Real Estate Reality

By Daniel Kadlec

Home prices have been rising faster than personal income for years, fueling concerns about a real estate bubble. After all, a house is worth only what someone can pay. And now that the Federal Reserve is raising interest rates, the affordability question is on the front burner.

The Fed nudged up its benchmark short-term Fed funds rate last week to 1.25%, from 1%. By itself that move will have little impact on housing. Yet the Fed is widely expected to push the rate to 2% by year's end and 3.5% by the end of 2005. The typical mortgage rate will surge to 7.5% from about 6% today, says Douglas Duncan, chief economist at the Mortgage Bankers Association. In that environment, says Duncan, home sales will fall 10% and mortgage activity, including refinancings, will fall more than half, to $1.75 trillion of new loans in 2005. Nonetheless, experts say the average home price will inch higher. But there is at least one sign that real estate prices may be peaking: people are obsessed with home values, in much the same way they were with tech stocks four years ago. That's clear in a flood of new books, such as Ron LeGrand's How to Be a Quick Turn Real Estate Millionaire, Robert Allen's Nothing Down for the 2000s and Mark Weiss's Real Estate Flipping.

A record 55 titles about real estate investing reached bookstores last year, and an additional 50 are arriving this year--more than double the pace of the mid-1990s, when housing was inarguably a great buy, according to Booksinprint.com Still, "there has never been a better time to invest in real estate," says LeGrand, whose strategy is to hold properties "days, weeks or maybe months--never years." The crush of today's printed advice is aimed at investors, not people looking for a place to live. It boils down to three tips:

DEAL WITH A MOTIVATED SELLER. Perhaps as many as 5% of sellers are so eager to unload their houses that even in a hot market they'll sell cheap.

LOCATION, ETC. Good neighborhoods in growing communities produce the best results.

OTHER PEOPLE'S MONEY. Enlist partners or use seller financing for a down payment, or gain control by assuming debt or through various options that allow you to tie up the property until you find a buyer.

The authors make it sound easy, even as their growing ranks signal softer prices just ahead.