Availability of units attractive on market
By Eugene Tong
Staff Writer

Sunday, June 19, 2005 - SANTA CLARITA — With many potential buyers priced out of single-family homes by the red-hot real estate market, condominiums are becoming a popular alternative, with builders ready to oblige.

At least three proposed developments with a total of 962 multifamily housing units — apartments or condos — are under city planning review. The owners of the Prado apartments along McBean Parkway recently filed a plan with the city to convert hundreds of units to condos for individual sale.

Even the recently-approved Newhall Land and Farming Company subdivision Riverpark contains 657 multifamily units, compared with 432 single-family homes planned for the 695-acre site north of the Santa Clara River.

Condominium sales were brisk in April, with 186 units sold — the second-highest monthly total since the record was established two years ago, according to a report from the Southland Regional Association of Realtor’s Santa Clarita Valley Division. The median price of a resale condo was $330,000 — $28,000 more than a year ago.

It’s a relative bargain compared with the record high median price of $552,000 for a single-family home sold in the same period.

“Because of the pricing, condos are in real high demand, and they’ve been going up in value because of demand,” said Mike Davis, the division’s president. “The entry-level market or people downsizing are candidates.”

Besides affordability, many empty-nesters are turning to condos or condo communities out of convenience.

“At one time, it was a stopover to getting a home,” Davis said. “People are now looking at condo and town houses as a way to live. … You have no maintenance of the yards, you have someone taking care of the parameters … and you get the advantages of all the facilities.”

Eric Kenney, a managing partner for Prado’s Houston, Texas-based owner Hanover Co., said market conditions are ripe for condo sales.

“When you set the (search) parameters for homes under a million and only see three or four listings … it would appear so,” he said. “The high cost of new housing and resale housing makes condominium conversion attractive because it has the ability to put a more affordable ownership opportunity into the hands of the public.”

In fact, most luxury apartment developers have plans to covert when it’s their time, Kenney said.

“Many developers are recording tentative track maps to preserve their right to convert to a condominium form of ownership in the future,” he said. “Almost every market-rate apartment project being constructed currently in Los Angeles County has a tentative track map associated with it.”

Glenn Adamick, vice president of planning for Newhall Land, said empty-nesters and seniors are likely driving the current market. They’ve made a killing selling the homes they’ve lived in for decades and are looking for smaller digs.

“You’re seeing more of that because that’s how the market is and there are a lot of folks in that generation,” he said.

Not all condos are created equal — some are apartments and town houses, while others are clusters of detached homes built around paseos, pools and other shared amenities. Still, they all share the desire by builders to pack as many residents in a limited space as buyers will allow.

“Builders are looking for what sells quick and fast and affordable,” Davis said. “They can put more units on that space.”

Santa Clarita, which is close to build-out, has 2,311 multifamily units approved or recorded by city planners, compared with 3,458 houses. In unincorporated Los Angeles County, which is still sparsely populated, it’s 165 multifamily units to 16,206 houses.

As city population continues to grow, from 171,000 to more than 242,000 projected for 2030, building condominiums is becoming one way to meet demand as land becomes scarce, said Lisa Hardy, a city planning manager.

“It’s actually more ’smart growth’ to design in a cluster fashion,” she said.

Newhall Land’s Adamick believes the popularity of condos is here to stay.

“I think you’re going to see a bit more multifamily in the future,” he said. “We have communities in the Newhall Ranch specific plan that are characterized as a more urban feel — similar to Town Center in Santa Clarita.”

By MICHAEL LIEDTKE
AP Business Writer

3:41 PM PDT, June 6, 2005

SAN FRANCISCO — Once a frustrated renter, Chris Economou is now a happy homeowner, enjoying a splendid view of San Francisco and an $80,000 increase in his property’s value since he bought the one-bedroom condominium for $435,000 a year ago.

He credits his good fortune to an interest-only mortgage, an increasingly popular — and risky — loan that enables borrowers to lower their monthly payments enough for several years to afford rapidly escalating home prices in expensive markets like the San Francisco Bay area. Economou estimates he saves $1,000 a month by having his interest-only mortgage instead of a traditional 30-year fixed rate loan.

“I’d still be looking at renting for a long time,” if not for that mortgage, said Economou, 33. “Home prices are so high that it’s about the only way young people like me can get into the market.”

Built on the assumption that home prices will continue to rise, interest-only mortgages represent a gamble that many home owners accustomed to conventional fixed-rate loans would never take. Unlike conventional 30-year mortgages, interest-only loans typically don’t require payments toward the principal for three to seven years, substantially lowering the costs of entry and making it easier to qualify for the loan.

But the financial firepower of interest-only mortgages is affecting all home owners. They are further elevating already lofty housing prices, a trend that’s raising fears of crash that could plunge the economy into a recession.

“When this market adjusts, it’s going to be painful,” said UCLA economics professor Edward Leamer, who has been warning of a California housing bubble for three years. “Borrowers are getting in over their heads, and lenders are too.”

The growth of interest-only mortgages reflects a fundamental shift in the way many Americans think of their homes. Rather than places to grow old in, they see homes as part of their investment portfolios — in fact, a much better bet than the stock market in recent years. In California alone, homeowner equity has grown by a whopping $1 trillion since 2000, according to the California Building Industry Association.

Even borrowers who can afford the higher payments of a conventional mortgage are opting for interest-only loans, so they can free up more cash to invest in retirement plans, college education funds or other home purchases, said Mark Carrington, director of information products for LoanPerformance, a mortgage research firm.

“Borrowers are becoming much more educated and smarter about what a mortgage really is,” Carrington said. “They are using it as just another investment tool in their overall financial plan.”

San Francisco accountant Patrick Duffy advises his clients to use interest-only mortgages, unless they plan to live in a home for at least seven years. “If you are only going to have it a short time, why waste your money” on the higher monthly payments required under a conventional 30-year mortgage, reasons Duffy, who financed both his homes with interest-only loans.

With some of the nation’s highest home prices, California has become ground zero for interest-only mortgages, especially in the San Francisco Bay area, where more than half of home buyers have financed their purchases with interest-only loans since the end of 2003, according to LoanPerformance.

Large numbers of home buyers also have been relying on interest-only mortgages in hotter markets in Florida, Nevada and Arizona, according to the market research firm.

The home buying frenzy reminds Yale University economics professor Robert Shiller of the mania that gripped the stock market during the Internet-driven boom of the late 1990s — an era dissected in his book, “Irrational Exuberance,” released in March 2000.

Shiller recently released a second edition with a new chapter warning that the housing market is creating the same kind of investment bubble that led to the stock market’s three-year meltdown.

“This is new territory for the real estate market,” Shiller said in an interview. “There’s been a major attitude change that’s caused people to become very speculative about home prices. All the fear (of a market correction) seems to be gone.”

A sharp downturn in housing prices could turn interest-only mortgages into financial albatrosses, saddling many borrowers with homes worth less than what they owe.

Also risky are the adjustable rates included with many interest-only mortgages. If the prime lending rate continues to rise, these homeowners’ monthly payments could soar even as home values plummet.

A double whammy like that would increase the chances of borrowers falling behind on their payments or, in the most extreme cases, just walking away from their homes, raising the specter of the massive foreclosures that contributed to the taxpayer-backed bailout of the savings-and-loan industry during the late 1980s.

Federal banking regulators are so concerned that they’re talking openly about regional housing bubbles and considering new guidelines for lenders to guard against taking on too much risk, said Steve Fritts, acting deputy director of the FDIC’s Division of Supervision. “There are people who are pushing the envelope,” he said.

Interest-only mortgages have been a boon for buyers so far because home values in most places have surged so much that borrowers are getting richer — on paper at least — even as the amount owed on their loans remain the same.

For instance, the median sales price area of an existing single-family home in the San Francisco Bay Area was $689,200 through the first three months of this year, a gain of 45 percent from $475,900 at the end of 2001, according to the National Association of Realtors.

Put another way, someone who bought a mid-priced Bay Area house with an interest-only mortgage in 2001 conceivably could be sitting on a $213,300 gain in home equity — enough to buy a house outright in many parts of the country — before repaying a cent of the original loan.

Economou, who is a commercial real estate broker, already is looking ahead to mid-2007 when his loan will start to require principal payments. By then, he hopes to have accumulated enough equity in his condo to be able to sell it and to buy a bigger home.

“Of course, I would hate to see my home’s value drop significantly, but I think this is a chance worth taking,” Economou said. “It’s been a pretty good bet so far.”