Saturday, April 29, 2006

Looking Ahead: Two Views

The debate continues. Who is right? That’s for you to decide. Below is a link to an article posted on the Business Week Online site which features two heavyweight real estate giants in the industry (Sam Zell and Barry Sternlicht) and their contrasting views on the future of the real estate market.

In my (pipsqueak) opinion, Zell is a bit disconnected with the overextension of many buyers today. He claims it’s a 20% of income debt, but I know a lot of homeowners who are using the adjustable rate mortgages and I would estimate one in four of those are in a interest-only program many of which adjust monthly! With rates rising monthly, and homeowners already overextended on their mortgages this poses a potential problem in the future as rates rise, mortgages rise and incomes stay steady or slight growth.

Also, another industry concern is that so many of the adjustable mortgages will be coming due and adjusting in the next three to five years. They will of course be adjusting up and this too will mean less disposable income for those homeowners or investors. This may mean an increase in foreclosures but it will also mean there will be opportunities for investments as people begin liquidating their real estate assets to reduce their risk.

So, I am instructing all of my clients to get locked into a 30 year mortgage and resist the temptation of the adjustable mortgages unless the investment is less than a year or two (at most). For example, if a buyer is going to purchase a property do minor rehab and resell or flip it, then an adjustable or interest-only loan is a good option. But look at how close the ARM rates are to the 30 year rates and you will see the best investment for the majority of people will be the fixed mortgages.

Here are a few paragraphs on the article referenced above and a link to the full article here

Two Views of the Real Estate Boom

By Christopher Palmeri
Business Week OnlineApril 28, 2006

Any time you get two market heavyweights to predict the future of the real estate boom, you're going to attract a lot of investor interest. And when they hold views as divergent as those of Sam Zell, the Chicago investor who early in his career earned the nickname "The Grave Dancer" for his skill in picking up distressed properties, and former Starwood Hotels & Resorts Worldwide (HOT) chief Barry Sternlicht, sparks are bound to fly. The venue for the Apr. 26 faceoff was the annual Milken Institute Global Conference in Los Angeles. Zell immediately dismissed inflation figures showing relatively benign 2% to 3% growth. "If you're trying to build, you're looking at 30% increases in construction costs in the past 24 months," he said. The financier believes inflation will continue to hold real estate prices up. "I don't think there's bubble or any area with oversupply," he said, before hedging by naming a few markets -- Las Vegas, San Diego, and Phoenix -- where he thought high-end condos were overbuilt.Zell quickly shot down the notion that Americans have overextended themselves by paying too large a share of their income for mortgage payments. "In Europe, it's more like 50%. Here, people think they're pressed if its 20%," Zell said. And if buyers get strapped, they'll cut down on discretionary spending before they stop paying their mortgage. "We're still the cheapest housing in the world," he said.ON THE CHASE.  Zell, who controls two large real estate investment trusts -- Equity Office Properties (EOP) and Equity Residential Properties Trust (EQR), an apartment owner -- said that while there are still some markets with relatively unfettered opportunity to build new homes, many cities and states are increasing zoning restrictions and other artificial barriers to construction. "The whole country is going the route of California," he said.Sternlicht took the opposite view. "This is too bullish," he said. "One thing I learned on Wall Street is that the flow of funds overwhelms fundamentals. There are so many funds chasing the real estate game -- oil sheiks, Hong Kong billionaires, hedge funds. This is a totally different market than even a year before."

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