Twenty-five residential properties for sale, nearly 250 hopeful buyers. It's an auction. It's a frenzy.
"It's ... the market today," says Jon Levinson, vice president of Alex Cooper Auctioneers Inc. in Towson, maneuvering his way last week through the standing-room-only crowd of investors hoping for a bargain. "This never would have happened five years ago."
A real estate revolution is afoot: For a growing number of Americans, homes are becoming more than just a place to live. With fast-rising prices, no-money-down mortgages and stubbornly low interest rates, investing in a second or even a third house seems to more and more people like a can't-lose proposition that beats jittery stocks. Investment purchases jumped 14 percent last year in the United States, some by people tapping the equity in their first homes.
But experts are warning that some parts of the nation are trapped in housing bubbles where prices have been wildly inflated by speculators caught up in the same mania that infected the stock market in the late 1990s. Federal Reserve Chairman Alan Greenspan, who famously called that unsustainable run-up in stocks "irrational exuberance," is now saying there are pockets of "froth" in the U.S. housing market.
"We don't perceive that there is a national bubble," he told the Economic Club of New York about a week ago, "but it's hard not to see that ... there are a lot of local bubbles."
The Baltimore and Washington markets - where home values have been appreciating rapidly - are seen as overpriced by some analysts, though others argue that values are being driven up by fast job growth and homebuilding restrictions.
Either way, more people locally and nationally are gambling on continued healthy price growth. Nearly one in four existing homes sold last year was bought by an investor, according to the National Association of Realtors. Add in the sizable number of vacation homes, and fewer than two-thirds of all sales were for primary residences.
Dicky Gaines, 42, who began investing in 1997 after working in residential construction, snapped up a home last week in Baltimore's newly hot Washington Village for $85,000. That doesn't include the 5 percent buyer's premium or closing costs; he figures the total will be about $93,000, and he'll probably plow more in to rehab it.
That was the first sale of the day at the Alex Cooper auction. Gaines didn't stay long afterward, or else, he said with amusement, "I would have bought another one."
"There's just so much competition out there," added Gaines, now a Coldwell Banker real estate agent. "I was kind of surprised that somebody didn't go over $100 [thousand] for that house."
'Time to get out'
Agents and experienced investors say they're getting calls every day from people who want to try it themselves, which is making some of them nervous.
"It's getting to the point where everybody I know wants to invest in real estate," said Steve Cook, who buys and sells properties in the city and suburbs. "That's the time to get out."
Some of the city's longtime real estate owners are doing just that through Alex Cooper, though Levinson adds that it's not a message about the long-term health of housing prices.
"You sell when the market is good," he said.
Some economists believe that the Baltimore region will slide back to price growth of a more normal 5 percent a year, protected from a fall by strong fundamentals. The area is benefiting from its bargain-compared-with-Washington prices, drawing D.C. workers here to live. Also, job growth doesn't look likely to screech to a halt.
"Government's a growth industry again," said David W. Berson, chief economist for mortgage company Fannie Mae.
Still, the financial holding company National City Corp. concludes that the Baltimore-Washington market was about 10 percent overvalued last year, judging by income levels, interest rates, population density and historical values. Study author Richard DeKaser said the places most at risk of decline are 16 metro areas that are more than 20 percent overpriced - many in California.
"The markets we identified as overvalued a year ago have likely become more overvalued," said DeKaser, chief economist of National City, who dubs these areas "bubblettes." He said he was worried about a drop in stocks as early as late 1998, and he sees in these communities "the same kind of dynamic."
Mark Zandi, chief economist at Economy.com, a research firm that believes both Baltimore and Washington are near the top of the list of bubbly regions, warned last week: "You have to either be very smart or very lucky to avoid getting burned badly if you're investing in these juiced-up markets."
Ellicott City resident Nick Calleri has been investing full time since only the beginning of the year, when his partner bought out his share of a graphic design business. "It's a feeding frenzy," he said.
He bought five houses in Washington Village for $50,000 each, intending to hold on to them, but another investor immediately offered a deal he couldn't refuse on two of that lot. The price: $83,000 each.
Everyone has a story like that, it seems.
Alan Chantker, president of the Mid-Atlantic Real Estate Investors Association, was going to rehab a property in Hampden but is selling it after eight months because a fellow investor offered him $71,000 more. And he's embarrassed to admit that last month he sold a home in Washington Village to an investor who then sold it to another for a lot more money.
"I don't see how he's ever going to make money on it," he said of the most recent buyer. "At some point, when the music stops, there's not going to be enough chairs."
Berson, with Fannie Mae, said the investor share of mortgages used to purchase homes has doubled nationwide in the past two years and is now the highest since records were first kept in the mid-1980s.
It's a similar story locally, he said. The last time the investor share was nearly as high was during a run-up in prices in the late 1980s - right before a slump.
Berson said the recession of 1990-1991 was mainly to blame for five years of stagnant prices in Baltimore and Washington, but investors contributed.
"We will certainly see a slowdown in price gains to something more normal," he said. "Now, when that will occur, I don't know - it depends in part on when the investor demand starts to slow, and nobody knows when that will be."
Speculation has also seeped into the first-home market: Americans are stretching financially to get their foot in the door of otherwise unaffordable homes and counting on price growth for a cushion. People are going for adjustable rates and mortgages that let them pay only interest to start, believing that when the higher bill comes due, they can always refinance or sell for a profit.
Interest-only loans in particular are surging in popularity. They jumped from less than 2 percent of mortgages for homes purchased in 2001 to more than 30 percent last year, says Loan Performance, a mortgage data and analytics company.
Buyers taking out a $250,000 mortgage with a starting rate of 4 1/2 percent and interest-only payments for five years would see their monthly bill jump by $750 at the end of the period if rates have moved to 6 1/2 percent, said Bankrate.com.
Betting the house
"The view of housing has changed dramatically in the past several years because appreciation has been so strong, interest rates have been so low," said Greg McBride, senior financial analyst with Bankrate.com. "People ... are gambling with their primary residence."
Others argue that homebuyers aren't being foolish; they're simply less interested in building equity. Bob Visini, vice president of marketing for LoanPerformance, said younger homebuyers would rather put their cash in retirement plans.
Long-term rates have remained low much longer than predicted, fueling the extended home-buying boom. They dropped again last week to an average of 5.65 percent for a 30-year, fixed-rate mortgage.
But that rate will probably rise to 6 1/2 percent by the end of the year and to 7 percent at the close of 2006, said Lawrence Yun, a senior economist with the National Association of Realtors. Price growth should ease as a result, he said.
He acknowledges that there are some signs of trouble, including loans given to people who wouldn't have qualified in past years, but he said the important point is that the number of new families has far outpaced new home construction.
"Our overall view is that the current price growth is just reflecting the market realities of too many buyers, too few sellers," Yun said.
Last month, the median cost of a resold U.S. home topped $200,000 for the first time. Prices rose nearly 90 percent over the past decade, according to the Realtors.
Median prices in the Baltimore region have shot up that fast in the past five years alone, to almost $240,000 last month, according to Rockville-based Metropolitan Regional Information Systems Inc.
But homes remain a lot cheaper here than in Washington or New York - especially in Baltimore City, where the median price is $100,000. The promise of growth is drawing investors from across the Northeast.
At the Alex Cooper auction Wednesday, everyone who approached Bank of America Vice President Ed Moore for a loan application was an out-of-towner. "I paid less for this house than I would have paid for a parking spot in New York City," one investor told him.
Some are long-distance landlords. Others are moving here, like 19th-century pioneers heading west in search of wealth.
"I sold all my properties in New York to come out here and invest," said Petar Pecovic, 36, now of Rockville. He is rehabbing Baltimore homes through Touch of Class Properties LLC. "It's a really great market."
Calleri, the new investor, is holding most of his recent purchases to rent out, financing them with interest-only mortgages so the monthly payments are as low as possible. He worries about rising interest rates, but not much. "I can always sell them and make money off them," he said. "I don't think real estate's a bubble. You have something tangible."
That's what Dave Schutsky and Dorian Keydash think, too. They are neighbors in Locust Point, agents with Century 21 Downtown and new landlords.
"I feel safer investing in real estate, especially in Baltimore, than giving money to ... Morgan Stanley," said Keydash, 25, referring to the large brokerage firm.
Said Schutsky, 30: "I have a first child coming along this fall, and we're thinking about our family's future."
Keydash paid $145,000 for his Locust Point house three years ago, rehabilitated it and just had it appraised at a "very conservative" $350,000. That new value has allowed him to buy four rowhouses in Southwest Baltimore, gaining him nearly $320,000 in equity and almost as much in debt. He's about to buy two more properties.
Keydash doesn't worry about the risk of tapping his residence for capital because his mortgage rates are fixed, his renters cover those costs, and his value - he figures - won't drop.
"There's so much behind [the housing boom] right now that I can't see how that would slow down anytime soon," said Schutsky. "It's not even close to where it could be."
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