Boom to bust, almost overnight Home sales cool dramatically and prices begin to fall, finally confirming what we all knew: It couldn't last forever. 2006 may well go down as the year Pluto was suddenly just another big rock, Brad and Angelina had a baby and the real estate market slid from great to miserable in a few short months. In data released Tuesday, prices declined in more than 61 of the 275 cities tracked by the Office of Federal Housing Enterprise Oversight. And the deceleration has been fast: The agency reported that the decline in quarterly appreciation was steepest in more than three decades. Nationally, at the end of August, sales of existing homes were down 11.2% from July. The national numbers mask how much better -- and worse -- things are in local markets. In Texas cities, the Carolinas, Utah, New Mexico, Oregon and Washington, real-estate markets are strong. Sales volume and prices are dropping in overpriced markets like California cities -- particularly San Diego -- some Florida cities, Northern Virginia and Las Vegas. In some markets, like Detroit, it is exceedingly difficult to sell a property at all. Prices declined in 13 of the 16 metro areas in Michigan. Among prominent cities where second-quarter prices fell were: Boston-Cambridge, Cincinnati, Detroit, Indianapolis, Kansas City, Manchester, NH, Pittsburgh, Pa., Portland, Maine, Reno, Rochester, Minn., Toledo and Youngstown, Ohio. Prices fell in the California cities of Napa, Sacramento, Redding and San Luis Obispo, and in the Florida cities of Fort Walton Beach-Crestview-Destin and Punta Gorda. Price decreases, however, largely were concentrated in Colorado, Ohio, Pennsylvania, Michigan and Indiana. In the second quarter, the biggest drops were in: Columbus, Ind., -3.55% Bay City, Mich., -3.10% Greeley, Colo., -2.63% Appleton, Wisc., -2.56% Athens-Clarke Co., Ga., -2.58% Oshkosh-Neena, Wisc., -2.32% Eau Claire, Wisc., 2.08% Detroit, Mich., -2% Second-quarter growth was greatest in: Bend, Ore, 7.37% Myrtle Beach-Conway-North Myrtle Beach, SC, 6% Boise-Nampa, Idaho, 5.64% Coeur d'Alene, Idaho, 4.81% Miami-Miami Beach-Kendall, Fla. 4.72% Wilmington, NC, 4.5% Bremerton-Silverdale, Wash., 4.32% To get a sense of the problem in troubled markets, read the message posted in the Your Money community by a reader going by the name of LittleMo: "We purchased 2 (single-family homes) in Fl, one in Niceville and the other in Crestview, brought near the top of the market and have been unable to sell them. The one in Niceville sat empty for almost a year, listed with a realtor and we did not receive one offer, even after a price reduction. The one in Crestview was empty for 6 months FSBO and listed in the MLS, no offers. The market has turned in both of these areas nothing is moving unless you give it away." According to one housing benchmark, the Standard & Poor's/Case-Shiller Composite Home Price Index, the tide actually quietly turned in 2004 when growth in housing prices slowed in the 10 major cities the index follows. Robert Shiller, co-creator of the tool, which also is used by the Office of Federal Housing Enterprise Oversight, says, "That's how these markets have ended. They slow down for a while, the volume of sales drops" and, eventually, prices drop. Right now, Shiller says, in six of the ten cities in his index, home-sale prices are falling. In August, the luxury home-builder Toll Brothers announced a 19% drop in profits and reports cancellations of building projects, particularly in Orlando, Fla.; Northern California; Palm Springs, Calif.; Las Vegas and Phoenix. All real estate is local "All real estate is local," quips Lawrence Yun, an economist with the National Association of Realtors. What he means is that there may be unique reasons in each locale for real-estate market run-ups and declines. Or, at the least, local market forces can exaggerate the effect of national trends. Toll Brothers' sales, for example, dropped in some markets -- mid-Atlantic, Midwest and California -- but rose in the Southwest, Southeast and Northeast. While most markets shared in the strong price increases between 2003 and 2006, many did not experience double-digit growth and astronomical home values. Now, some of those slower-growing markets seem to be insulated from the larger downturn. Prices and sales in all regions were largely driven since 2003 by record low interest rates. That interest-rate boost is now gone, but, ironically, mortgage rates did not rise to hideous levels and currently they are dropping. On Aug. 31, the rate for a 30-year fixed mortgage averaged 6.44%, down from 6.48% the previous week and up from 5.71% a year ago, according to Freddie Mac's weekly primary mortgage market survey. The end to the Fed's support for record-low interest rates, though, exposed underlying differences in regional markets. Those best-insulated from the downturn, says Yun, are those with affordable housing prices and growing numbers of jobs. In Texas, the Carolinas, New Mexico, Ohio, Utah and the Pacific Northwest, particularly, there is work to be had and, for those who have jobs, home prices are within reach. In Houston, prices have risen 3% over last year -- not spectacular but, unlike in much of the rest of the country, sales there are growing. In Austin, prices rose 8.5% over last year. Salt Lake City prices grew 17%. Texas, Utah and the triangle regions in the Carolinas are basking in recovery of technology, in the movement of manufacturing from union-based Northeastern and Midwestern areas to largely non-union economies and from the rise in construction jobs that other growth brings, says the NAR's Yun. Real estate in the Pacific Northwest is still being pumped up by fleeing Californians. Californians (retiring baby boomers in particular) see that their homes have reached record prices and they've been selling. They are flooding into neighboring states with pockets full of cash, buying homes larger than the ones they sold for prices that seem, by comparison, pretty low and, in the process, driving up prices in the Northwest, particularly in the Portland, Ore. and Seattle metro areas. The Northwest's real-estate boom is likely to continue, albeit a bit slower, because those Californians are still moving around and also because that region's economies are strong, Yun says. Both cities are riding a strengthened technology sector. Seattle is going strong on orders for Boeing aircraft and increased international trade at its port. How low will it go? For an economy centered on house construction, appreciation and equity borrowing, the downturn is an indisputable blow. The questions are: How long will it last and how low will it go? NAR economist David Lereah is telling Realtors that the downturn will be brief. He sees pent-up demand building as potential buyers stay out of the market, presumably waiting for prices to drop and settle. The NAR's Yun points out that the context for the housing drop is not dire, since other aspects of the economy, like job creation, interest rates and unemployment are all fairly strong. Economist David Seiders, in his regular newsletter to the National Association of Home Builders, was soothing: He agrees that all indications "suggest that home sales and housing production still are on a downward path," but he see no recession coming. He tells the builders: "The economy still does not approach recession and a friendlier (interest) rate structure helps to keep housing activity at historically high levels." But other analysts believe the slide "still has a long way to run," as Ian Shepherdson, chief U.S. economist for Valhalla, N.Y.-based High Frequency Economics, put it in a newsletter to subscribers. In fact, Shepherdson worries that the fast housing downturn might pull the rest of the economy down, too. He points to recent NAR data showing a big drop in pending home sales, a trend that Lereah predicts is likely to "flatten out" in months to come. Shepherdson wrote: "The 7.0% plunge in the (NAR) pending home sales index for June is astonishing; it points to existing home sales dropping to about 5.9 (million) from the 6.33 (million) June level. … We continue to expect a 40-to-50% drop in home sales peak-to-trough, so there is still a long way to go." Shiller wrote "Irrational Exuberance," in which he predicted a real-estate market bubble. He expects "substantial price falls in 2007 and maybe even bigger ones, continuing down for a number of years. That's the kind of pattern we've seen in the past." That said, he cautions that he has been wrong about real estate before and it is possible the decline will turn around faster, for reasons not yet evident. Given the information available, though, Shiller says he is worried about recession. The so-called housing ATM is no longer functioning, so people aren't spending as they were. When homeowners were borrowing heavily at low interest rates against their home equity, the nation's savings rate dropped to less than 0 in 2006. Now, Shiller says. "We don't feel so secure as we used to, especially about our properties and home. … People won't feel like such free spenders anymore." Rents are rising The silver cloud on the troubled market for home sales is that it has created a booming rental market. Investors and home owners who can't find buyers at the prices they want are renting out their properties instead. Such an increase in places for rent ordinarily would drive down prices. But with more families -- who can't or won't buy -- shopping for a home to rent, costs are rising. RealFacts, which researches apartment industry occupancy rates and rents, reports that both occupancy rates and rents increased in the second quarter in all but one of 29 major metro areas. The highest price increase, 9.1%, was in the San Jose, Calif., area, which had until then been still suffering from the dotcom bust, says Chris Bates, RealFacts spokesman.

Market Update: 4th Quarter 2006 Turn a profit on rising rents The gap between home and apartment-rental costs is going to narrow, which means rents will keep rising. Renting short term lets you keep more of your income and paycheck without the hassle of being involved with the "real estate bubble." It looks like the axiom that says, "For every action, there's a reaction," applies to the housing market. Although new home sales appear to be falling off a cliff, the apartment-rental market is booming. Many investors are profiting from the action via real-estate investment trusts (REITs) that specialize in that market. Is it too late to participate? Probably not. I'll show you how to pinpoint the best candidates in a minute, but first some background. According to a recent report published by RealFacts, a research outfit that focuses on the apartment industry, occupancy rates and rents are rising all across the United State. Nationwide, rents are up 4% over the past year and occupancy levels are running at 94%. In San Jose, Calif., where the action is the hottest, apartment rents rose 9% on average. All this is new. When the economy faltered in 2001, apartment rents dropped and continued falling until last year, when they bottomed out and began to turn around. What's behind the upsurge in apartment rentals? It's simple: In 2005, prices of single-family homes skyrocketed, dramatically shifting the rent vs. own equation. The big question Deutsche Bank Securities published a July 31, 2006, research report titled, "Rent or Buy?" that puts it all in perspective. The analysts at Deutsche did what most of us do when we think about making the move from renting an apartment to buying a home. They compared the cost of owning vs. renting. To do that, Deutsche devised a gauge for measuring the monthly cost of owning a home, called the ATMP, which stands for "after-tax monthly payment." The ATMP adds up adjustable-rate mortgage interest, property taxes and insurance, but deducts principal amortization and income tax savings.   Deutsche compared average apartment rents to the monthly cost of owning a home in 47 different U.S. metropolitan areas. Deutsche expressed the results as the percentage cost of renting vs. owning. For instance, a rent/own ratio of 50% means that if it cost $1,000 per month to own a median-priced home, you could have rented an average apartment for $500/month. Those ratios show why the rents have taken off. For example, according to Deutsche, in Los Angeles it cost $1,158/month to own a median-priced home in 1999. By comparison, it would have cost $885/month, or 76% of the monthly home ownership cost, to rent an average apartment. Here's where it gets interesting. By the first quarter of 2006, the monthly cost to own a home in Los Angeles had jumped to $3,015, but you could have rented an average apartment for $1,215 a month, about 40% of the cost of owning. The same story repeats, in varying degrees, around the country. For instance, in Miami in 1999, your monthly outlay would have been about the same for renting an apartment as for owning a home. But, by 2006, you could rent an apartment for less than half the cost of owning. Obviously, something has to give. To get the rent vs. own equation back in balance, either rents must go up, or home prices must come down. According to Deutsche, if rents were to remain constant, home prices would have to drop 28% on average, and more than 40% in the hot markets. Conversely, if home prices didn't budge, apartment rents would have to rise 45% to return to the 1999 cost of renting vs. owning ratio. Most likely, of course, a little of each will happen. Rents will increase and home prices will come down some. Deutsche estimates that rents will increase 4% to 8% annually. The bottom line in all this is: Consider all your personal needs when deciding to rent or buy! The idea of Land Contracts and "renting to own" maybe the best hybrid to suit most people in the near future since it can incorporate the best of both options. In either case the most important factors to most people is working with someone they trust and living in a location they feel comfortable in. 2006 has been a busy year for RENT2OWNLOUISVILLE.com as we continue to expand our services! And, as we are planning on continuing to expand with the changing market, the most important thing to us is YOU! Thanks to all our tenants and customers for your patronage! Call us anytime at 502-777-5246