HOME PRICES PLUMMETING

When Bear Poth put his Rollingwood home on the market in October 2001, he expected to have no trouble finding a buyer willing to pay $419,000 for the house that has red oak floors, big windows and a canopy of live oak and pecan trees shading the pool. After 15 months and six price reductions, the price was $336,800. But still no takers. Poth's experience is extreme but not atypical in Central Texas, where sellers have had to lower their expectations to match a cooling market. Last year, the median sales price grew by 3 percent compared with 2001, to $157,000, the smallest increase in five years. The number of sales declined by 1 percent.

"A lot of people have lost their jobs, and it's clearly different than it was several years ago when offers were placed at prices above the asking price," Poth said. "I'm hoping the economy has bottomed out and is on the upswing." That may be wishful thinking. Some local real estate experts expect 2003 to be a repeat of 2002, with economists forecasting only tentative job growth in the region. For buyers, that means an abundance of houses to look at. For sellers, it means facing up to tough realities about how much they can get for their houses. Joe Stewart, chairman of the Austin Board of Realtors, thinks price reductions averaging 3 percent will continue.

Stewart says he's persuading sellers of his high-end listings in West Lake Hills to cut their prices by $10,000 every 45 days, hoping to hit the right number. Still, some sellers are in denial. "They don't believe what the Realtors are telling them, that it's a slow market," Stewart said. "We spoiled our sellers 2 1/2 years ago," when the economy was booming, he said, "and now we're having to undo that mess."

The slowdown last year was uneven. In real estate zone 8E, which includes West Lake Hills, the median price plunged 22 percent, although the number of sales rose by 26 percent from 2001. But in the adjacent zone 8W, west of Capital of Texas Highway (Loop 360), the price decline was only 7 percent. Some areas, such as Buda and Georgetown, saw rising sales and moderate price increases of 5 percent to 7 percent. Round Rock remained the top selling area, but the 1,850 sales were down 11 percent from 2001, and the median price was flat at $155,000. Upper-end houses took the hardest hit. Sales of homes priced between $800,000 and $899,999 fell 25 percent in 2002 compared with 2001. There are nearly 200 houses priced at $1 million or more for sale in the Austin area, taking an average of nearly a year to sell.

When mansions do sell, the price reductions are often steep. A 12,000-square-foot house on Stratford Drive overlooking Town Lake went on the market more than a year ago for $7.75 million. Now it's listed for $6.7 million. In the fashionable Tarrytown area in West Austin, agent Karen Kuykendall listed a 1,700-square-foot house for $475,000 in July. The owners are in no rush to sell the Sharon Lane house, but Kuykendall persuaded them to drop the price almost immediately, to $425,000. "We just had a sort of come-to-Jesus on it," Kuykendall said. In September, she lowered the price again, to $395,000.

"It's certainly not the market it has been," said Kuykendall, with Green Mango Real Estate Co. "We're having to struggle with our listings. We don't have enough people looking." There is plenty for them to look at. Listings peaked at 9,000 in July, and fell steadily. But there were still more than 8,000 houses for sale at the end of December -- 25 percent more than a year earlier. "Some of the buyers are overwhelmed by the amount of homes there are to look at," said Scott Betters- worth, an agent with Keller Williams Realty. "I think our market is more depressed than some other areas. We were way more affected by the dot-com debacle." But Jack Harris, research economist at the Real Estate Center at Texas A&M University, says the area's six-month supply of houses is "about normal," though it may seem high compared with the tight two-month supply in 2000.

The local market is "not falling apart or anything. It's just getting back to normal," Harris said. Harris said Central Texas ranked near the bottom on price appreciation in a third-quarter survey of 185 housing markets. During the previous five years, the region saw one of the biggest run-ups, with prices increasing nearly 45 percent. The market was due for an adjustment, he said. "Nobody's talking about a bubble there anymore," Harris said. "Nothing lasts forever." Record low interest rates hovering near 6 percent helped keep the housing market going through the economic downturn. Nationally, existing home sales hit a record level of 5.56 million in 2002. Economists think low interest rates could last until late summer. There is concern that home sales will fall off once interest rates start to rise as the economy rebounds. But Judith Bund- schuh, a loan officer with Mortgages Direct in Austin, thinks those worries are overplayed. "Generally speaking, rates move up when the economy is stabilized and the stock market improves, so people have more money to spend, and that can stimulate the home purchasing market," Bundschuh said.

Bettersworth, the real estate agent, has experienced both sides of the local market. He sold his condominium in the Arboretum area for $100,000 -- $14,000 less than his original price but $25,000 more than he paid for it eight years ago. This weekend, Bettersworth, his wife, Nancy, and their newborn son, Carter, are moving into an 1,800-square-foot house on Laurelwood Drive in southwestern Travis County. He paid about $260,000, about 3 percent less than the seller had asked. "It's a very attractive time to buy, and still a good time to sell if you have a decent equity position in the house and you're realistic about the present market," he said. Harris, the economist, says home sales in Central Texas will begin slowly but will build up steam throughout the year. That may not be soon enough for Poth. He bought another house in West Austin and has spent money expanding and remodeling it. The family will move to the new house in March. Poth, who took his Rollingwood home off the sales listings in December, said he'll put the home back on the market in a few weeks and lower the price once more.

Real Estate Bubbles in Boston, NYC?

Chicago, Feb. 14 (Bloomberg) -- Despite what U.S. Federal Reserve Chairman Alan Greenspan and the real estate industry say, there's evidence that housing bubbles are still inflating across the country, especially in Boston, New York, Miami and Southern California.

Michael Youngblood, research director for GMAC-RFC Securities in Bethesda, Maryland, a wholly owned subsidiary of GMAC Financial Services and the largest short-term lender for mortgage bankers in the U.S., said in a soon-to-be-released study that ``the number of cities with bubble-prone markets doubled in 2002 and represent nearly 40 million people.''

Of the 55 markets Youngblood identified as bubble prone, he says his research shows 20 metropolitan areas are most likely to see market corrections, although he doesn't know when.

That means if you are considering buying in those markets, you may want to hold off. And if you have a reason to sell, now may be a good time.

Residential real estate has received billions in investor dollars because of the three-year slump in stocks, the threat of war in Iraq and other factors. More than half of 1,800 people polled by E*Trade Financial, the online service, said they ``find real estate investments more attractive than stocks.''

Yet real estate risk is a matter of the stability of your income and how you finance your properties. If you are highly leveraged -- meaning you have low-equity positions in your properties -- you are most at risk during property market corrections.

There are a number of steps you can take to protect yourself from bubbles. First, you need to determine if your market is at risk.

Most Dangerous Markets

A bubble is defined as a market that is moved by almost sheer speculation that ignores underlying fundamentals. In the case of real estate, Youngblood identified markets where double-digit housing price increases are well exceeding per capita personal income growth.

It's logical to see home-price increases where jobs are being created, the local economy is booming or there's a short supply of homes. Those fundamentals generally don't support the price increases in the markets Youngblood is studying.

For example, Youngblood cited Monmouth and Ocean Counties, New Jersey, where he said home prices rose an average 13.1 percent in the third quarter of last year. He suspects that those increases aren't sustainable since income growth in those areas only rose 1.9 percent in that period.

Youngblood is most concerned about the following markets:

-- In the Northeast, Boston; Monmouth-Ocean Counties, N.J.; New York City; Nassau-Suffolk counties, New York.

-- In the South, Fort Lauderdale and Miami.

-- In the West, Bremerton, Washington; in California, Oakland, Orange County, Riverside, Sacramento, Salinas, San Diego, Santa Barbara, San Luis Obispo, Santa Rosa, Stockton-Lodi and Vallejo.

All told, Youngblood found that for the year ending Sept. 30, 2002, home prices rose an average 6.3 percent in 175 metropolitan areas, compared with a 2.3 percent increase in personal income.

``Why are we seeing such gains in these markets?'' Youngblood asked. ``They're not supported by the fundamentals, which is the classic definition of a bubble. Gains in those markets are likely to be reversed. It will be painful.''

The Fundamentals

Double-digit gains in local markets by themselves don't mean there's a bubble ready to pop. It may not be like the Nasdaq in March of 2000.

Greenspan, for example, disputed this comparison in Congressional testimony last April, noting ``the turnover of home ownership is less than 10 percent annually -- scarcely tinder for speculative conflagration.''

The Office of Federal Housing Enterprise Oversight, or OFHEO, the watchdog agency over government mortgage enterprises Freddie Mac and Fannie Mae, is contradictory on the subject of bubbles.

OFHEO stated in a Feb. 4 report it had found ``no evidence of speculative house price bubbles on a regional or national basis,'' while also acknowledging ``there is evidence that house price appreciation in some local markets has recently exceeded the rates that can be explained by economic fundamentals.''

There is definite cause for concern if the economy heads into a double-dip recession, is bogged down by war concerns or unemployment rises in the hottest markets.

The key to real estate pricing is always local economic and housing conditions, so that should be your first point of reference.

Watching Your Local Market

All real estate is priced based on supply and demand, financing rates and the local economy.

Lawrence Yun, senior economist for the National Association of Realtors, a real estate trade association, said most of the highest-price-growth markets in Southern California, New York area and Southeast Florida are experiencing housing demands that exceed local supplies.

``The data is not surprising,'' Yun said. ``There are not enough homes being constructed in these markets to accommodate housing population growth. There may be a few markets where prices are a concern, but I can't pinpoint them.''

Local job growth is also a key local indicator for housing. Mark Stadtlander, a certified financial planner and President of the Foster Group, a money management firm in West Des Moines, Iowa, for example, said his area is fairly resilient due to local expansion in the insurance industry, which has increasingly relocated to Iowa from Hartford, Connecticut.

``We're the new insurance capital,'' Stadtlander said. ``Even though there's been some downsizing, it hasn't had a big effect.''

What You Can Do

For most homeowners who aren't planning to relocate, the best strategy is to stay put. There are a few caveats, though:

-- For those considering moving or a lifestyle change, eye selling your primary residence if it means reducing your overall housing costs. Stadtlander says smaller properties -- especially for empty nesters -- may have more appeal ``to allow you to downsize while mortgage rates are low.''

If your market is overheating, go slow on big improvements to your existing homes. You may be pricing yourself out of the market if your additions create a $500,000 home in a neighborhood of $400,000 homes.

-- Consider delaying purchases of additional properties in overpriced markets.

-- Increase your equity stake in properties you want to keep. That may mean increasing payments on principal and converting an adjustable-rate mortgage to a fixed one to hedge against a rise in interest rates. If you're planning to refinance, don't take equity out if you are in a hot market.

In times of economic turmoil, real estate is still a reasonable safe haven in most places. There may be no place like home, although you still need to keep an eye on your local market.

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