Real estate survival guide: The great housing bubble has finally started to deflate, and the fall will be harder in some markets than others.

By Shawn Tully, FORTUNE senior writer
May 4, 2006: 2:15 PM EDT


NEW YORK (FORTUNE) - The stories keep piling up. In many once-sizzling markets around the country, accounts of dropping list prices have replaced tales of waiting lists for unbuilt condos and bidding wars over humdrum three-bedroom colonials.

The message is clear. Five years of superheated price gains rescued America from stock market collapse, put billions in consumers' pockets, and ignited a building boom that bolstered the nation's economy. (To relive the frenzy, see "Riding the Boom.") But it's over. The great housing bubble has finally started to deflate.

These markets are already showing the signs of distress that will soon spread to the rest of the bubble zone. As interest rates rise, more homes are becoming unaffordable. Developers are offering discounts and incentives, and buyers are biding their time. As the standoff hardens, sales will keep falling. The downward spiral will make the former boomtowns Dead Zones. (See the cities)
Danger zones

These cities also saw prices soar, but so far their overheated markets are still strong. They present a mixed picture: Chicago and Seattle are in only moderate danger, while L.A., New York, Oakland, and San Francisco are headed for a steep fall. The problem: fast-rising inventories of unsold homes. To make matters worse, builders keep pouring new units onto the market. (See the cities)
Safe havens

These cities between the coasts completely escaped bubblemania. Their housing prices have been rising at 3% to 7% a year, far below the double-digit gains in the hot markets. The reason: Land is cheap and plentiful, and investors are relatively rare, so the supply of new housing has kept pace with the demand even where job growth is strong, as it is now in Texas. (See the cities)

You won't find that news in broad national statistics or the upbeat comments from the real estate industry. Thelatest official figures, for example, show both new and existing home sales rising in March, a mixed bag on prices - and a record number of new homes on the market.

But FORTUNE's on-the-ground reporting - in what up to now have been some of the nation's hottest areas - paints a very different picture: Contracts are being canceled, deals are drying up, prices are starting to drop. The psychology is shifting even as thousands of new homes and condos join the for-sale listings each day - so the downward pressure will only get worse.


http://money.cnn.com/2006/05/03/news...ex.htm?cnn=yes

By Kathleen M. Howley
May 5 (Bloomberg) -- Toll Brothers Inc., the largest U.S.
builder of luxury houses, said fiscal second-quarter orders fell
33 percent as customers waited to see whether a glut of homes on
the market would lead to lower prices.
Orders for the period ended April 30 fell to 2,076 from
3,120 a year earlier, Horsham, Pennsylvania-based Toll said today
in a statement. It was the second consecutive decline following
10 quarters of increases for the builder, whose homes cost triple
the national average.
Rising mortgage rates and record prices have chilled demand
at the height of the so-called spring selling season,
traditionally the busiest time for builders. Hovnanian
Enterprises Inc., the largest builder in New Jersey, said on May
1 that orders for the quarter ended April 30 plunged 20 percent.
``Prices are higher and interest rates are higher -- those
are the two limiting factors,'' Bernard Markstein, director of
forecasting for the National Association of Home Builders, said
before Toll's report was released. ``We're expecting the market
to simmer down, not fall off a cliff.''
U.S. sales of new homes this year probably will drop 12
percent to 1.13 million after reaching a record 1.28 million in
2005, Markstein said. The last sales decline was 1999 when new-
house purchases fell 1.1 percent.
Prices are starting to ease. The median U.S. price of a new
home was $224,200 in March, according to the Commerce Department.
That's down from a record $243,900 in October.
The average U.S. rate for a 30-year fixed mortgage likely
will increase to 6.5 percent in 2006, the highest since 2002,
Markstein said. Last year, the rate was 5.9 percent.

Sales, Backlog

A preliminary tally showed homebuilding revenue, excluding
condominiums and joint ventures, increased 14 percent to $1.4
billion on the sale of houses ordered during last year's real
estate boom. Toll sold 2,063 homes in the quarter, an increase of
7.9 percent from a year earlier. The backlog of houses ordered
and not yet delivered was 8,119 units, valued at $5.65 billion,
down from 8,442 units valued at $5.77 billion.
``We believe the excess supply on the market is a short-term
phenomenon,'' Robert Toll, the company's chairman and chief
executive officer, said in the statement.
The number of homes on the market increased as investors
tried to sell properties or canceled contracts in mid-
construction, the executive said. Prices on these speculative
homes were being ``aggressively discounted,'' he said.

Cancellations

Demand from ordinary buyers eased because of ``worries about
the direction of home prices,'' he said.
The company's cancellation rate in the quarter was 8.5
percent, compared with its historic average of 7 percent, Toll
said.
Shares of Toll fell 92 cents, or 3 percent, to $29.64
yesterday in New York Stock Exchange composite trading. The
company split its stock 2-for-1 on July 8 after a gain of 149
percent in the previous 12 months.
Toll, the sixth-largest U.S. builder by stock market value,
typically issues preliminary revenue figures in advance of its
earnings report, scheduled for May 23.

source: bloomberg

Lenders have begun offering a half-century home loan as incentive in face of record-high home prices, rising interest rates, report says.
May 10, 2006: 9:19 AM EDT

NEW YORK (CNNMoney.com) - As home prices and interest rates keep rising, lenders have figured out a way to keep the dream alive for millions of people who want to own their own home. It's called the 50-year mortgage.

According to a report Wednesday in USA Today, a handful of small lenders have begun offering 50-year adjustable-rate loans to buyers who need to keep payments low in the current economic environment.

Most banks already offer 40-year mortgages, which account for about 5 percent of all home loans, the report said.

"One of the biggest things in California is the high costs of homes. With rates going up, there's demand from customers (for) longer loans," Alex Diaz Jr., with Statewide Bancorp in Rancho Cucamonga, Calif., was quoted in the report as saying.

Statewide, which introduced its 50-year loan in March, has already received about 220 applications, Diaz said in the report.

The 50-year mortgage also signals that the cooling real estate market is heating up competition among lenders, the newspaper said.

"Mortgage lenders are getting craftier to get the attention of consumers," Anthony Hsieh, CEO of LendingTree, told the newspaper. However, he added that consumers first need to understand the product.

Two issues to keep in mind: A borrower with the 50-year mortgage builds equity very slowly. And because rates on the loans are adjustable, a borrower's monthly payments could rise, the report said.

Mortgage experts caution that the 50-year mortgage is best-suited for those who plan to stay in their home for about five years, while the loan's interest rate remains fixed, the report said.

"If you're going to be there for more than five years, you're gambling," Marc Savitt of the consumer protection committee for the National Association of Mortgage Brokers told the newspaper. "You don't know what interest rates are going to be. I wouldn't do it."

The assumption is that prices will eventually go up again, and ultimately you will have gained substantially in equity, and done so at an opportune time. i.e. When prices are back up you made a 60k increase on your 540k property vs a 30k increase you would have made on the 270k property.