Office, Industrial Hold Up Amid Slowing Economy

Office

The Los Angeles market still has the market fundamentals of an attractive investment.

Though there has been upward pressure on capitalization rates of roughly 50 to 70 basis points and downward pressure on pricing—which has fallen between 10% and 15%—the Los Angeles market continues to have a low vacancy rate with rising lease rates.

The declining values in office buildings should be met next year by an influx of foreign investment that continues to be fed by the weak dollar. While significant projects and buildings, such as Union Bank Plaza in Downtown Los Angeles, have been taken off the market due to falling prices, it is expected that investment activity will pick up in the coming year as timidity subsides to an increase in bargain shoppers.

It should be noted that these buyers will be much more conservative in their purchasing as underwriting has become an arduous task—though nowhere near as difficult as other markets.

Less leveraged investment entities remain active players in the market. CalPERS, the largest U.S. pension fund, increased its real estate holdings this past month to an unprecedented 10% of total assets as bargains become ever more present.

There is no doubt that the pace of leasing activity decreased in the fourth quarter with a noticeable decrease in demand. The vacancy rate in greater Los Angeles has increased by nearly a half of a percentage point, which has resulted in a substantial negative net absorption of nearly 500,000 square feet. Despite this, lease rates in the region have increased to a record of $2.84 per square foot.

Due to recent changes in the economy and capital markets, tenants are becoming increasingly diligent and cautious about space requirements and more creative with space usage. This creativity has stifled the significant organic growth that has drastically reduced the vacancy rates over previous quarters.

Industrial

Although facing considerable challenges to the economy and the greater Los Angeles industrial market, positive attributes of the current conditions are strong rents (69 cents per square foot), healthy tenancy (1.6% vacancy) and positive growth (557,055 square feet of net absorption).

However, investors and users alike seek signs of sustained stability and this cautionary behavior is causing activity to slow from levels experienced year over year since 2004. Yet, market slowdowns are the catalyst for more serious and opportunistic buyers, local and foreign, often flush with cash and banking on continued strong global economic activity to drive demand for industrial space.

With demand trending toward smaller spaces, buildings with more than 100,000 square feet are sitting for longer periods of time while investor and user interest turn to blocks of space as low as 2,000 square feet.

On the trade front, a key driver of the industrial market, the total number of containers handled at the ports of Los Angeles and Long Beach in November fell by 3.8% from a year earlier. According to the Los Angeles Economic Development Corp., this was the fourth month in a row of year-over-year declines.

Data and analysis provided by CB Richard Ellis Group Inc. Research.

By GARY GENTILE – 2 days ago

LOS ANGELES (AP) — Ongoing weakness in the housing market will push the national economy to the brink of recession, but growth in other areas should put the country back on a slow road to recovery by 2009, according to an economic forecast released Wednesday.

The quarterly Anderson Forecast by the University of California at Los Angeles predicts growth in the gross domestic product of just over 1 percent for the fourth quarter of 2007 and first quarter of 2008.

Economic growth will remain “tepid” for the remainder of 2008 and return to 3 percent in 2009, said David Shulman, senior economist for the forecast.

That growth is just above the traditional definition of a recession — two consecutive quarters of decline in gross domestic product.

“Of course, when the economy slows to a 1 percent pace, it runs the risk of falling into an actual recession, just as when an airplane’s velocity dips down to its ’stall speed’ and falls out of the sky,” Shulman wrote.

The declining housing market could remain at the heart of the nation’s economic woes for some time.

Shulman lowered his forecast for housing starts to an annual rate of about 1 million to 1.1 million, down from a range of 1.2 million to 1.3 million.

That outlook is less optimistic than one presented Tuesday by the National Association of Realtors, which projected construction of new homes will fall to 1.4 million this year from 1.8 million last year.

Shulman also expects housing prices to plunge 10 percent to 15 percent before they start to recover, sometime in 2009.

“The small recent minimal declines represent not the end, but rather the beginning of what will be a very painful decline,” he wrote.

Housing woes have already started to affect consumer spending and are expected to keep doing so through 2008, the forecast said.

Auto sales will reach only 15.7 million units in 2008 — the lowest rate since 1998, Shulman predicted. Housing-related purchases, such as furniture and appliances, were also expected to decline.

Still, strong global demand for U.S.-produced goods and reduced domestic demand for imports should fuel economic growth of about 1.8 percent for 2008, according to the report. Corporate investment in software and equipment was also predicted to fuel modest growth.

Other key factors affecting the economic slowdown could include further credit tightening, which could discourage corporate investment, and the willingness of foreign investors to hold dollar-based assets, the report said.

Shulman expects Congress to pass tough new regulations for the mortgage industry as a result of rising defaults and the demise of the subprime lending market.

Congress is also likely to increase the price limit for home mortgages that government-sponsored Fannie Mae and Freddie Mac can buy.

While regulators focus on the role of lenders in the current crisis, little attention will be given to homebuyers, who “got caught up in the real estate mania seeking a quick path to wealth,” Shulman wrote.

Yes, there have been small declines in some relatively overbuilt parts of this state. But in places where homes have not been overbuilt, or where in-migration continues at a fast pace, prices are still rising slightly or just staying flat.
By Tom Elias

It happens every year about the same time pitchers and catchers report to Florida and Arizona for the start of spring training: “For sale” signs pop up all around California like toadstools after a heavy rain.

And this year, there was good news and bad news in the springtime for both buyers and sellers.

First, the bad news. The intense boom of the 1995-2005 decade has plainly petered out. Anyone who buys a California home and expects to make a 20 percent profit in less than one year - the same kind of expectation fostered by the dot-com stock balloon of the late 1990s - is in for a serious disappointment. In the most heavily populated parts of the state, there will still be profits, but they will be in a more normal range, about 4 percent or 5 percent per year.

That is also the good news. For while the rest of America, places like Miami, Denver, Houston, Phoenix, Boston, Washington, D.C., and other boom markets of the last 10 years are suffering declines, that’s not true in most of California.

Yes, there have been small declines in some relatively overbuilt parts of this state. In the third quarter of last year, home prices in Orange County dropped by 0.8 percent - less than 1 percent - from the previous year. In Sacramento, the drop was about 3.5 percent and in San Diego County approximately 2.1 percent.

But in places where homes have not been overbuilt, or where in-migration continues at a fast pace, prices are still rising slightly or just staying flat. That’s also true in places that are built out, with little hope for new housing that isn’t constructed on the sites of previously existing homes.

Examples of these phenomena are Seattle, with a 14.6 percent price rise during last year’s third quarter and the Inland Empire area including Riverside, San Bernardino and Ontario. Prices there were stable, even as the number of houses and condominiums sold was down. Reason: Many people who expected to make a quick profit pulled homes from the market when they realized windfalls weren’t coming.

In the Los Angeles-Long Beach market, buyers paid 5.2 percent more this spring than a year earlier, and in San Francisco they paid an average of 3.8 percent more.

None of these positive numbers will blow investors away. But they ought to be comforting to recent homebuyers who paid top dollar and worried they might lose equity they saved for years to create.

In fact, price increases have slowed gradually for most of the past year all over California, but the state has been spared any precipitous drop. It’s one thing not to be making windfall profits. But it’s no disaster when prices remain fairly stable while wages and salaries gradually catch up with prices that have risen sharply for about 10 years. That kind of pause can even be constructive, as it both allows a new cadre of homebuyers time to save up the down payments that can get them into the market.

It’s also a familiar part of the California real estate cycle. Booms in California generally last eight to 10 years, followed by leveling-off periods of about four or five years.

Immigration is the reason this state rarely experiences true busts after its booms. The more people pile into California, the greater the demand for housing. Demand begins at the bottom of the price scale, but when owners of the cheapest housing sell to newcomers at a profit, they suddenly gain the ability to move up to a new level. This propels the homeowners from whom they buy yet another step up the ladder.

So California is not in a real estate crisis and doesn’t figure to be in one very soon. Real estate agents in the 1970s and ’80s often told their clients that, “No one ever lost money on California real estate.”

After the bust of the ’90s, this statement is no longer completely correct. But it’s still at least close to being true.

May 01, 2007
By Barbra Murray, Contributing Editor

Two sales transactions valued at an aggregate $94.1 million have brought three fully leased retail assets in the Los Angeles area under new ownership. BlackRock Realty sold the properties, accounting for a total of approximately 277,000 square feet, to two separate private investors.

The 164,700-square-foot Plaza de Hacienda in La Puente commanded $33.8 million from a Los Angeles-based buyer. Built in 1992, the shopping center underwent an expansion process 1995 and again in 2001. Gateway at Burbank in Burbank and Creekside Place (pictured) in Santa Clarita sold in off-market deals to a Bellevue, Wash.-headquartered buyer that had a previous relationship with BlackRock. The eight-year-old, 74,400-square-foot Gateway property carried a price tag of $37.6 million, while Creekside, a 47,700 square-foot center built in 1995, sold for $22.8 million. For its part BlackRock opted to sell the assets, which it had acquired in 2006 as part of a 16-property portfolio purchase from Barclays Realty & Management Co., because they did not meet the company’s investment criteria.

Real estate services firm Grubb & Ellis Co. marketed the properties on behalf of BlackRock and represented the seller and buyers in the transactions. Grubb & Ellis’ Peter Spragg, Dixie Walker and Charles Simpson handled the negotiations.

British company will replace old building with pricey condos and stores.

By Roger Vincent
LOS ANGELES TIMES
Friday, April 13, 2007

BEVERLY HILLS, Calif. — It might be the ultimate Beverly Hills teardown.

British developers paid $500 million this week for the once-grand Robinsons-May department store in one of the priciest property sales ever in Southern California.

The buyers said they would proceed with the previous owner’s plans to raze the store on Wilshire Boulevard and build a condominium and retail complex designed by Richard Meier, architect of the Getty Center.

The extraordinary price catapults Los Angeles County real estate values into the realm of such top European markets as London and Paris.

“We intend to see this vision through and bring Beverly Hills what will truly be the world’s most luxurious address,” said Nick Candy of Candy & Candy Ltd., the London-based firm behind the acquisition known for building “superpremium” residences.

The new complex will have 252 multimillion-dollar condominiums at the western gateway to Beverly Hills and overlook the Los Angeles Country Club.

“Candy & Candy in the U.K. is what Tiffany is to jewelry here,” said Laurie Lustig-Bower of brokerage firm CB Richard Ellis, which represented Candy in the transaction. “Therefore, they believe they will achieve record prices for their condos.”

“It’s of historic proportions in sheer magnitude,” said broker Carl Muhlstein of international real estate firm Cushman & Wakefield who was not involved in the deal. “This is huge.”

The sale is a huge jump in value from the $33.5 million that the seller, Beverly Hills-based New Pacific Realty, paid for the eight-acre site three years ago. New Pacific was planning to spend $500 million to redevelop the site.

Work could start by early next year, but hurdles remain. Neighbors are likely to object to the potential effect on traffic from the Candy & Candy project and others planned nearby.

But the new owners of the Robinsons-May property say their development would not generate any more traffic than the department store did.

Perhaps Candy’s best-known development is One Hyde Park, an ultraluxury project in London where residences are selling for almost $10,000 per square foot, Candy said. The company declined to say how much the Beverly Hills units would cost.

“I believe this will be the One Hyde Park of the West Coast of America,” Candy said.

City’s old names grace trendy new residences
As stately downtown buildings of yesteryear are reborn as high-end lofts and condos, some storied pasts are being dusted off too.
By Cecilia Rasmussen
Times Staff Writer

March 25, 2007

As downtown’s new residential conversion marches deeper into old Los Angeles, architects and developers are tapping into history, paying homage to pioneers and perhaps to a tree.

Some of the building names — Brockman, Blackstone, Douglas — were practically forgotten in the years when downtown sank into decay. Now, many of the buildings are enjoying a revival as they’re converted into high-end lofts and condos. Downtown’s mostly young new residents tell one another, “I live at the Higgins” or “at the Douglas.”

Art Astor isn’t in that demographic. He’s 82, and he may be one of the few who bought a piece of downtown for reasons of nostalgia. He owns a sixth-floor corner loft in the newly refurbished Chapman Building at 8th Street and Broadway.

“My father had his law office here from 1930 to 1960,” Astor said in a recent interview. He owns four radio stations and a private Anaheim museum of vintage cars and antique radios and telephones.

Astor recalled going downtown every Saturday with his father. From the office window, he could see every theater along Broadway.

“He’d give me a dime and send me off to the movies while he worked,” Astor said.

“All of his mail was addressed to A.M. Astor at the Chapman building,” Astor said. “Street addresses weren’t necessary. Everyone knew the Chapman Building.”

His father, who changed his name from Astor Arakelian to A.M. Astor, was an Armenian who immigrated to America in 1910, at 21, to escape slaughter in Turkey, Astor said.

“His parents were killed by soldiers right in front of him, when he was about 4 years old,” he said. “He ran to a neighbor’s house and hid under her skirt. She turned him over to an orphanage, where he was educated by Methodist missionaries.”

Once in the U.S., Astor said, his father “worked as a soda jerk while putting himself through USC law school.”

The Chapman, a 13-story beaux arts building, was constructed in 1912, more than a decade before Broadway became downtown’s jazziest entertainment district, lined with motion picture palaces. The Los Angeles Investment Co. built it at a cost of $1 million. Designed by architect Ernest McConnell, the building was said to be fireproof. It has mahogany doorways, sweeping marble stairways and wrought-iron letters “LA” marking each stair railing.

“It’s built like a battleship,” Astor said, referring to the strength of the materials.

In 1920, Charles Clarke Chapman — Fullerton’s first mayor and the chief benefactor of Chapman University — bought the building for $1.6 million. The so-called Orange King of California — who built his fortune on citrus and real estate — made it his headquarters. He added bronze elevator doors ornately embossed with the letter C.

At the Chapman, “everyone advertised with gold lettering on the windows,” Astor said. But in the 1930s, business was so slow that his father “was almost swatting flies.” That is, until the day a poorly dressed elderly woman walked into his office with a brown paper bag.

The woman, whose name Astor has forgotten, told the senior Astor that every day she’d meet a man in Pershing Square. They shared coffee and muffins and became friends. One day the man didn’t show up, but someone else did: a stranger who handed her the bag. Her friend had died the night before, he explained, leaving her everything he owned. As the stranger walked away, the woman opened the bag and saw “stocks and bonds worth nearly $400,000, even in the late Depression.”

As she walked out of the park, the woman looked up and saw Astor’s name and sign on his office window — “A.M. Astor, Attorney at Law.”

“She had no idea that her friend had been wealthy, and my father became her executor.”

Greg Fischer, an aide to Councilwoman Jan Perry, wields such knowledge of downtown’s historic past that you’d think he’d lived there since the early 1900s. He can rattle off details about old buildings as if they were family.

Here are a few of downtown’s residential projects that have pioneer names:

• Brockman Building, 530 W. 7th St. In 1912, mining magnate John Brockman staked half a million dollars that 7th Street would become the heart of downtown’s shopping district. He was right. The 13-story renaissance revival building at 7th Street and Grand Avenue was designed by architect Harrison Albright. Brockman leased several floors to J.J. Haggarty clothing store.

By the mid-1920s, the sidewalks and electric streetcars were bustling with shoppers. Brooks Brothers traditional men’s clothing store anchored the building for decades.

• Douglas Building, 257 S. Spring St. Thomas Douglas Stimson, a Chicago and Seattle lumber baron, industrialist and financier, made a fortune before retiring to Los Angeles in 1890. He turned to banking, built the most expensive mansion in the city and erected a 42-room boarding house at 3rd and Spring streets, called the Stimson Block.

He dreamed of another grand office complex across the street, handing the task to San Francisco architects James and Merritt Reid, whose credits include the Hotel del Coronado in San Diego. Stimson died in 1898.

His family continued the project and etched “Douglas” deeply into terra cotta over the entrance, probably in honor of his middle name.

But it could also have been a nod to the type of tree — Douglas fir — whose wood was shipped from Stimson’s timberlands in Oregon and Washington and used to decorate the interior.

• Blackstone’s Department Store Building, 901-909 Broadway. Nathaniel Blackstone, former business partner and brother-in-law of department store founder J.W. Robinson, began building the flagship of his own emporiums in 1917.

The six-story beaux arts building at 9th Street and Broadway was designed by architect John Parkinson. In the 1920s, Blackstone hired beauty specialists to give tips on hairstyles and makeup, provided customers with mah-jongg lessons and offered classes in interior decorating and landscape gardening, according to Times stories of the era. Blackstone died in 1930.

• Roosevelt Building, 727 W. 7th St. Named for President Theodore Roosevelt, the renaissance revival office building opened in 1927. The Roosevelt was once a popular address for doctors and dentists.

Before Christmas in 1943, an aggrieved patient shot and killed his surgeon, then killed himself. In 1946, the state Supreme Court ruled in Hunt vs. Authier that the slain surgeon’s heirs had the right to collect damages from the killer’s estate. Victims’ families have filed wrongful-death suits ever since.

By ALEX VEIGA AP Business Writer
News Fuze
Article Launched:03/16/2007 02:04:31 PM PDT
LOS ANGELES- For years, mortgage banker New Century Financial Corp. was flying high amid the strong housing market and a seemingly insatiable demand by borrowers for sub-prime home loans to chase the American Dream.

Riding historically low mortgage interest rates, the Irvine-based company became the second-largest provider of expensive home loans to borrowers with less-than-perfect credit.

Just four months ago, CEO Brad A. Morrice gave a roundly positive outlook at an investors’ conference.

Despite acknowledging the growing challenges of sub-prime lending, Morrice said it was “an excellent business for the long term.”

“We don’t have a great crystal ball. I can’t tell you when everybody gets healthier,” he said. “What I can tell you is we’re going to be there when it happens and ready to profit on the next up cycle.”

Now, faulty accounting and rising mortgage defaults have left New Century on the brink of bankruptcy. Its stock has collapsed and creditors are pressuring it to buy back billions of dollars in loans.

“They don’t have the liquidity to operate the business,” said Matthew Howlett, an analyst with Fox-Pitt, Kelton in New York. “Clearly, it’s in rough shape.”

New Century was founded as a mortgage lender in 1995 by Morrice, Robert K. Cole and Edward F. Gotschall.

Its primary focus was providing sub-prime loans that it then sold to investment banks, using that revenue to fund more consumer loans. In 2003 and 2004, Fortune magazine listed New Century on its list of 100 fastest-growing companies.

Like other sub-prime lenders, New Century profited during the real estate boom, when appreciation rates soared and equity protected most homebuyers from defaulting on their loans. Most could simply refinance or sell homes at a big enough profit to pay off mortgages and move on.

Investment banks also jumped in, eager to buy loans from sub-prime lenders then slice them up into bond products to sell on Wall Street.

“New Century was the prime beneficiary of it, as they were sort of in the sweet spot, having the sales force out there to capture the growing market,” Howlett said.

That helped New Century stock hit its historic high of $65.95 in December 2004. Its earnings a year later also reflected a company that was riding high, despite mounting concerns over the weakening housing market. New Century posted net earnings that year of $411.1 million, or $7.17 a share, up from $375.6 million, or $8.29 a share, in 2004.

Its loan production for 2005 hit a record $56.1 billion as it racked up four consecutive dividend increases. However, it held off on providing Wall Street with full-year guidance for earnings per share or loan production.

By 2006, the housing downturn had led to weaker price growth and even declines in some pricier markets. Homeowners were left with few options if they fell behind on payments.

Default rates and foreclosures shot up as a result. New Century, like other sub-prime lenders, began to see loans go bad.

That spelled trouble, as New Century’s deals with investment banks required the company to buy the loans back if borrowers default early in the loan.

“Now that housing is flattening or declining, all the problems in the industry are coming to the surface,” said Chris Brendler, an analyst with Stifel Nicolaus.

Despite the faltering market, New Century’s financial reports showed continued profitability through 2006.

Morrice hinted in November that he wasn’t thrilled with its third-quarter performance, but he reassured investors that New Century was nevertheless on sound financial footing.

A company statement boasted it was able to “add liquidity, add financial strength,” even though it expected loan repurchases to increase.

“As we look at our own situation, we feel, despite the challenging market, that we’re very well positioned to compete and continue to profitably grow market share,” Morrice told investors at the time.

On Feb. 7, the outlook changed drastically.

New Century informed the Securities and Exchange Commission that it would have to restate financial results for the first three quarters of 2006. The problem: The company had failed to accurately tally losses from loan repurchases.

Earlier this month, the company said it be unable to file its annual report on time, but advised it expected earnings for 2006 would be significantly lower than previously reported.

This week, New Century revealed its lenders had cut off funding or announced their intent to do so. It also said it did not have enough capital to pay outstanding loan repurchase obligations.

The company also stopped accepting new loan applications.

Speculation grew on Wall Street that the company could be close to filing for bankruptcy protection as its creditors began demanding payments. The apparent financial meltdown spurred several analysts to change their outlook on New Century stock, advising investors to dump it.

On Monday, the New York Stock Exchange halted trading of New Century shares and said it would seek to have the company’s stock delisted from the exchange.

The company’s stock has tumbled 96.8 percent since its 52-week high of $51.97 last May.

It also faces federal probes by the SEC and the U.S. Justice Department. And shareholders, angry over their losses and alleging mismanagement by the company’s directors and officers, have fired off several lawsuits.

“Most likely, the final outcome will be determined in a bankruptcy type auction,” Howlett said. “Clearly, it’s going to be bid out and segmented.”

Gregory J. Wilcox, Staff writer

Most of the big home sales and price reports for the first month of 2007 are in, and this year is looking a lot like 1996, sort of.

Home sales will probably stay under the 1,000 level every month this year, just like they did in 1996.

Price is where the two years differ though.

Back in 1996 the year started with the median price home of $164,000 in the San Fernando Valley. This year started with a price 273.8 percent higher - $613,000.

OK, one month doesn’t make a trend, but the evidence seems compelling that at least sales in 2007 will more closely track 1996 than any other year.

Since 1984, every year but five has featured at least one month when Valley residents bought 1,000. And 2006 was one of those five years.

“When we get to the end of this year, our feeling is we’ll find a market with about the same sales as last year and the median price up 5 or 6 percent,” said Jim Link, executive vice president of the Southland Regional Association of Realtors in Van Nuys.

Home sales have now fallen for 16 consecutive months, though January’s was the smallest decline of this current down market.

The numbers now hint that the biggest price declines are behind us.

“I think quite honestly we have enough time under our belts to realize that this is a trend, and it’s going to continue this way,” Link said. “The market seems to have found a level.”

Daniel Blake, director of the Economic Research Center at California State University, Northridge, concurs.

“The sales were going to drop, then sort of level off. That’s what it looks like to us.”

There’s still weakness in the market, though.

Blake said that notices of default, the first step in the foreclosure process, are about 30 percent higher than a year ago.

The actual foreclosure rate, in which a person loses a home, is about one in four.

The California Budget Project notes that the slump has already taken a toll on some real estate-related sectors.

Last week it issued a report showing that the slowdown is having a like impact on personal income growth and consumer spending.

It’s not doing any forecasting, though.

“We look at the past, we don’t predict the future,” said Jean Ross, the project’s executive director. “The take-home message for us is when you look at the housing sector’s contribution to job growth in the early years of the decade and look at the current environment, there are widespread implications.”

For example, in the decade’s first five years, 61.7 percent of California’s non-farm job growth came from three housing-related industries - residential construction, residential speciality trade contracting and real estate. But they accounted for just 3.7 percent of the state’s jobs.

In the preceding five years, these three sectors accounted for 6.8 percent of California’s job growth, the report said.

And the surge of housing-related jobs from 2000 to 2005 helped offset weakness in other sectors.

The report also found that job growth slowed last year, reflecting a deflating housing market, and it dampened the nation’s economic growth.

This news didn’t resonate with everyone, though.

“This is sort of, `OK, we know this news. Why bother?’ is sort of my response,” said Jack Kyser, vice president and chief economist at the Los Angeles Economic Development Corp. “Construction employment has slowed, but you are seeing other sectors pick up the beat.”

Kyser said some big nonresidential construction projects are now under way (l.a.livenext to Staples Center) or recently approved (Grand Avenue project downtown) and this will ease the pressure from the housing slowdown.

And Stephen Levy, director of the Center For Continuing Study of the California Economy, doesn’t see long-term fallout from the housing market slowdown.

“I think that is a problem for this year. I think we will see some job losses, but what’s been fortunate so far is that throughout the state we’ve been able to offset them,” he said.

In other words, sales may continue at an anemic pace but the patient will eventually recover.

It’s the “when” that remains unclear.

BY JACOB ADELMAN, Associated Press
LA Daily News
Article Last Updated:01/13/2007 01:31:53 AM PST

Far from her home in South Korea, Choung Yang-suk just bought a condo in Los Angeles, where she plans to retire in a few years to be near her two grown children.

Choung is among a growing number of Koreans scooping up real estate in the United States and elsewhere after the overseas investment cap in their country was lifted.

Koreans are expected to invest nearly $2 billion in U.S. residential property in 2007, up from $1.27 billion in 2005 when such investments were mostly limited to large Korean corporations, said Brian Shaffer of the International Real Estate Trade Organization.

Worldwide, Koreans could spend at least $4 billion on overseas homes in 2007 as a result of the changes made in May that allow an individual to make as much as $1 million in foreign investments, analysts said.

Many of the purchases are being prompted by the strength of South Korean currency - the won, pronounced like “one” in English - against other currencies, analysts said.

Much of the money will likely be directed to U.S. cities with large Korean populations, including San Francisco, New York and Atlanta as well as well as Los Angeles, to take advantage of the weakening U.S. housing market.

Observers said the lion’s share of the money will be invested in Los Angeles, with its large Koreatown and one of the world’s largest Korean populations outside the Asian nation.

“It could very well release a tidal wave of investment into Southern California, particularly Koreatown,” said Peter Morrison, a demographer with the Rand Corp., who has studied homebuying patterns among immigrant groups.

Investors are snatching up properties as long-term investments or as future homes for themselves.

For Koreans with family members in Koreatown, buying homes in the district two miles west of downtown Los Angeles is particularly attractive. The swath of five square miles features hundreds of Korean-owned businesses. Few English-language signs are visible along the wide boulevards.

“Koreatown is very convenient for me since I only speak Korean,” Choung said through an interpreter. “This is where my people live, and I can go to the market or shops without speaking English.”

Southern California also has an abundance of banks and brokers catering to Koreans to aid in purchases.

One Koreatown-based lender, Wilshire State Bank, created a special division for overseas borrowers and has closed its first mortgages since the investment caps were lifted, bank executive Gene Sheen said.

Sheen met the borrowers at investing seminars he stages in Korea.

Until May, Korea enforced tight investing rules to stem capital flight after the Asian financial crisis of 1997. Only large firms and individuals with special permits could buy property abroad.

But with South Korea’s won now near nine-year highs of about 930 to the U.S. dollar, government officials have decided to encourage Koreans to spend money abroad, hoping to take some air out of the currency to benefit exporters.

This year Korean officials intend to allow citizens to invest as much as $3 million in overseas property. If President Roh Moo-hyun gives his approval, caps would be dropped altogether by 2009.

That could free up even more potential buyers for the roughly 1,500 condo units now on sale or planned as part of a Koreatown construction boom. Many of the units are part of high-rise complexes resembling condo complexes in South Korean cities.

The Martin Group, developers of the 1100 Wilshire building in nearby downtown Los Angeles, has sold about 40 units to Korean buyers since the investment caps were changed, said Ki Ryu, a director for the company. Planners have overseas Korean investors in mind as they map out future condominium projects in Koreatown.

By David Streitfeld
Times Staff Writer

December 11, 2006

EVERY day, Will Hertzberg owns a little less of his three-bedroom house in Corona.

Like hundreds of thousands of other homeowners around the state, Hertzberg has a mortgage that lets him choose how much he pays each month.

Like many of them, he always chooses to pay as little as possible.

For the moment, this allows the 56-year-old Hertzberg to continue living in his tract home despite being only marginally employed. But his debt is swelling, and his mortgage company controls his fate.

“I am rather screwed,” he said.

Alarmed regulators recently have attempted to force lenders to cut back on loans like Hertzberg’s. Even some industry executives are beginning to wonder how these borrowers will handle their added debt, especially if housing prices stay flat or fall.

If it turns out that many can’t, it would be a major blow to the housing market. In the worst outcome, it could drag down the overall economy.

Hertzberg could sell now, but his lender would charge him an $11,034 prepayment penalty — money he doesn’t have. Yet if he stays, the housing market may tank, vaporizing what little equity he has left.

“I made choices, and they happened to be the wrong choices,” said Hertzberg, a big guy who lives alone amid the clutter of decades of memorabilia.

The real estate boom of the last few years has made it very easy to become overextended.

Earlier generations bought houses knowing they had no choice but to keep paying at the same rate for three decades. Their reward: the ability to sleep well, knowing their payments wouldn’t abruptly adjust upward.

As interest rates rose in the early 1980s, many borrowers couldn’t afford these traditional loans. Lenders responded with adjustable mortgages that offered lower introductory rates.

A few years ago, as home prices began escalating sharply, lenders pushed loans that let the homeowner pay only the interest for an initial period.

When even that was too onerous for some borrowers, they offered loans such as Hertzberg’s, often called “pay option” loans.

One of his options is to pay $2,513 a month. That would cover the principal and interest as if it were a traditional 30-year loan.

A second possibility is to pay $2,279, which would cover only the interest.

But each month he always takes the cheapest option: paying $1,106 and promising to make up the shortfall later.

Essentially, option loans are bets that good things will happen. Maybe the mortgage holder will get a big raise, or sell a script to Hollywood, or inherit a chunk of change. When the borrower has to start paying off the loan in earnest in five years, the plan is that he or she will somehow be able to handle it.

At a minimum, the borrower is betting the housing market will be better in a few years than it is today. If the house goes up in value, it will be possible to refinance and the day of reckoning can be put off once again.

In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan, according to San Francisco-based data tracking company First American LoanPerformance.

Last year, 1 in 5 loan applicants got one.

In the first eight months of 2006, even as the real estate market began to weaken amid fears of a downturn, the appeal increased again. Nearly 1 in 3 California loan applicants are now choosing them. The state boasts about 580,000 active pay option mortgages, about half the U.S. total.

After four years of escalating prices, they’re the only way some first-time buyers can get into the market. But another group flocking to option loans are homeowners who find themselves stretched. For those beset by calamity, these are the loans of last resort.

HERTZBERG bought his house 11 years ago for $129,995, immediately after his second divorce. (He has no children.) Since then, Corona and the Inland Empire have boomed.

Comparable homes in his neighborhood fetch more than $400,000. With fresh paint and a few repairs, Hertzberg could probably sell his place for $275,000 more than he paid.

He would see little of that, however, because he’s already seen so much. Over the years he has taken out $190,000 in cash through refinancings.

Hertzberg’s home equity paid off his credit cards, financed trips around the world that allowed him to indulge his passion for photography, bought a $32,000 Toyota Avalon and enabled some lousy investments. He bought dot-com stocks and lost money. To recoup those losses, he bought commodities — and lost money faster.

“Free money always has the unfortunate effect of making people go overboard,” said Hertzberg, whose living room is strewn with financial publications including American Cash Flow Journal and Donald Trump’s “How to Get Rich.” “You’d be surprised how fast $190,000 can go.”

The money wasn’t really free, of course. It just seemed that way, the result of a radical shift during the last decade in how people view their homes.

“Homeownership has become like auto leasing, where the price of the car doesn’t matter,” said Rick Soukoulis, chief executive of LoanCity, a San Jose lender that funded $7 billion in mortgages in 2005. “All that matters is the size of your monthly payment.”

Lenders say these new loans are all about payment choice, but Hertzberg is far from the only borrower who invariably chooses the smallest payment option. Washington Mutual Inc., which has one of the nation’s largest portfolios of pay option loans, said 47% of its borrowers in this category last December took the minimum option.

Few people intend to become deeper in debt every month. Hertzberg certainly didn’t.

“I assumed my future and my retirement would be taken care of by the company I worked for,” he said. “I trusted corporate America.”

He used to make a six-figure income selling vacation packages to corporations that would use them as customer incentives and employee bonuses. After the 9/11 terrorist attacks, the business soured.

His current sources of income include selling comic books on EBay and freelance photos to golf and travel publications. “Once you’re over 55, what employer wants to hire you?” he asked. “I’m a dinosaur.”

Last fall, he went to a mortgage broker and refinanced again to make his payments easier to bear. He thought he would have a five-year window before the principal started coming due.

But the day of reckoning is arriving early. By paying the minimum, Hertzberg has increased the size of his loan in a little over a year from $320,000 to $332,616. His lender, Calabasas-based Countrywide Financial Corp., recently sent him a letter warning that when his loan hits 115% of its original size he’ll run out of credit with the company.

That will happen in about two years if he continues to take the smallest payment option. Then his minimum payment will automatically go up 150%, to $2,848 a month.

“If I could afford that,” he said, “I wouldn’t have needed this loan in the first place.”

It’s a sorry situation, and Hertzberg is generous in assigning responsibility for it. To start with, he blames his mortgage broker, who didn’t advise him how risky these loans were.

Few brokers do, U.S. Comptroller of the Currency John Dugan says.

In an October speech, Dugan said the marketing materials for payment option loans often “emphasized the low initial payments but glossed over the likelihood of much higher payments later.” He also said some lenders were not evaluating the borrowers’ ability to handle the inevitable higher payments.

Although Dugan and other regulators are taking steps to address both problems, Hertzberg said they never should have allowed these loans to become so prevalent in the first place.

“The government wanted to keep the housing party going,” he said.

Yet who didn’t want that? Hertzberg admits he was a willing co-conspirator.

“I got spoiled and complacent and was not prepared when the bottom fell out,” he said.

COUNTRYWIDE sees little risk of widespread foreclosures, saying its pay option customers have good credit scores, indicating a high degree of financial stability. But at a company investment conference in September, Chairman Angelo R. Mozilo seemed to indicate that these borrowers might be naively optimistic.

“The average age of our borrowers is about 38 years old,” Mozilo said. “They have never in their adult lives seen values going down. The concept is alien to them.”

Just how many of these homeowners will end up in trouble is the big unknown for the housing market and the economy. Although many economists expect the loans to prompt a certain degree of turmoil, they don’t think it would cause a recession.

Hertzberg is much bleaker. He’s become a connoisseur of doom, a subscriber to websites and newsletters that predict the economy is headed for both recession and inflation.

The bears’ speculation: A rapid increase in foreclosures will flood the market with cheap homes, putting all of real estate into a tailspin. That would push up unemployment among builders, lenders, home improvement warehouses and furniture stores. That, in turn, would stall the economy, which is already slowing.

Although Hertzberg has lost his complacency, he hasn’t been compelled to act.

He estimates it would cost about $22,000 to fix up his house for sale, and he’d have to upend his life. The sales agent would take another chunk of money, and he’d have to undercut the crowded market to secure a buyer. Texas and Panama, two places he has thought about moving, aren’t so appealing that he wants to be broke there.

When the year-over-year appreciation numbers in Corona start heading down, he says, he’ll do something.

If Hertzberg is living on borrowed time, there’s small comfort in the home finance industry’s endless inventiveness. It’s certainly trying to tempt him. Several times a week, he gets a refinancing offer in the mail.

The latest one suggested a certain unfamiliarity with basic English, proclaiming, “Economic forecast suggests you Interest Rate will increase 1.00% every six months.” But its central message was clear: “We can solve your problem in 15 minutes over the phone.”

Hertzberg always looks at these fliers, hopeful in spite of himself. “I’m waiting for a 100-year loan,” he said. “My heirs can worry about paying it off.”