Front Lines: Economy

FRONT LINES: Economy

Find current economic data at REALTOR.org/research.

BY ROBERT FREEDMAN

Your new role for good times
The real estate boom has legs and represents an investment opportunity for everybody, not just professional investors. So says NATIONAL ASSOCIATION OF REALTORS® Chief Economist David Lereah, whose new book Are You Missing the Real Estate Boom? (Currency/Doubleday, 2005) hits the bookstores in March. The book is written for consumers, but it comes with a message for you: Don’t limit your role to just helping people buy their primary residence. Introduce them to real estate as an investment and become a trusted adviser to them on what has traditio nally been a neglected part of many investment portfolios. REALTOR® Magazine recently talked with the author.

REALTOR® Magazine: Why is real estate investing coming of age?

David Lereah: It’s never been simpler to buy and sell real estate, and there’s never been a better market for it. We’re in the middle of a boom, not at the end of one. That opens the door for consumers to make real estate investments just as much a part of their financial planning as stocks and bonds.

RM: You say the multi-year boom will go well into the next decade. What’s fueling it?
DL: First, it’s important to see the boom for what it is. It’s not year-over-year of record sales. We’ve been in a boom since 1992, yet we’ve also had two down years in that time. So we’re talking about a long-term expansion of the market that will include both ups and downs.
With that understanding, there are three factors underlying the boom: One, the low cost of borrowing. We’ll continue to be in a low interest rate environment through the remainder of the decade. I’m predicting rates between 5.5 percent and 8.5 percent. Two, we’ll continue to see strong demand for properties thanks to a confluence of once-in-a-lifetime demographic trends: baby boomers in their peak earning years; their children, the echo boomers—also a huge age cohort—starting to form their own households; retired people living longer and healthier lives; and immigrant households—a record number over the last 30 years—now ready for homeownership.
When you combine these factors with the increasing ease of buying and selling thanks to technological advances and an array of mortgage products, you have the recipe for a long-term boom.

RM: What advice do you have for real estate professionals who want to get the most out of these trends?
DL: Educate your customers that real estate has become more liquid than in the past and is no longer this large asset that’s hard to sell. Plant the idea that real estate should be integrated into their financial planning process and not separated from stock and bond investments.
Once you establish the relationship, you can counsel them on whether they should be trading up, trading down, buying a second home, or a buying a home they can rent out.

RM: How does a salesperson begin?
DL: Get comfortable with non-primary-residence real estate. I’m not talking about commercial real estate. That’s not for beginners and marches to a different drummer on returns. Instead learn more about different types of residential real estate, including second homes and rentals.

RM: What’s the next step?
DL: Develop a relationship with a lender who’s involved in investment real estate, because financing becomes more complex when you’re buying to invest. It also helps if you’re affiliated with a brokerage that offers property management. If you’re not in a vacation area, form alliances with practitioners who are, because you’ll be supplying them the customers.
I’m not suggesting practitioners become financial planners. Rather they should look at what they do a little differently. They’re an excellent resource for investors: Who knows real estate better than they do?
Homeownership in Japan is at a solid 60 percent of households, but there are relatively few transactions—only 0.6 percent of the inventory annually. By contrast, 5 percent of U.S. inventory changes hands annually. One reason for the desparity is far fewer national tax advantages to homeownership in Japan. Among the differences:

U.S.	Japan
Capital gains	Yes	No (up to 40 percent tax liability) tax relief
Mortgage interest	Yes	Limited (and not deduction permanent)
Special land	None	3 percent holding tax
Registration and		Up to 2 percent after 2006 license tax	(up to 1 percent through 2006
Additional taxes	None	Preservation of ownership (0.6 percent);	transfer of ownership 5 percent; settlement of mortgage (0.4 percent)

Business Confidence
Continuing optimism Conditions for home sales, already solid, will get better and will stay high in the months ahead. Confidence in what traffic will look like for both buyers and sellers continues to rise. A big leap in buyer traffic confidence suggests demand is expected to stay strong.

Existing-home Sales
Annual sales set record Existing single- family home sales surged in 2004 to well above the record set in 2003, despite a decline in December from November’s record 6.92 million unit* pace. There were 6,675,000 existing-home sales in 2004.
* Revised from figure reported in February 2005 issue.
† Actual rate of sales for the month, multiplied by 12 and adjusted for seasonal sales differences.

Source: NAR Research

Correction: Last month we reported that the March issue would reflect a change in the way NAR Research calculates existing-home sales. However, the new formula—which will be used to rebenchmark historical EHS data too—will not appear until the April issue.

Bush: pass AHPs
NAR commended President George W. Bush for backing association health plans in his 2005 State of the Union address Feb. 2. AHPs, an NAR legislative priority, would allow small businesses and self-employed workers to band together to negotiate lower health insurance costs.
“Most REALTORS® are small-business people or independent contractors who struggle to find quality, affordable health care for their employees and families,” says NAR President Al Mansell. “Association health plans will allow small businesses to compete with large employers for workers who need good health care coverage for their families, and they’ll put self-employed workers on equal footing with corporate employees and union members when it comes to health insurance.”
Legislation creating the plans was intro- duced in the House in early February. The same legislation passed the House last year with bipartisan support.

NAR endorses VA nominee
The REALTOR® organization is backing Denver-area real estate developer Jim Nicholson to be secretary of the U.S. Department of Veterans Affairs. Nicholson was nominated by President Bush in mid-December to replace outgoing head Anthony Principi.
“[Nicholson’s] experience in real estate will serve him well as the overseer of the VA Home Loan Guaranty Program, an important program to our membership,” says NAR President Al Mansell. Confirmation could be completed this spring.

Bank bill is back
“REALTORS® across America applaud the reintroduction of the Community Choice in Real Estate Act (S. 98) and the sponsors’ commitment to passing the bill this Congress,” NAR President Al Mansell said in a January statement.
The bill, which was reintroduced in the House and Senate in January, attracted the backing of 28 Senators and 255 House members in the last Congress. NAR expects the list of cosponsors to grow to a majority of lawmakers in this Congress, say NAR analysts.