Michigan Real Estate Investors take note for the excellent article in US News about the real estate bubble situation in certain States. Note the paragraph on investors losing money on speculative properties which they are having a hard time renting out. One of them is even giving out free Plasma T.V. or 3 months free rent to incite renters.

It is really old news for us Michigan real estate investors. Detroit market is the #3 nationwide according to several real estate professional magazines as far as rental income is concerned. Michigan real estate has that magical quality of low rices and stable rents which is attracting a whole droves on out of State investors to us.

Through The Roof
With home prices at record highs, some experts say it may be time to pull back
By Kim Clark, US News 6/13/2005

After watching prices on the houses he was selling jump by an average of $3,000 a month most of last year, Mike Larson, president of the oldest real-estate agency in Tacoma, Wash., decided to try for some of the easy money himself. In October, he and his wife bought a duplex, which they planned to rent out while the value kept growing.

The money hasn't turned out to be so easy. The two units sat empty for three months, until Larson dropped the rent $50 to $675 a month and cut the lease to six months. He has kept busy selling houses in Tacoma, thanks to clever, new low-cost mortgages that enable people to buy nice homes for less than $1,000 a month. He now has a firsthand look at one of the aftershocks of steep price hikes: Sales to investors like himself have increased the supply of rental units, while a building boom has been luring away potential renters. "There are new houses going up all over the place," says Larson. "It is crazy."

Crazy, indeed. None other than the usually hypercautious chairman of the Federal Reserve, Alan Greenspan, has confirmed the irrational exuberance of the real-estate market. In late May, he uttered the dreaded "B" word: While he didn't think there was a national real-estate bubble, "It's hard not to see that there are a lot of local bubbles." And last week's news only heightened the debate over the froth, as the National Association of Realtors reported that existing homes sold at a record annual pace of 7.2 million in April. What's more, the median selling price across the nation was up more than 15 percent over last year to $206,000. And the supply of homes for sale hovered near an all-time low of just four months' worth. Sales of new homes also set a record in April.

Overpriced. Home builders say these numbers show that strong pent-up demand is fueling the price gains. And even the most bearish economists agree that in about half of communities nationwide, prices are still affordable and rising only moderately, which will most likely allow those residents to safely weather a downturn. In addition, many economists note, several previous big run-ups in price have been followed not by collapses but by price stagnation. What's more, nobody can predict when price inflation will pause, let alone whether prices will, if ever, fall.

Still, in many of the 54 percent of communities that economists now deem overpriced, such as Tacoma, Las Vegas, Denver, Miami, and New York, there are worrying signs of a bubble, says Mark Zandi, chief economist for Economy.com . "It is nuts. It is beyond nuts."

The single most worrisome sign, Zandi says, is a construction boom that is starting to outpace demand. America creates only about 1.2 million additional families or individuals who need new housing each year. About 400,000 houses have to be replaced because of obsolescence each year. Add in, say, 300,000 more for second or vacation homes, and the total annual demand for additional housing tops out at about 1.9 million. But builders and manufacturers are on track to create at least 2.2 million new housing units this year. "For a better part of a year, supply has been outpacing demand significantly. That will become a real problem in the next few years," says Zandi.

One danger spot is Florida, where the Census Bureau has estimated the number of households increases by about 70,000 a year. Last year, builders applied for permits to build 256,000 units. In the first four months of this year, builders started work on more than 92,000 additional units. Despite the construction boom, prices have been soaring. The median home price in Bradenton, Fla.--the hottest housing market in America--has skyrocketed 45.6 percent to $275,000 since last spring. Greg Gieber, home-building analyst for A. G. Edwards, says the rate of construction can't help but catch up with demand. "I would not buy a co-op or condo in a tower in Florida right now," says Gieber. "I'd wait a few years" until the overbuilding starts driving prices down. In fact, he adds, "If I were in these markets, I'd be taking money out myself."

Another indication of a bubble is the growing disconnect between housing prices and rents. One reason demand for housing is so hot is that nearly one quarter of all buyers are investors. They're creating an unprecedented glut of vacancies that is driving rents down. Starting last year, for the first time since the Census Bureau started counting in the 1950s, the share of units that were vacant topped 10 percent annually. As a result, median rent in the United States dropped from $620 last spring to $608 in the first quarter of this year.

Of course, the growing desperation of landlords has meant great deals for renters. Some proprietors, like the Larsons, are simply reducing their prices. Others are getting more creative. Offers of three months' free rent are common in the Atlanta and Dallas areas. In Boston, rental agent Demetrios Salpoglou is dangling a free plasma TV to anyone who will sign a lease for a $3,400-a-month, five-bedroom luxury apartment. "We have to be creative" to fill up apartments that aren't in hot communities like Cambridge, says Salpoglou.

Though economists don't see any immediate threat, they say it may not take much to pop whatever real-estate bubbles do exist. If rents don't pick up, enough investors will decide they can no longer afford to make their mortgage payments and will sell. Or, if interest rates keep rising, the homeowners who have adjustable-rate mortgages may see their payments rise above their ability to pay.

Coming squeeze. Although the vast majority of those mortgages have fixed rates for the first three to five years, perhaps 10 percent of them may already be rising, says Keith Gumbinger, vice president of mortgage analyst HSH Associates. He's especially worried about those homeowners who took out loans with below-market teaser rates of as little as 1 percent or that only require interest payments for the first year or two. Those are especially popular in places like San Francisco, the nation's most expensive housing market, where the median house price has risen to $689,000, he says. Adjustable mortgage rates are usually set by adding 2 or 3 percentage points to rates on, say, Treasury bills. And those rates have risen by about 2 percentage points in the past year. Once borrowers have to start making principal payments and pay higher interest rates, the squeeze may prove too much. "There is a lot of wishful, hopeful thinking going on out there," says Gumbinger. "I would not gamble that I will be able to sell my house when everybody else is dumping theirs at the same time."

Many in the industry say there won't be a price collapse because they are preparing now for a soft landing. Jeff Mezger, chief operating officer for KB Home, one of the nation's biggest home builders, says his company is limiting speculation by requiring that about 90 percent of the homes it builds be presold. And last year, KB started cracking down on investors by insisting that all buyers live in the homes. "We recognize prices cannot continue to increase at the level they are," says Mezger. But he sees a big backlog of contracts and record crowds at sales offices. At the worst, he believes, prices will level off for a while and then start accelerating again. "Business is strong."

Perhaps. But some buyers are getting anxious. Larson is thankful for the tax break, and he anticipates profiting from Tacoma's 19 percent-a-year housing increases. But he's worried about recent investment customers who are paying top prices and may have an even tougher time covering their costs.

Of course, bubbles can persist and do plenty of damage, despite the warning signs. Greenspan gave his famous "irrational exuberance" caution about the stock market in 1996. The Dow Jones industrial average then went on to double over the next four years, before falling about 40 percent. If history repeats itself, even average Joes could be living in half-million-dollar houses before this bubble bursts. While housing has long been considered less volatile than stocks, it would be a mistake to assume that any asset that can rise 45 percent in a year can't, or won't, have just as dramatic a fall.

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