building rather than renting an office. If your business is relatively steady and profitable, you might want to look into buying a building that you can use as an office rather than moving to rent a bigger office.

By purchasing a building, you’ll be able to use your rent to pay down your mortgage and build equity in the property. Your accountant might even suggest that you own the building personally and have the company sign a lease renting it from you to maximize tax opportunities. If you are growing, you can purchase a bigger property than you might need now and rent out the other part of the building until you are ready to move into it. If your business outgrows the entire property, you can then rent it to someone else.

There are plenty of ways to profit from the purchase of investment real estate. But the time to buy may be now, when interest rates are at historic lows and real estate values have come way down off their highs.


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6 Worst Types of Real Estate Investments

As any experienced real estate investor will tell you, not all investment properties are created equal. Homes that might be perfect for a primary residence, for example, might not yield positive cash flows — and without positive cash flows, you’re losing money, not making it.

Here are a few things to think about and properties to avoid when you are ready to invest your hard-earned cash equity capital.

1. Anything that doesn’t generate rental income

These include second homes and land investments. Too many people invest in properties hoping that they will go up in value. But there is an opportunity cost to having money sit in real estate that doesn’t pay any income. Even if the property goes up in value, you’ve got to reconcile and account for all the money you would have earned if your money had instead been in the bank or in stocks and/or bonds.

2. Anything with negative cash flows

If you buy a “prize property” — such as a fancy downtown fancy condo, beach property or vacation rental — it’s probably going to be 20+ years before you get your first dime of positive cash flow. And that’s just no way to invest your hard-earned money. Pencil out any potential deal ahead of time, and buy properties that pay cash flow from day one — the moderately priced properties in non-prize areas.

3. Tenant-in-common (TIC) investments

These were popular from 2005 to 2007 as a way to diversify a portfolio without having to deal with the hassle of owning and managing real estate. But few people ever earned a dime because of all the costs and fees associated with the agreements.

4. Development deals

Development of land is extremely high risk. There are entitlement, construction and market pricing risks, plus countless others. These investments are best left to the extremely wealthy and experienced investors who can take the chance that they’ll never see their money again.

5. Condo-hotels, intervals & time-shares

These aren’t even investments. There’s no ability to predict cash flows, rental income or future value/sales prices. And they are very hard to resell and typically only at a fraction of the original cost.

6. Foreign real estate

You might be OK buying real estate in Canada or Britain – however don’t forget about the foreign currency risk — but foreign countries generally have different real estate laws, protections and fluctuating currencies, making these properties extremely high risk.

Where U.S. Real Estate Might Be Getting 'Bubbly'


This is a guest post by Glenn Kelman. Kelman is the CEO of Redfin, a technology-powered real estate broker, and one of only six housing forecasters, according to the Wall Street Journal, to have called the U.S. housing bottom.

Sliding into a seat for lunch last month with six of Redfin’s Seattle agents, I asked if we were in some kind of bubble. All six nodded wide-eyed. “Maybe a mini-bubble,” one said. “But it’s crazy out there. Too crazy.”

This isn’t the answer you expect from real estate agents, even at a brokerage that prides itself on truth-telling. We’re supposed to get excited about a hot market. But after home prices increased 10% in a single year, everyone in the industry has again been whispering the B-word.

So we asked other Redfin agents around the country for recent examples of irrational exuberance among home-buyers. What we got back was unnerving:

  • Flash sales: This Portland home got 48 showings in 48 hours. Another listing in the same area got four offers in its first four hours on the market. We’re used to bidding wars, and we’ve noticed recently that high-frequency website updates and instant mobile alerts have led to flash real estate sales, but rarely have we seen multiple offers on a listing’s first day.
  • Multi-million-dollar cottages: This 986-square-foot Palo Alto home listed for $1.25 million got 20 offers, and sold for all cash with a 15-day closing, for $1.73 million.
  • Ten is the new two: A listing agent told agent Amie Conteh she was disappointed to only get two offers, “not the normal ten” on this Arlington, Virginia property.
  • Month-to-month markups: Agent Brad Le got a $520,000 offer on a San Jose condo even though a unit with an identical floor-plan sold for $470,000 the week before. Nearly all of the nine offers on the Redfin listing waived inspection and financing contingencies.
  • Instant flips: A buyer for this Bowie, Maryland home beat out 15 other offers by paying $22,000 above the asking price, only to get an email from investors the next day asking if the buyer would like to sell at a profit the property he’d just got under contract.
  • Listing lineups: Agent Chad Pluid complained on Facebook about a traffic jam outside this Seattle listing caused by three inspectors trying to access the property at 8:30 on a Wednesday morning. Each represented a buyer preparing an offer to buy the property as-is.
  • Inside jobs: Other agents are approaching our agents about our Los Angeles listings to ask if we want to take their fee for representing their buyer alongside the seller, in exchange for ensuring that the buyer’s offer wins. The buyer, almost always an investor, then agrees to give his original agent an extra fee outside of closing, effectively paying a 9% commission. Fortunately at Redfin, one agent can’t represent both buyer and seller.

Crazy as the market is, it’s not a bubble. And we’d tell you if it was: Redfin has argued before that prices were too high, in some cases emailing our customers advice to wait 12 – 18 months until prices fall another 10%. But this time we’re less cautious for a few reasons:

  • Prices are in line with incomes: The ratio of U.S. home-prices to income is only 5% above its January 2000 level.
  • New listings are low because prices are low: The number of new listings reaching the market was down 19% year-over-year in March, following a 17% drop the year before. Listings were scarce in the last bubble but that was different: everyone was buying, but everyone was selling too. Now what’s driving low inventory is different. Prices are still too low for most homeowners to make much money from a sale of their home.
  • Sales volume is far from bubble levels: The rate of home sales in February 2013 was down 38% from the 2005 sales peak, when speculation had reached a fever pitch. While we saw plenty of investor activity in 2012, most of 2013 demand is due to the return of household formation levels to historic norms.
  • Appraisals are limiting home-price increases: Buyers who want to pay more can’t because the lender will balk at the price. Sellers don’t always choose the highest offer, instead preferring a buyer with enough cash to cover any shortfall in the lender’s appraisal. As Phoenix agent Marcus Fleming says, “The appraisers could be the ones to play the biggest part in limiting price increases.” When appraisals were less rigorously regulated in 2006, lenders never quibbled with what the buyer wanted to pay. Now they do, loudly and often.
  • Cash is king, for now: whereas in 2006, 26% of homes were bought with no down-payment whatsoever, 46% of homes bought today are paid for in cash. Regardless of what happens to home prices, a bank cannot foreclose on a home bought with cash.

Why The Market Is Getting Bubblier

For all these reasons, U.S. housing prices aren’t going to drop significantly any time soon. But there’s one significant change that has occurred in the past few weeks. The market is becoming increasingly leveraged, with more buyers borrowing 95% or 97% of the home value, while investors retreat from the resulting increase in competition.
Agent Paul Reid recently got 20 offers on an Orange County listing that he had thought was perfect for investors, but the down-payment for three offers was 20%, and the rest were 3.5% – 10%. Three cash investors had inquired about the property but all declined to compete.

  • A Riverside-area couple wanted to buy this Murrieta home but the appraisal came in $15,000 low; two months ago, they would have had to try to negotiate a lower price, but because competition is hot and lending restrictions have eased, they were now able to handle the appraisal by borrowing more, lowering their down-payment percentage from 10% to 5%.
  • Loans that no one outside the government would have dreamed of making a year ago are now being aggressively marketed by banks, which have again become dependent on lending profits. If home prices were to decline at all, the home-buyers taking out these loans would once again find themselves underwater.

But What Will Happen When Rates Increase

And there’s one change that is about to come: rates will rise. In our survey of 1,100 home-buyers, 58% cited “low interest rates” as a primary reason for buying now, but mortgage bankers now expect rates to rise from 3.5% to 4.5% over the next year. When that happens, the frothiest markets could be in for a setback, with prices flat-lining or even declining slightly from where they are now. This won’t be the apocalypse we saw in 2008, but it could deliver a jolt to an already fragile economy.

The Frothiest Markets

So which areas are most vulnerable? Just because we’re not in a national bubble doesn’t mean that some markets aren’t seeing unsustainable price increases, especially in Washington DC, San Diego, Los Angeles and perhaps the San FranciscoBay Area.
It’s always hard to say that Bay Area prices are out of line, just because the normal laws of economics simply don’t apply to that place: most Silicon Valley wealth is not accounted for as income, but is instead based on huge windfalls from stock sales in tech companies.

It’s a mad, mad world of booms and busts and now booms again, with hardly anything in between. As the chairman of my last software company, Plumtree Software, said about a different boom, in a different time, a swinging pendulum never stops in the middle.

Table: Cities Facing Bubble-Like Behavior (credit: Redfin)

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10 hottest U.S. housing markets of 2013

After a long and painful downturn in the housing market, home prices in many—but not all—regions of the U.S. are showing signs of recovery. According to Zillow, a real estate listing website, home values rose 5.1% across the U.S. between February 2012 and February 2013. Many local housing markets are performing considerably better than the country as a whole. Home values rose more than 13% in 10 of the 30 largest housing markets for which Zillow has data, and rose more than 20% in five of them. Most of the 10 housing markets on the list were disproportionately hurt by the housing crisis. However, many of the areas with the most growth in the past year have remained desirable places to live. This has helped these areas recover at a faster clip compared with the rest of the country. Residents have taken advantage of the record-low mortgage rates and relatively low prices, despite the fact that average home values in places like San Jose and San Francisco are higher than most of the country.

10. Denver

Change in home value: 13.1%

Current home value: $234,200

Bottom in home value: Q2 2011

Forecast change in home value: 3.1%

The city experienced robust growth in 2012, and this is likely to continue, according to Zillow. However, between 2013 and 2014, home values are expected to rise only an additional 3.1%, by far the smallest growth of any housing market on this list. The Denver market didn’t fall as hard as other areas during the housing collapse. Between the peak in the first quarter of 2006 and the third quarter of 2012, Denver home prices only fell 5.4%. This February, more than 5,000 homes sold—an increase of 27% from the same month last year.


9. Detroit

Change in home value: 13.1%

Current home value: $84,700

Bottom in home value: Q3 2011

Forecast change in home value: 4.4%

For years, Detroit has been hit by a steep decline in home prices, as well as continued contraction in the automobile industry. As of the first quarter of 2013, the average home value in the Detroit area was just $84,700, by far the lowest of all the large metro areas in the country measured by Zillow. Detroit continues to suffer from high unemployment. The area’s unemployment rate was 11.3% in February, down just slightly from 11.5% a year ago

8. Los Angeles

Change in home value: 14.9%

Current home value: $439,400

Bottom in home value: Q1 2012

Forecast change in home value: 11.1%

In addition to the nearly 15% growth already experienced in the past year, home values are expected to rise an additional 11% next year. The growth in the housing market in California has led to growth in employment as well. The unemployment rate in the Los Angeles metropolitan area was 10.3%, a significant improvement from the 11.6% rate a year ago. Between February 2012 and February 2013, the number of people employed in construction rose 7.1%, an indicator of an improving housing market.


7. Riverside, Calif.

Change in home value: 16.3%

Current home value: $210,100

Bottom in home value: Q1 2012

Forecast change in home value: 17.2%

Like many parts of California, the Riverside metropolitan area is recovering from the housing bust. Home values are expected to jump 17.2% in the coming year, more than any other large city in the U.S. that Zillow considered. Like all other metro areas on this list, the unemployment rate in the Riverside area also has fallen, but remains comparatively high. The 10.8% unemployment rate in February was 1.8 percentage points lower than it was in the same month of 2012.

6. San Diego

Change in home value: 17.1%

Current home value: $396,800

Bottom in home value: Q1 2012

Forecast change in home value: 8.8%

Between the market peak in the first quarter of 2006 and the third quarter of 2012, home prices fell 37%. But now home values have rebounded, increasing 17.1% from the first quarter of 2012 to the first quarter of 2013. This included a 5.5% increase in the past quarter alone. There were 3,769 home sales in February in the San Diego housing area, an increase of nearly 5% from the same month in 2012. The unemployment rate in San Diego was 8% in February, a significant improvement over the 9.4% back in 2012.

5. Sacramento, Calif.

Change in home value: 20.1%

Current home value: $241,600

Bottom in home value: Q1 2012

Forecast change in home value: 15.6%

Home prices in Sacramento peaked in the fourth quarter of 2005, earlier than most metropolitan areas. Between the peak and the third quarter of 2012, home prices fell a painful 51.5%, which was among the largest drops in the entire country. Between the first quarter of 2013 and the same quarter in 2014, home values are expected to rise an additional 15.6%, more than any of the other largest 30 housing markets except for Riverside. The metro area’s unemployment rate of 9.6% as of February was still considerably higher than the national rate of 7.7%.

4. San Francisco

Change in home value: 21.4%

Current home value: $563,200

Bottom in home value: Q1 2012

Forecast change in home value: 10.5%

San Francisco’s home values rose by 21% last year, with 6.4% growth between the fourth quarter of 2012 and the first quarter of 2013. This was among the largest quarterly increases of all large metro areas in the country. The median home value in San Francisco was $563,200 as of the first quarter of 2013. And the growth in home values is expected to continue—by an additional 10.5% in the next year. The unemployment rate in the San Francisco metropolitan area was 6% in February, a significant drop from the 7.5% in the same month last year.

3. San Jose, Calif.

Change in home value: 22.1%

Current home value: $676,100

Bottom in home value: Q3 2009

Forecast change in home value: 9.7%

The housing market in the San Jose metropolitan area bottomed out in the second quarter of 2009, significantly earlier than the other metro areas on this list. Since then, home prices have increased a great deal. As of the first quarter of this year, San Jose’s median home value of $676,100 was more than any of the other largest metro areas in the country. The unemployment rate in the San Jose area has declined from 9.2% in February 2012 to just 7.6% in the first month of 2013. Construction jobs in the area grew by 12.3% from February 2012 to February 2013, likely a positive sign for the local housing market.

2. Las Vegas

Change in home value: 22.3%

Current home value: $138,800

Bottom in home value: Q1 2012

Forecast change in home value: 7.5%

Las Vegas’s housing market has made a rapid comeback, with home values rising more than 7% in the most recent quarter alone. While values are on the rise again, it may take some time for the area to return to prerecession levels. Between the peak in the first quarter of 2006 and the third quarter of 2012, home prices plunged a whopping 59%. As the housing market has started to rebound, jobs have come back as well. Las Vegas’s unemployment rate of 9.8% as of February—while still considerably higher than the national rate—was a significant improvement from the 12.1% unemployed in the same month of 2012 and the high of 14.6% back in July 2010.

1. Phoenix

Change in home value: 24.0%

Current home value: $165,600

Bottom in home value: Q3 2011

Forecast change in home value: 10.6%

No other metropolitan area’s housing market has grown faster than Phoenix, where home values rose 24% over the past year. Between 2013 and 2014, home values are projected to rise an additional 10.6%. The unemployment rate in the Phoenix metro area was just 6.7% in February 2013, down a percentage point from the same month in 2012. Notably, construction jobs were up 8.2% from the previous year, likely an indicator of a more robust housing market.

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How Your Neighbors Could Tank Your Loan

Some lenders can make condo buyers with pristine credit feel like rejects. Blame it on the building.

Before making a loan to a would-be buyer, lenders comb through the building’s financial statements to see if too many condos remain unsold, or if units are mostly rentals instead of owner-occupied. Lenders also look to see if the building’s cash reserves, which help cover maintenance costs, are too low. 

These factors — which have nothing to do with a potential buyer’s finances — can put a chokehold on a loan.

A lot of condo buildings don’t make the grade. At national lender EverBank, for instance, roughly 30% of condo mortgage applicants encounter a roadblock due to the building’s finances. “A perfect borrower can’t fix a bad project,” says Tom Wind, executive vice president of residential and consumer lending at EverBank.

Shaky condos have been popping up more frequently over the past two to three years, even in luxury buildings, says Zeke Morris, president of the Chicago Association of Realtors. Real-estate agents say they’re also prevalent in other markets, including Houston and Miami.

In general, lenders say they view condos as riskier purchases than other homes. Much of that stems from condo-association fees. If existing owners are behind on those payments or many units remain unsold, monthly fees are likely to rise to help cover costs.

At some point, lenders argue, those expenses could rise to a level where an owner can no longer afford to pay the fees and walks away from the property, leaving the lender with the outstanding mortgage. That’s why, currently, it is almost impossible to get a mortgage — regardless of your wealth — if more than 15% of condos in a building are behind on dues, says Jeff Gennarelli, president of Bridgeview Bank Mortgage Co., based in Lombard, Ill.

But luxury buyers have alternatives besides paying all cash for the condo. One is private mortgages, loans that lenders hold on their books rather than sell to the government. They tend to be larger than traditional loans, require larger down payments and are often offered only as adjustable-rate mortgages. Rates are also generally higher than traditional mortgages.

Private loans are sometimes the only source of financing for condos sold in luxury hotels and in buildings where more than 20% or 25% of the units consist of commercial space, like restaurants and shopping malls. They’re also common for a condo in a new building where a certain percentage of the units are still owned by the developer.

To find such a loan, borrowers should consider a community bank or other local lending institution where they have a lot of assets or where they have been banking for years, though an existing relationship isn’t always required. Or they can ask mortgage brokers who may know a lender willing to fund such a loan.

The opportunity for profit is partly why these lenders take on the risk when others won’t. Whatever leniency they offer on a building’s finances they often make up for by imposing strict lending requirements, including high credit scores, says Eddie Hoskins, president of First Florida Financial Group, a Fort Myers, Fla.-based mortgage broker that arranges such loans.


Some points to consider when applying for a condo loan:

• Get an early start: Buyers should ask lenders for the list of criteria the building will need to meet; then real-estate agents can provide those answers when potential buyers shop for properties.

• The type of building: Some condo buildings have a greater risk of not being approved for financing. Jonathan Cherry, senior mortgage banker at Wyndham Capital Mortgage based in Charlotte, N.C., says buyers who want to avoid financing complications might want to stick to mid- to larger-size buildings that are mostly owner-occupied.

• Large down payments: With a private mortgage, borrowers often need to make at least a 20% to 30% down payment if it’s a primary residence. If it’s a second home, they could need to put down at least 40%. For investment purposes, cash is among the few options, since a mortgage may be impossible to get.

• Rising costs: With adjustable-rate mortgages, rates could be low now but rise in a few years, thereby increasing the monthly mortgage payment. And borrowers could still end up with rising condo dues if the other owners in the building hit hard times.



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Rejoice – Your House Is An Investment Again

Good news for homeowners – your house is appreciating in value!  The housing bubble (and bust) is over and prices are now poised to appreciate with the inflation rate, as they should.

Bubbles occur in all asset classes and housing is no exception as Figure 1 illustrates. The average U.S. home price doubled in value on an inflation-adjusted basis from 2000 to 2006. The housing bust only took a few years to bring home values back to their long-term average.

Housing prices got out of hand for many reasons. Many people have an opinion about why it happened; I have several.

Taxes: Liberal tax breaks enacted in 1997 allowed up to $250,000 of tax-free gains on the sale or exchange of a principal residence ($500,000 for married couples filing a joint return), and this is after deducting mortgage interest on a tax return for mortgages up to $1,000,000 and $100,000 for a home equity loan.

Easy Credit: Lending standards disintegrated at financial institutions. Marginal buyers with little credit were invited into the market and qualified for new types of loans where they made minimum payments in the early years of a mortgage. The idea was that prices would continue higher and the homeowners could refinance.

Greed: The stock market waned after the tech bubble burst in 2000, while home prices rose. Expectations for continued price increases led to widespread speculation among individuals who had never been in the housing market before except as a homeowner. I knew the top was near when one former client liquidated his IRA account to speculate on two Florida homes in 2005.

The house of cards began to shake in 2006 and it collapsed in 2007. Prices cascaded down. The bottom was finally hit in the first quarter of 2012.

That’s all water under the bridge. Home prices have retrenched back to where they should have been all along. Nationwide, homes are selling about where they were in the year 2000 after adjusting for inflation. That’s the normal growth range.

Am I saying that prices are building a base from which to catapult north again? I certainly hope that doesn’t happen. It would be bad for the economy and eventually lead to another financial crisis.

What I am saying is that it’s okay to buy a house today. Prices are back to normal and interest rates are low. From this point, home prices will likely appreciate with the inflation rate providing the property is kept up.

Washington also seems willing to help. Federal Reserve policy is to keep mortgage rates low, and the interest mortgage deduction will probably survive the next round of tax increases. This should keep a new homebuyer’s interest expense down around the inflation rate after tax.

There’s also good news for sellers. There hasn’t been much talk in Washington about cutting the $250,000 tax-free capital gain on the sale or exchange of a principal residence ($500,000 for married couples.)

Owning a home may not lead to speculative windfall profits that some people earned a few years back, but it beats paying rent. If you can turn rent into something that appreciates with inflation, that’s a good investment.


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Winners of the Investor-Led Housing Recovery

The housing market recovery is gaining momentum, but it’s not your average homebuyer behind the push, it’s investors.

Low interest rates and recuperating home prices have investors flocking to the market to find bargains and they’re pricing out traditional buyers.

But just like any competition, there are winners and losers in the recent shift and surge in the real estate market.

“Investors are increasingly putting money into residential properties because they see it as a lucrative investment,” says Deonta Smith, an analyst at market research firm IBISWorld. “Investors are purchasing foreclosed and existing homes that need a lot of work, fixing them up and renting them until prices increase.”

According to the National Association of Realtors, all-cash home purchases, typically the domain of investors, made up roughly 32% of sales nationally in March 2013 compared to around 20% in 2009.

Because investors are flooding the existing home market, it’s driving up prices, sparking bidding wars in some areas and freezing out home buyers that can get a mortgage, but can’t compete with an all-cash offer. As a result, buyers are turning to newly-constructed home, giving home builders a boost.

“They inflated the homebuilder market for new construction because they can’t get old ones,” says Smith, who cited Pulte Homes, Lennar Group and KB Homes as beneficiaries of the market shift.

Since many investors buy homes to renovate and then rent out, ancillary industries are seeing a surge. “While some industries, such as the specialty contractors, would benefit from a traditional homebuyer-led recovery as well, others in the service and retail sectors benefit specifically because the market is shifting toward single-family home rental,” says Smith in his research report.

“Several industries across different sectors benefit from a rentals-driven housing market recovery.”

According to IBISWorld, the remodeling industry has been one of the early beneficiaries of this investor-led real estate surge as they find more opportunities for small projects including the installation of appliances, kitchen remodels and bathroom improvements. Landscaping companies are also benefiting from the need for curb appeal to attract renters. Painters and plumbers are also seeing increased demand and home improvement stores whether it’s a mom and pop or a national chain are seeing more customer traffic.

Property management companies are getting a boost since the investors topically don’t directly manage the day-to-day operations of the homes they buy and rent out. These companies deal directly with the tenants and any maintenance and upkeep of the building.

Times may be good for real estate investors and the service providers now, but IBISWorld is cautioning that the good times won’t last forever, given investors have little appetite to rent out properties forever.

According to IBISWorld, many investors won’t stay in the market for long as more consumers pay down debt and begin the process of purchasing a home. The more people in the market will put more upward pricing pressure on homes, prompting investors to sell. “A widespread selloff of these assets could have wider implications for the overall housing market. If too many of the institutional investors who bought thousands of homes decide to cash in on their housing assets at once, they could flood the market with new inventory, dramatically increasing the supply of homes and risking another collapse in prices,” says Smith.

Still, the firm doesn’t think the recovery will fall apart if investors start to sell off since consumer buying power is expected to regain enough strength. “With unemployment steadily falling, disposable income growing moderately for the next five years and rising pentup demand for homeownership among consumers currently forced to rent, a second wave of homes on the market could receive a warm welcome,” says Smith.

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10 Most Polluted Cities

These 10 cities had the highest level of year-round pollution and some of the highest incidences of heart and lung issues as well, according to the American Lung Association’s annual report.

1. Bakersfield, Calif.

Population: 852,000

Cardiovascular cases: 168,000
Rank among ozone-polluted cities: 3

Located in the southern edge of California’s San Joaquin Valley, Bakersfield is hemmed in on three sides by mountains making it a perfect place for pollution to linger and collect.

“Light prevailing winds push air south and the farther south you go, the worse the air,” said Seyed Sadredin of the San Joaquin Valley Air Pollution Control District.

The area is also a major oil producing region, which introduces diesel soot, from well pumps, and chemical fumes into the air.

Still, the area has made great strides in recent years. Overall, harmful emissions are down 80% over the past 20 years, according to Sadredin.

Future improvement should come from recent Environmental Protection Agency programs that offer cash incentives to replace dirty diesel engines in trucks, tractors and buses. Jared Blumenfeld, the EPA’s regional administrator, said local farmers have replaced many of their old tractors, as well as diesel-fueled water pumps with electrical ones.


2. Merced, Calif.

Population: 260,000

Cardiovascular cases: 51,000
Rank among ozone-polluted cities: 11

Criss-crossed by major roads, including California’s Route 99 and Route 140, which takes many travelers to Yosemite National Park, Merced has long struggled with ozone and emission-related pollution.

In fac,t, some 80% of the area’s harmful pollutants can be traced to transportation sources, said Bonnie Holmes-Gen, senior director for policy and advocacy for the American Lung Association in California. However, Merced is making progress in reducing its ozone levels, with the pollutant hitting it lowest level in 14 years, she said.

Another issue facing the town is its proximity to San Francisco and Oakland. Jared Blumenfeld,of the EPA, estimates that as much as a quarter of the pollutants in Merced drift in from those metro areas.


3. Fresno, Calif.

Population: 1.1 million

Cardiovascular cases: 225,000
Rank among ozone-polluted cities: 4

Fresno’s air suffered a setback last year, with an increase in the particle pollutants found in smoke and haze like soot and sulfur dioxide, which can aggravate asthma and heart issues.

The Fresno metro area’s population sharply increased 16% between 2000 and 2010, spurring the once compact city to sprawl outwards. Now, residents drive much further distances to get to work, leaving a trail of exhaust and emissions.

“Air pollution is proportional to vehicular traffic,” said John Swanton, an air pollution specialist with the California Air Resources Board.

Like other cities located in California’s valleys, layers of warm air trap those emissions like a lid on a cooking pot and pollution builds up to unhealthy levels.


4. Los Angeles

Population: 18.1 million

Cardiovascular cases: 4 million
Rank among ozone-polluted cities: 1

Los Angeles is still one of the worst cities for all types of pollution, but the air quality is much better than it was in the first State of the Air report released 14 years ago. Days with unhealthy ozone levels have fallen by a third since then, to about 125 days a year.

Improvements in auto engines and clean-burning gasoline have made most of the difference, according to Carsten Warneke, a scientist with the Cooperative Institute for Research in Environmental Sciences at the University of Colorado Boulder.

“The main emissions source [in Los Angeles] is vehicle exhaust, but the cars we’re driving are getting better every year,” he said.

With those improvements, many of the volatile organic compounds that used to fill the skies of Tinseltown, such as benzene and toluene, have been reduced by about 98%, according to Warneke.


5. Hanford, Calif.

Population: 154,000

Cardiovascular cases: 30,000
Rank among ozone-polluted cities: 5

A large part of Hanford’s pollution problems stems from tiny bits of dust, soot and gasses in the air. Close to half of that mix is from nitrate particles, which have been boosted by the massive cattle feedlots in the area.

Mishandled animal waste can release large quantities of ammonia into the air. The nitrogen in the ammonia then combines with auto emissions to form nitrate particle pollution.

The town also receives doses of pollution from cities to the North, like Fresno. But even more comes from the traffic along the big North-South superhighways that flank both sides of town. About 40% of all the container freight tonnage in the country comes through the ports of Los Angeles, Long Beach and Oakland and much of it winds up traveling these roads.


6. Modesto, Calif.

Population: 519,000

Cardiovascular cases: 110,000
Rank among ozone-polluted cities: 13

Situated at the northern end of the San Joaquin Valley, Modesto shares many of the same pollution issues other valley cities face. One of the biggest culprits: Exhaust from California’s Route 99, a major truck route for agricultural produce haulers.

But Modesto also gets emissions and industrial drift from the nearby San Francisco-Oakland metro area.

The American Lung Association’s Bonnie Holmes-Gen said reducing particle pollution in Modesto has proven tough on a local level as well. Many area residents burn wood for heat in the winter and the area is prone to droughts. In July, August and September, virtually no rain falls in most years. Wildfires can break out and keep skies smoky for weeks.


7. Visalia, Calif.

Population: 429,000

Cardiovascular cases: 87,000
Rank among ozone-polluted cities: 2

Residents of Visalia can’t rely on summer winds and rains to wash away high ozone and particle pollution. On average, less than a third of an inch of rain falls between June 1 and September 30.

And since the city is located hard up against the Sierra foothills, air flowing eastward hits the mountains and stays there, building up pollutant levels.

Forest fires and smoke are a bigger problem here than elsewhere in the San Joaquin Valley. Visalia is close to national forests in the mountains and the U.S. Forest Service holds “prescribed burns” to keep the underbrush under control, according to Seyed Sadredin of the San Joaquin Valley Air Pollution Control District.

“Even worse, we have wild fires, which totally overwhelm the control in place,” he said. In a particularly bad year, like 2008, he said, there can be 3,000 wildfires in the area.


8. Pittsburgh

Population: 2.5 million

Cardiovascular cases: 705,000
Rank among ozone-polluted cities: 24

The air in this steel town was once so polluted with coal and coke soot that streetlights were sometimes turned on at high noon. Now, much of Pittsburgh’s pollution comes from Ohio, West Virginia and further west, according to Neil Donahue, who studies transport pollution at Carnegie Mellon University.

While coal-burning power plants strung for hundreds of miles along the Ohio River are still a problem, many plants can switch back and forth between coal and natural gas. So when gas prices drop, as they did last year, the plants rely more heavily on that cleaner-burning fuel, which accounts for some of the city’s improved air quality.

With its deep valleys, however, Pittsburgh’s topography works against it, especially during the hazy days of summer, according to Donahue. That’s when warm blankets of air bottle up pollution in the city’s deep river valleys for days at a time.


9. El Centro, Calif.

Population: 177,000

Cardiovascular cases: 37,000
Rank among ozone-polluted cities: 10

El Centro’s air quality has several factors working against it, namely its hot, dry climate and the border it shares with Mexico, which has much less stringent clean air laws, according to Brad Poiriez, air pollution control officer for the region.

The city tries to keep dirt roads and farm drives watered or covered with crushed asphalt to stop dust from flying, but there’s still plenty of open land where strong winds can stir it up.

The steady stream of traffic to and from Mexico only makes it worse. Often the line is more than two hours long, which means cars idle in the hot desert sun and emit a steady stream of exhaust, said Poiriez. Many of those cars are registered in Mexico and are older models with engines that burn dirtier than newer cars.

The air pollution control office has been working with Mexican authorities to require vehicles that cross the border to meet U.S. emissions standards. It has also gotten Mexican authorities to limit uncontrolled burns on farms. That helped the area reduce its pollution in 2012, but it still has a way to go.


10. Cincinnati

Population: 2.2 million

Cardiovascular cases: 164,000
Rank among ozone-polluted cities: Not in top 25

With three major interstate routes meeting in the metro area, much of Cincinnati’s air pollution comes from vehicle exhaust.

Megan Hummel, spokeswoman for the Southern Ohio Air Quality Agency, said the agency is spearheading a campaign to reduce engine idling in the city. The program uses posters and pubic service announcements aimed at parents waiting to pick up schoolkids, reminding them to turn off engines within 30 seconds after stopping. It also managed a program to retrofit 519 school buses to burn fuel cleaner and took 63 older, dirtier buses out of service entirely.

Their efforts are paying off: The city has made steady progress reducing its smog and ozone levels, said Hummel.

“We routinely exceeded ozone standards in the 1990s and early 2000s and now we rarely do,” she said.



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