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Strategies & Market Trends : 50% Gains Investing

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From: Dale Baker5/8/2006 7:47:51 AM
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Trouble to Real Estate Cool-Off

As deals sour and mortgages come due, many bargain while others fold.

New York Times Regional Newspapers

Until the summer, investors were crawling over each other trying to get their hands on Southwest Florida homes.

In some cases, their plans were haphazard, built on heavily marketed low-interest loans with escalation clauses, or marked by a lack of attention to what the carrying costs would be, or how much of their costs would be covered by rent.

Now that lemminglike rush seems to be operating in reverse.

Listings are stacking up, prices are going flat and words that haven't been heard much in some time are being spoken: "non-performing loans" and "foreclosures."

While still quite manageable for lenders, these problem loans are increasing and are likely to keep doing so because of rising interest rates, adjustable-rate loan resets and a stalling out of real estate appreciation.

Nationally, the number of foreclosures rose by a sharp 38 percent during the first quarter, says RealtyTrac, an Internet data cruncher based in Irvine, Calif.

Texas racked up the most at 40,000, but Florida came in a close second with about 30,000. Those numbers are still small, but the trend is in place.

"This goes hand-in-hand with the softening housing market and rising interest rates," said Greg McBride of, which reports mortgage rates and other real estate data from North Palm Beach. "This is probably just the beginning, and certainly not the end."

The first-quarter action is a continuation of a steady upward trend that RealtyTrac has been observing since the beginning of 2005.

Analysts expect the foreclosure trend to accelerate the rest of 2006 and into 2007, in large part because of the ticking time bomb represented by adjustable rate mortgages, whose rates are about to be reset by the lenders.

Southwest Florida Realtors, meanwhile, are faced with four times as many listed homes and three times as many condos as in July, when the market began falling apart after a brilliant longterm run-up.

The empty dwellings worry Realtor Steven DuToit. He says that as some of those sellers cave in to the pressure of two mortgages and other carrying costs, their departure will drive prices down further.

"This whole market has been driven by investors," said DuToit of Keller-Williams Realty.

For the last two years, Fishkind & Associates, an Orlando-based economic consulting firm for developers and major real estate investors, has been advising clients that the Florida residential real estate was approaching a market top that needed to be heeded.

"Now we are past the peak and in the downside of the cycle, and all the things we said would happen are happening," said Fishkind economist Stan Geberer. "That includes a reduction in prices, a drying up of investor activity, nonperforming loans, condominium projects that will not be built, and certain projects in certain locations seeing dramatic and significant reductions in price."

While the median price of a condo in Florida still looks like it is above water compared with a year ago -- $214,200 in March, up 2 percent from March 2005 -prices are flattening out as listings multiply.

In February, that newly available statistic from the Florida Association of Realtors showed a median of $218,700 where January was $221,300.

While RealtyTrac describes the spike in national and Florida foreclosures, the Sunshine State is actually running at a slower pace now than a year ago, when the real estate market was still red hot.

In the first quarter of 2006, the state knocked out 29,636 foreclosures, a 14 percent decline from a year earlier.

"There are properties the bank couldn't even get sold off at auction," said Sharga, RealtyTrac's marketing chief. "Maybe it was overvalued, or there were two notes on it, so they couldn't auction it, so they repossessed it."

What the statistics don't show are deals in which investors have simply walked away from their deposits on newly built residences.

Geberer, the Fishkind economist, describes the sizeable monetary effect that can have on the builder or developer.

Somebody gives a builder or developer a $10,000 deposit, so he builds the unit. The buyer walks "because they can't close or had no intention of ever closing."

The developer keeps the deposit, but is stuck with continuing to carry the construction cost loans until he can resell, and is newly saddled with paying the property taxes on a finished residence.

"You just look in the Sunday real estate section to see `All closing costs paid. We will give you $15,000 in upgrades. We will throw in the fancy appliances and the marble counter tops.' "
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