Speculating on the Housing Market

Real estate has become one of the nation's favorite investment opportunities. Investors have made large profits but some are now wondering when the housing bubble will burst in places like San Diego, which is one of the hottest housing markets in the country.

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Forecasters say 2005 could be another record year for US home sales. Rising real estate prices act like a magnet, drawing new money into the market. A glitch? Only up to a point. NPR's Scott Horsley reports.

SCOTT HORSLEY reporting:

Wayne Franklin and his wife, Kate, bought their first condominium in San Diego not quite two years ago. Recently, they've been fixing up the place in preparation for putting it back on the market.

(Soundbite of door opening)

Mr. WAYNE FRANKLIN: This is our guest bedroom, filled with tile and sinks. It doubles as a little office.

HORSLEY: The Franklins are confident they can sell the two-bedroom unit in a hip urban neighborhood for at least $420,000. That's $130,000 more than they paid for the condo just two years ago.

Mr. FRANKLIN: You know, when we first decided to own a place, we knew that the area had been appreciating about 15 percent, maybe 20 percent a year. And we didn't think it would keep going at 20 percent a year. And it definitely has. So it's actually--it's worked out better than we thought.

HORSLEY: Bankers have offered to lend the Franklins enough money to buy a single-family house costing $650,000. But Wayne Franklin is a little hesitant about going through with the deal for fear of the payments that would carry and how much house he could afford in this market, where even million-dollar homes are not uncommon.

Mr. FRANKLIN: I mean, a million-dollar home to me doesn't seem like anything, and a couple years ago it was, you know, million-dollar homes are in Beverly Hills and Bel Air, and now it's--the houses around me. You see an 800-square-foot house for $800,000. It's crazy.

HORSLEY: Of all the frothy housing markets nervously eyed by Alan Greenspan, San Diego is the grande latte. Prices here have jumped nearly 140 percent in the last five years. John Karevoll, who monitors real estate for San Diego-based DataQuick, says neither population growth nor job trends nor local incomes can explain that.

Mr. JOHN KAREVOLL (DataQuick): We're off into uncharted statistical territory. By most models, prices in San Diego are between 5 and 7 percent above where they should have maxed out. And then the question is for the rest of the country and for San Diego in particular here, when this all plays out, how will it play out? You know, are we in a bubble where things will pop or are we just nearing the end of a normal cycle, where prices will flatten out and then the rest of the economy will catch up?

HORSLEY: One thing is clear in San Diego and many other markets. People are investing far more money in housing than they were five years ago, not just as a way to put a roof over their heads, but as a way to make money. In a sense, many of us have become housing speculators, from the pension funds funneling money into mortgages and keeping interest rates low to landlords snapping up rental properties to individual homeowners like Wayne Franklin, who's already thinking about his next home's resale value. Karevoll says it's not just happening in California.

Mr. KAREVOLL: There are indications that the rate of appreciation for homes all along the middle swath of America there will come up, not just because of things like job growth and in migration but because more and more people will be comfortable putting money into real estate and keeping it there.

HORSLEY: For many people, real estate seems like a safer investment than, say, the stock market. But real estate conversations at cocktail parties are starting to sound a lot like tech stock conversations of seven or eight years ago. For veteran San Diego real estate investor Dick Knox, that's a sign the market is overheated.

Mr. DICK KNOX (Real Estate Investor): They're on the end of it. They needed to start doing this seven years ago, but people didn't have that foresight. I mean, when you see something explode and grow, then you jump in. You know, it's like riding a skateboard. You ride it down to the bottom of the hill and you jump off. You know, our economy's going to slow down and that's when you'll see the novice get weeded out.

HORSLEY: San Diego's housing market has begun to slow down. Last month prices were only 7 1/2 percent higher than they were a year ago. That's still not a bad return, but it's the first time in more than five years that appreciation has fallen into the single digits. Knox stopped buying houses in San Diego two years ago, figuring prices here were too high to make much additional profit. That hasn't stopped him, though, from investing in real estate elsewhere.

Mr. KNOX: There's always a bull market in housing, always. You may have to go to Arkansas to get it, or you may have to go to Wyoming, but somewhere someone is building something at a good price.

HORSLEY: These days Knox is buying houses in Tucson, Arizona, which he thinks is still early on in its boom cycle. When he goes to visit his new Arizona properties, Knox says, he sees a lot of other Californians lining up to do the same.

Scott Horsley, NPR News, San Diego.

MONTAGNE: This is MORNING EDITION from NPR News. I'm Renee Montagne.

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