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Open House
Americans Buying Real Estate in Record Numbers; The Value of a Million Dollars When Buying a Home; Flipping Real Estate, Risky and Lucrative; Container Gardens Are Fun and Lovely.
Aired May 28, 2005 - 09:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RANDI KAYE, CNN ANCHOR: But, first, these stories "Now in the News."
Graduation ceremonies are underway right now at the U.S. military academy at West Point. Keynote speaker is Joint Chiefs Chairman Richard Myers. Most of the young officers look forward to tours in Iraq and Afghanistan in the near future.
Former President Clinton is in Sri Lanka today acting as U.N. special envoy for tsunami recovery efforts. He publicly endorsed the Sri Lankan president's offer to work with rebels to distribute aid to tsunami victims. The Tamil tigers effectively control the northern and eastern parts of the island.
And, in Atlanta, a murder suspect is no longer atop a construction crane. After holding authorities at bay for more than two days, Atlanta police subdued Carl Roland early this morning. He was lowered to the ground strapped to a stretcher.
I'm Randi Kaye. OPEN HOUSE starts right now.
GERRI WILLIS, HOST: The latest numbers prove it. Americans keep snapping up real estate at a record pace. But can it last?
ANNOUNCER: Today, on OPEN HOUSE, forget a housing market slowdown. New reports out this week show real estate is on fire. But how long can it last?
Plus, a million dollars sounds like a lot of money for a home. But what can it really get you? We take a look.
And plenty of investors are hoping to make money flipping real estate. We take a look at how it's done, next on OPEN HOUSE.
WILLIS: Hello, and welcome to CNN OPEN HOUSE. I'm Gerri Willis.
Huge home sales numbers this week are drowning out any rumblings of a real estate market slowdown. The latest statistics show new and existing home sales hit record highs last month.
But as Allan Chernoff reports, the momentum is fueling fresh concerns over a housing bubble.
(BEGIN VIDEOTAPE) ALLAN CHERNOFF, CNN CORRESPONDENT (voice-over): Twenty-five miles west of the nation's capital, there is a mecca for homebuilders and buyers. In Ashburn, Virginia, hundreds of homes under construction, thousands more planned.
STEVEN ALLOY, PRESIDENT, STANLEY MARTIN: If you can get permits, if you can get pavement, then you're going to sell houses.
CHERNOFF: That kind of demand pushed new home sales up again in April. The median price nationwide for a new home, now at $230,800, the second-highest level ever.
In markets like Las Vegas, Phoenix, and Miami, speculation is fueling price gains, investors putting down just 5 percent and taking out interest-only mortgages to defer principal payments. Their plan, flip the house, sell it quickly for a profit.
DEBBIE SMITH, LAS VEGAS INVESTOR: You could buy a house for $130,000, and by the time you close, it could have been worth $200,000 or more. Some people made $50,000 to $100,000, even $150,000, off a single-family home.
CHERNOFF: "Fortune" magazine is calling it the real estate gold rush. But housing experts say it can be dangerous.
MICHAEL CARLINER, NATIONAL ASSOCIATION OF HOME BUILDERS: If they think they're going to make a quick buck, it's not as easy to sell houses as it is to buy them. In a soft market, at least, it's not as easy to sell them. Right now, it's pretty easy. And so that's a risky proposition.
CHERNOFF: Federal Reserve officials are worried as well. One central banker Wednesday warned, buyers are going to get burned. And Fed chairman Alan Greenspan says some hot markets could easily cool off.
ALAN GREENSPAN, CHAIRMAN, FEDERAL RESERVE: But it's hard not to see, one, that there is, there are a lot of local bubbles, and indeed, even without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern.
CHERNOFF (on camera): The key to housing is mortgage rates. As long as they remain relatively low, experts say the nation's housing market should be able to avoid a bust. But in certain overheated markets, they warn, supply could soon outstrip demand, leading to lower prices.
Allan Chernoff, CNN, New York.
(END VIDEOTAPE)
WILLIS: So will this market bubble burst?
Joining me now for a closer look is Robert Shiller, professor of economics at Yale and author of "Irrational Exuberance." He joins us from New Haven. And in Washington, Frank Nothaft, vice president and chief economist at Freddie Mac.
Welcome to you both.
ROBERT SHILLER, AUTHOR, "IRRATIONAL EXUBERANCE": All right, thanks.
FRANK NOTHAFT, CHIEF ECONOMIST, FREDDIE MAC: Hi, thanks for having us, Gerri.
WILLIS: All right, Frank, let's start with you here. You know, housing prices, you have to go back 25 years to find a time when prices have risen more quickly than they have this year. How can this not be a boom that's going to bust?
NOTHAFT: There's no national house price bubble. Oversupply is a necessary prerequisite for any drop in prices, and we just don't see oversupply at a national level. In fact, most markets, the housing market is very tight, and we have the lowest inventory of homes available for sale anywhere in 30 years in the U.S. And that's one reason we've seen such strong house price appreciation.
WILLIS: Bob, you want to jump in here?
SHILLER: The low inventory is a reflection of the bubble. It's because the nature of the market, in response to the enthusiasm, has changed. So often, houses sell on the first day. It's like an auction.
The real issue of supply is that with prices high, construction has been very strong, and we are going to continue to see new construction. And that, along with the change in psychology, has a good chance of bringing house prices substantially down.
WILLIS: Well, that brings up a good question, Frank. Is Greenspan right? Is this unsustainable?
NOTHAFT: Well, I'll tell what I think is unsustainable, the strong house price appreciation rates of the last two, three years. Last year, for example, we had 10.7 percent appreciation for the average home in the U.S., and with stronger rates of appreciation along both coasts, weaker in the midsection of the country. Ten percent annual appreciation for the average home in the U.S. is unsustainable. And our expectation is that that will moderate over the course of the next couple of years.
WILLIS: Well, you guys may actually agree on something here.
But Bob, let me get to you to a different topic, the role of speculation here, gold rush mentality. What's it doing to the market?
SHILLER: This is, in many places -- I agree with Greenspan -- a speculative bubble. You could even say it's a national bubble, because it's big in so many places that it affects the national numbers.
But what is a bubble? It occurs when people are stretching to buy property because they think the price is going to go up. And when they no longer perceive them as going up, they won't want to stretch to own this property. And that brings the seeds of a deflation of the bubble.
WILLIS: Well, I was trying to get you to this idea that a lot of people out there are gambling not just on their primary home, but on investment real estate. Now, is that a problem as well?
Frank, let's go to you.
NOTHAFT: Well, investment purchases of single-family homes are still a relatively small component of the national market. It's true that it's up. It's up over the last five years. But still, nationwide, investor loans are maybe 10 percent of the total single- family market.
Now, the concern is that there might be some certain markets -- you mentioned Las Vegas in your story -- where there's a larger investor component. There in Las Vegas, the investor share's maybe up around 20, 25 percent of home purchases.
Markets where you have a large proportion of sales that are investor leads to a more speculative component. Again, nationwide, I don't have any concerns at all. I don't think there's any national house price bubble, and I don't think there's an overvaluation at a national level. But there are certain markets where -- submarkets, where, if it's really...
WILLIS: (INAUDIBLE).
NOTHAFT: ... being driven by investor activity, that could be an issue.
WILLIS: Interesting.
Bob, I know you like to talk about some of these more speculative mortgages that people use, interest-only mortgages. What kind of impact is this having on the bubble? And could it lead to a decline?
SHILLER: Yes. There has been a decay of our investment -- of our mortgage-lending standards. That's part of the bubble. That's what happens in a bubble. We get very optimistic. So we have interest-only mortgages. We have adjustable-rate mortgages. And we have mortgages where they don't even ask much information about your credit. It's a big problem. In the boom states, most mortgages now are adjustable-rate mortgages.
We should have learned from the experience in the 1930s, the Great Depression, when people switched en masse to long 30-year fixed- rate mortgages, that was a change in our mortgage industry to prevent a big crash, which we saw then.
But now it's been 70 years, and we're just forgetting, and we're starting to make the same mistakes again.
WILLIS: Frank, is money too cheap? NOTHAFT: Well, money's not too cheap. I'm surprised at the lengthy period that we've had and enjoyed low mortgage rates in the U.S. Currently, we see 30-year fixed-rate mortgage rates on the market at about 5.7 percent. Well, that's a great rate. That's one of the lowest rates that we've had in the last 40 years.
So I don't want to say it's too cheap. But we are certainly enjoying very low mortgage rates.
WILLIS: Now, Bob, I want to ask you this question. What is the risk to homeowners of a bubble that goes too far? I mean, what's the downside here? If you're holding your house, you could hold it until prices rise again. It might not make a difference.
SHILLER: Well, that's true. I think that most homeowners are longterm holders. And the question is, of course, what will the home prices do in the long term?
There's a lot of optimism that they will -- that maybe they'll dip, but they'll come back up. And that optimism is based on what happened in the last two cycles.
So -- but I don't think that's really convincing evidence. I think that there's a possibility that home price increases are over for -- will be over in not too many years.
WILLIS: Wow.
SHILLER: And...
WILLIS: OK.
SHILLER: ... and for a long time. We just don't -- housing is a...
WILLIS: Right.
SHILLER: ... risky investment, that's (INAUDIBLE)...
WILLIS: Frank, do you agree with that, housing price increases are over?
NOTHAFT: Well, we're still expecting house price appreciation for the average home across the U.S. In fact, our forecast over the next 10 years is that the average home will appreciate at approximately 5 percent per year. So much, much slower than the last few years, but I don't see house price appreciation...
WILLIS: All right.
NOTHAFT: ... being over.
WILLIS: Frank, Bob, thanks for joining us today. We appreciate your time.
SHILLER: Thank you, Gerri. NOTHAFT: Thank you, Bob.
WILLIS: Coming up on OPEN HOUSE, what can you get for a million bucks? Well, it depends on the housing market. We'll take a look.
Plus, buying property, fixing it up, and selling it for a quick profit. We have the ins and the outs of flipping real estate.
But first, your tip of the day.
(BEGIN VIDEO CLIP)
ANNOUNCER: You're ready to buy a house. You know you can afford the monthly mortgage payments. But you don't have the 20 percent for the down payment.
Don't worry. There's hope for that dream home yet. Ask both public and private lenders if they offer programs aimed at lower- income people. Many times, they work in conjunction with Fannie Mae, Freddie Mac, or nonprofit or government agencies.
You may be able to get low-interest mortgages with as little as 3 percent down. Shop around for lenders, and don't be afraid to ask what they can do for you.
That's your tip of the day.
(END VIDEO CLIP)
WILLIS: A million dollars should get you the home of your dreams, but in many markets, that's just not always the case.
This year, home prices have risen more quickly than at any time in the past 25.
(BEGIN VIDEOTAPE)
KATHY BRADDOCK, BRADDOCK AND PURCELL: It is a terrific one- bedroom, totally renovated, move-in condition, one-bedroom apartment. The kitchen, as you can see, fabulous countertops, state-of-the-art appliances. One of the wonderful features of this apartment is clearly the view.
WILLIS: What is the square footage?
BRADDOCK: It's about 822 square feet, and very well-used square footage. Every single part is well used.
WILLIS: Eight hundred and twenty-two square feet, a million dollars.
BRADDOCK: Yes.
WILLIS (voice-over): Prices in Manhattan have risen 20 percent in the last year. And the Big Apple is not the only city overheating. Some 66 metro areas posted double-digit price increases this year, and many of them are in unexpected places, like Bradenton, Florida, a baby-boomer retirement mecca, where prices spiked 45 percent. West Palm Beach and Boca Raton make the top five list too.
The boom is making it tough for middle-income Americans to land a home. Take a look at this home on the market for $989,000 in Chicago's exclusive Lincoln Park. For the money, you get three bedrooms, two baths, and 2,500 square feet of space. But if you want a garage, you'll have to go elsewhere.
Don't look for easy pickings once you retire, either. This Miami condo on the market for $1.1 million has ocean views, but with just 1,400 square feet of space, it will be tough to accommodate the grandkids.
One house on the list delivered value for the money.
DAVID D'AUSILIO, REMAX REAL ESTATE BROKER: Well, Gerri, this is what $1 million buys you in Monroe, Connecticut.
WILLIS (on camera): It's pretty nice. Let's take a look.
D'AUSILIO: The homeowners here did a lot of custom work, including the cherry cabinets.
WILLIS (voice-over): Four bedrooms, 3.5 baths, 3,800 square feet on one acre of level land. Price tag, $979,000.
But even here, where values appear to be better, D'Ausilio says the market has gone too far. This man, who makes his living selling homes, is a renter.
D'AUSILIO: We decided to rent for a few years. We think this housing market's going to cool down a little bit, and we'll be able to find a better value perhaps 24 months from now.
WILLIS: Experts warn, in the metro markets, where prices have gone up the most, prices could fall, and fall hard. That means, for some people, they could end up owing more than the house is worth if they had to sell.
In most of the rest of the country, though, the likelihood is that prices might flatten, but not collapse.
(END VIDEOTAPE)
WILLIS: But today's soaring home prices have many people thinking of real estate as a quick way to make a buck.
Chris Huntington takes a look at one man who's flipping properties for a living, with all its risks and rewards.
(BEGIN VIDEOTAPE)
CHRIS HUNTINGTON, CNN CORRESPONDENT (voice-over): For Frank La Fragola, time is of the essence.
FRANK LA FRAGOLA: Whatever price it is, it doesn't make a difference, and we want to move fast.
HUNTINGTON: La Fragola flips real estate. He buys rundown homes in nice neighborhoods, renovates them, then puts them right back on the market.
LA FRAGOLA: The first thing is always price. But when we come in, the cheaper it is, the better for us, because we know we're not going to have to lay out so much money.
But a lot of times, what really jumps out is when real estate agents list the house, they'll put each "TLC" or they're put "Handyman special." As soon as I see that, I know that's a project that I can tackle.
HUNTINGTON: The plan is always to turn a big profit in a small time frame, usually just three to four months. But his newest acquisition, a two-bedroom, two-bathroom home in Arlington, New Jersey, shows there can be hangups.
LA FRAGOLA: When we bought this place, we paid $250,000. We were hoping to sell for $350,000. But in this business, the longer you sit on a property, the less money you make. So we took a lower price. We sold it for $335,000.
HUNTINGTON: And before he could sell it, La Fragola had to put in another $30,000 worth of work. He redid the bathroom and kitchen, added a patio and a new deck, and hired a contractor to renovate a stairway to the attic. When that contractor failed to get the proper permits, La Fragola had to spend yet another $4,000 on a second contractor.
MICHAEL MARKS, EIC GENERAL CONTRACTORS: Well, we were called in because the stairs here did not meet code. A couple of reasons why. One, there wasn't enough head room. There wasn't proper balusters on the railing, and the stairs weren't wide enough.
HUNTINGTON: That second round of work also meant more time on the project. And more time before a sale means more time carrying a mortgage.
LA FRAGOLA: We've had one project that we were red-flagged. Initially, we thought the project was going to be two months. It turned out to be seven. So we lost a lot of time, and we lost a lot of money.
HUNTINGTON: Lost time and renovation snags make property- flipping a risky business. But by sticking to desirable neighborhoods where buyers often outpay sellers, Frank La Fragola says he's pulled in half a million dollars in just two years.
For OPEN HOUSE, Chris Huntington, CNN.
(END VIDEOTAPE)
WILLIS: Before you flip, decide whether it's right for your market. Flipping works best in rising markets. And with annual price gains at 25-year highs, you have to ask yourself whether your market is poised for a slowdown or even a fall. Unloading a property when buyers are skittish is difficult.
To analyze your market, check if double-digit price gains have been going on longer than three to five years. If so, that's a signal there could be trouble.
Also check out what the pros call days on market. That's the average number of days it takes to sell a home. If that number is double usual levels, your market could face a slowdown.
Coming up on OPEN HOUSE, our weekend project. We're creating beautiful container gardens with the help of a pro. Garden expert Allen Smith shows us how it's done. That's up next.
(COMMERCIAL BREAK)
WILLIS: Forget working on your tan at the crowded beach this weekend. Why not work on your own back yard?
I recently went to Little Rock, Arkansas, for tips on a special kind of garden, with "Cottage Living"'s garden design expert, Allen Smith.
(BEGIN VIDEOTAPE)
WILLIS: We're going to do container gardening?
P. ALLEN SMITH, GARDEN DESIGN EXPERT: You better believe it.
WILLIS: And this is gardening on training wheels. I need the baby steps, OK?
SMITH: Container garden's perfect for beginners. You know, it doesn't take a lot of time. You don't have to have a lot of space. And you don't have to have a big budget.
WILLIS: I love that.
SMITH: Now, when you choose a container, you really want it to work with the style of your house. Or if you just get really turned on by a color or a shape, just go for it.
You need to start with fresh potting soil every year, OK?
WILLIS: Any potting soil? Because I -- that's complicated. You know, you go and you look at the soil, and there's all kinds of (INAUDIBLE)...
SMITH: I know, there's a million different kinds. But to simplify it, go for something that's a container mix, something that has "Container Mix" on it. It's blended by the professionals to work in containers.
And if you get one of these container blends, you don't have to worry about putting gravel in the bottom and that sort of thing. WILLIS: Oh, OK.
SMITH: The soil will drain perfectly.
So we want to moisten it. Doing a good job. And when you grab ahold of the soil, when it's moist...
WILLIS: It's just like...
SMITH: ... and you hold it...
WILLIS: ... it looks like a mudpie.
SMITH: ... and you squeeze it, and you squeeze it as hard as you can, and you open your hand, if it falls apart, you know it's just right.
WILLIS: OK.
SMITH: We want to feed the plant. All right? So what I like to do is, I like to start with a slow-release fertilizer.
Now, when we...
WILLIS: How much, though? Because I know people are always burning out their plants with too much fertilizer.
SMITH: Well, what's great about the slow release, and this one, for instance, I think, will feed up to four months. What I'd like to do here is show you this (INAUDIBLE)...
WILLIS: That looks like salt.
SMITH: ... water-retentive polymer. All right? Now, just -- it doesn't take much of this. For a container this size, about two tablespoons, all right?
But what happens with this little granule is that it will absorb water, and that water will be available to the young plants.
So we've added soil. We've added a slow-release fertilizer. We've used the water-retentive crystal.
WILLIS: Great.
SMITH: So now it's time for the fun part.
You want plants that respond to the same sort of growing conditions for -- you don't want to put a sun-lover and a shade-lover together, because one of them's going to suffer, all right? And you want to make sure that the plant forms all work together. And that means...
WILLIS: You mean the shapes, the (INAUDIBLE)?
SMITH: The shapes of them. So I like to use three different flower shapes if I'm going to do a container, a combination container. You could call this a thriller, filler, and a spiller.
WILLIS: A thriller, a filler, and a spiller.
SMITH: That's right.
WILLIS: That's great.
Well, the results are simply stunning.
SHILLER: Well, thank you. It's so simple and easy to do.
Now how about a tour of the garden?
WILLIS: This is just so pretty.
SMITH: Well, I mean, Gerri, why have a garden if you don't have places in the garden where you can just sit back and relax and enjoy it?
But if you need a flower fix, hey, go back to those containers, and fill those containers till your heart's content.
WILLIS: Sounds beautiful.
Allen, thanks so much for giving us the tour today.
SMITH: Well, you're welcome. Thanks for being here. It's been a lot of fun.
(END VIDEOTAPE)
WILLIS: Another advantage of container gardens, you can easily shelter plants during intense summer heat.
Coming up, a look at next week's show.
But first, the mortgage snapshot.
(COMMERCIAL BREAK)
WILLIS: Coming up next week on OPEN HOUSE, we're heading to the back yard just in time for summer. We'll look at everything for decks to pools to grills.
Thanks for watching OPEN HOUSE.
Coming up, "DOLANS UNSCRIPTED" looks at identity theft.
But first, the day's headlines.
Have a great weekend.
TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com
Aired May 28, 2005 - 09:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RANDI KAYE, CNN ANCHOR: But, first, these stories "Now in the News."
Graduation ceremonies are underway right now at the U.S. military academy at West Point. Keynote speaker is Joint Chiefs Chairman Richard Myers. Most of the young officers look forward to tours in Iraq and Afghanistan in the near future.
Former President Clinton is in Sri Lanka today acting as U.N. special envoy for tsunami recovery efforts. He publicly endorsed the Sri Lankan president's offer to work with rebels to distribute aid to tsunami victims. The Tamil tigers effectively control the northern and eastern parts of the island.
And, in Atlanta, a murder suspect is no longer atop a construction crane. After holding authorities at bay for more than two days, Atlanta police subdued Carl Roland early this morning. He was lowered to the ground strapped to a stretcher.
I'm Randi Kaye. OPEN HOUSE starts right now.
GERRI WILLIS, HOST: The latest numbers prove it. Americans keep snapping up real estate at a record pace. But can it last?
ANNOUNCER: Today, on OPEN HOUSE, forget a housing market slowdown. New reports out this week show real estate is on fire. But how long can it last?
Plus, a million dollars sounds like a lot of money for a home. But what can it really get you? We take a look.
And plenty of investors are hoping to make money flipping real estate. We take a look at how it's done, next on OPEN HOUSE.
WILLIS: Hello, and welcome to CNN OPEN HOUSE. I'm Gerri Willis.
Huge home sales numbers this week are drowning out any rumblings of a real estate market slowdown. The latest statistics show new and existing home sales hit record highs last month.
But as Allan Chernoff reports, the momentum is fueling fresh concerns over a housing bubble.
(BEGIN VIDEOTAPE) ALLAN CHERNOFF, CNN CORRESPONDENT (voice-over): Twenty-five miles west of the nation's capital, there is a mecca for homebuilders and buyers. In Ashburn, Virginia, hundreds of homes under construction, thousands more planned.
STEVEN ALLOY, PRESIDENT, STANLEY MARTIN: If you can get permits, if you can get pavement, then you're going to sell houses.
CHERNOFF: That kind of demand pushed new home sales up again in April. The median price nationwide for a new home, now at $230,800, the second-highest level ever.
In markets like Las Vegas, Phoenix, and Miami, speculation is fueling price gains, investors putting down just 5 percent and taking out interest-only mortgages to defer principal payments. Their plan, flip the house, sell it quickly for a profit.
DEBBIE SMITH, LAS VEGAS INVESTOR: You could buy a house for $130,000, and by the time you close, it could have been worth $200,000 or more. Some people made $50,000 to $100,000, even $150,000, off a single-family home.
CHERNOFF: "Fortune" magazine is calling it the real estate gold rush. But housing experts say it can be dangerous.
MICHAEL CARLINER, NATIONAL ASSOCIATION OF HOME BUILDERS: If they think they're going to make a quick buck, it's not as easy to sell houses as it is to buy them. In a soft market, at least, it's not as easy to sell them. Right now, it's pretty easy. And so that's a risky proposition.
CHERNOFF: Federal Reserve officials are worried as well. One central banker Wednesday warned, buyers are going to get burned. And Fed chairman Alan Greenspan says some hot markets could easily cool off.
ALAN GREENSPAN, CHAIRMAN, FEDERAL RESERVE: But it's hard not to see, one, that there is, there are a lot of local bubbles, and indeed, even without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern.
CHERNOFF (on camera): The key to housing is mortgage rates. As long as they remain relatively low, experts say the nation's housing market should be able to avoid a bust. But in certain overheated markets, they warn, supply could soon outstrip demand, leading to lower prices.
Allan Chernoff, CNN, New York.
(END VIDEOTAPE)
WILLIS: So will this market bubble burst?
Joining me now for a closer look is Robert Shiller, professor of economics at Yale and author of "Irrational Exuberance." He joins us from New Haven. And in Washington, Frank Nothaft, vice president and chief economist at Freddie Mac.
Welcome to you both.
ROBERT SHILLER, AUTHOR, "IRRATIONAL EXUBERANCE": All right, thanks.
FRANK NOTHAFT, CHIEF ECONOMIST, FREDDIE MAC: Hi, thanks for having us, Gerri.
WILLIS: All right, Frank, let's start with you here. You know, housing prices, you have to go back 25 years to find a time when prices have risen more quickly than they have this year. How can this not be a boom that's going to bust?
NOTHAFT: There's no national house price bubble. Oversupply is a necessary prerequisite for any drop in prices, and we just don't see oversupply at a national level. In fact, most markets, the housing market is very tight, and we have the lowest inventory of homes available for sale anywhere in 30 years in the U.S. And that's one reason we've seen such strong house price appreciation.
WILLIS: Bob, you want to jump in here?
SHILLER: The low inventory is a reflection of the bubble. It's because the nature of the market, in response to the enthusiasm, has changed. So often, houses sell on the first day. It's like an auction.
The real issue of supply is that with prices high, construction has been very strong, and we are going to continue to see new construction. And that, along with the change in psychology, has a good chance of bringing house prices substantially down.
WILLIS: Well, that brings up a good question, Frank. Is Greenspan right? Is this unsustainable?
NOTHAFT: Well, I'll tell what I think is unsustainable, the strong house price appreciation rates of the last two, three years. Last year, for example, we had 10.7 percent appreciation for the average home in the U.S., and with stronger rates of appreciation along both coasts, weaker in the midsection of the country. Ten percent annual appreciation for the average home in the U.S. is unsustainable. And our expectation is that that will moderate over the course of the next couple of years.
WILLIS: Well, you guys may actually agree on something here.
But Bob, let me get to you to a different topic, the role of speculation here, gold rush mentality. What's it doing to the market?
SHILLER: This is, in many places -- I agree with Greenspan -- a speculative bubble. You could even say it's a national bubble, because it's big in so many places that it affects the national numbers.
But what is a bubble? It occurs when people are stretching to buy property because they think the price is going to go up. And when they no longer perceive them as going up, they won't want to stretch to own this property. And that brings the seeds of a deflation of the bubble.
WILLIS: Well, I was trying to get you to this idea that a lot of people out there are gambling not just on their primary home, but on investment real estate. Now, is that a problem as well?
Frank, let's go to you.
NOTHAFT: Well, investment purchases of single-family homes are still a relatively small component of the national market. It's true that it's up. It's up over the last five years. But still, nationwide, investor loans are maybe 10 percent of the total single- family market.
Now, the concern is that there might be some certain markets -- you mentioned Las Vegas in your story -- where there's a larger investor component. There in Las Vegas, the investor share's maybe up around 20, 25 percent of home purchases.
Markets where you have a large proportion of sales that are investor leads to a more speculative component. Again, nationwide, I don't have any concerns at all. I don't think there's any national house price bubble, and I don't think there's an overvaluation at a national level. But there are certain markets where -- submarkets, where, if it's really...
WILLIS: (INAUDIBLE).
NOTHAFT: ... being driven by investor activity, that could be an issue.
WILLIS: Interesting.
Bob, I know you like to talk about some of these more speculative mortgages that people use, interest-only mortgages. What kind of impact is this having on the bubble? And could it lead to a decline?
SHILLER: Yes. There has been a decay of our investment -- of our mortgage-lending standards. That's part of the bubble. That's what happens in a bubble. We get very optimistic. So we have interest-only mortgages. We have adjustable-rate mortgages. And we have mortgages where they don't even ask much information about your credit. It's a big problem. In the boom states, most mortgages now are adjustable-rate mortgages.
We should have learned from the experience in the 1930s, the Great Depression, when people switched en masse to long 30-year fixed- rate mortgages, that was a change in our mortgage industry to prevent a big crash, which we saw then.
But now it's been 70 years, and we're just forgetting, and we're starting to make the same mistakes again.
WILLIS: Frank, is money too cheap? NOTHAFT: Well, money's not too cheap. I'm surprised at the lengthy period that we've had and enjoyed low mortgage rates in the U.S. Currently, we see 30-year fixed-rate mortgage rates on the market at about 5.7 percent. Well, that's a great rate. That's one of the lowest rates that we've had in the last 40 years.
So I don't want to say it's too cheap. But we are certainly enjoying very low mortgage rates.
WILLIS: Now, Bob, I want to ask you this question. What is the risk to homeowners of a bubble that goes too far? I mean, what's the downside here? If you're holding your house, you could hold it until prices rise again. It might not make a difference.
SHILLER: Well, that's true. I think that most homeowners are longterm holders. And the question is, of course, what will the home prices do in the long term?
There's a lot of optimism that they will -- that maybe they'll dip, but they'll come back up. And that optimism is based on what happened in the last two cycles.
So -- but I don't think that's really convincing evidence. I think that there's a possibility that home price increases are over for -- will be over in not too many years.
WILLIS: Wow.
SHILLER: And...
WILLIS: OK.
SHILLER: ... and for a long time. We just don't -- housing is a...
WILLIS: Right.
SHILLER: ... risky investment, that's (INAUDIBLE)...
WILLIS: Frank, do you agree with that, housing price increases are over?
NOTHAFT: Well, we're still expecting house price appreciation for the average home across the U.S. In fact, our forecast over the next 10 years is that the average home will appreciate at approximately 5 percent per year. So much, much slower than the last few years, but I don't see house price appreciation...
WILLIS: All right.
NOTHAFT: ... being over.
WILLIS: Frank, Bob, thanks for joining us today. We appreciate your time.
SHILLER: Thank you, Gerri. NOTHAFT: Thank you, Bob.
WILLIS: Coming up on OPEN HOUSE, what can you get for a million bucks? Well, it depends on the housing market. We'll take a look.
Plus, buying property, fixing it up, and selling it for a quick profit. We have the ins and the outs of flipping real estate.
But first, your tip of the day.
(BEGIN VIDEO CLIP)
ANNOUNCER: You're ready to buy a house. You know you can afford the monthly mortgage payments. But you don't have the 20 percent for the down payment.
Don't worry. There's hope for that dream home yet. Ask both public and private lenders if they offer programs aimed at lower- income people. Many times, they work in conjunction with Fannie Mae, Freddie Mac, or nonprofit or government agencies.
You may be able to get low-interest mortgages with as little as 3 percent down. Shop around for lenders, and don't be afraid to ask what they can do for you.
That's your tip of the day.
(END VIDEO CLIP)
WILLIS: A million dollars should get you the home of your dreams, but in many markets, that's just not always the case.
This year, home prices have risen more quickly than at any time in the past 25.
(BEGIN VIDEOTAPE)
KATHY BRADDOCK, BRADDOCK AND PURCELL: It is a terrific one- bedroom, totally renovated, move-in condition, one-bedroom apartment. The kitchen, as you can see, fabulous countertops, state-of-the-art appliances. One of the wonderful features of this apartment is clearly the view.
WILLIS: What is the square footage?
BRADDOCK: It's about 822 square feet, and very well-used square footage. Every single part is well used.
WILLIS: Eight hundred and twenty-two square feet, a million dollars.
BRADDOCK: Yes.
WILLIS (voice-over): Prices in Manhattan have risen 20 percent in the last year. And the Big Apple is not the only city overheating. Some 66 metro areas posted double-digit price increases this year, and many of them are in unexpected places, like Bradenton, Florida, a baby-boomer retirement mecca, where prices spiked 45 percent. West Palm Beach and Boca Raton make the top five list too.
The boom is making it tough for middle-income Americans to land a home. Take a look at this home on the market for $989,000 in Chicago's exclusive Lincoln Park. For the money, you get three bedrooms, two baths, and 2,500 square feet of space. But if you want a garage, you'll have to go elsewhere.
Don't look for easy pickings once you retire, either. This Miami condo on the market for $1.1 million has ocean views, but with just 1,400 square feet of space, it will be tough to accommodate the grandkids.
One house on the list delivered value for the money.
DAVID D'AUSILIO, REMAX REAL ESTATE BROKER: Well, Gerri, this is what $1 million buys you in Monroe, Connecticut.
WILLIS (on camera): It's pretty nice. Let's take a look.
D'AUSILIO: The homeowners here did a lot of custom work, including the cherry cabinets.
WILLIS (voice-over): Four bedrooms, 3.5 baths, 3,800 square feet on one acre of level land. Price tag, $979,000.
But even here, where values appear to be better, D'Ausilio says the market has gone too far. This man, who makes his living selling homes, is a renter.
D'AUSILIO: We decided to rent for a few years. We think this housing market's going to cool down a little bit, and we'll be able to find a better value perhaps 24 months from now.
WILLIS: Experts warn, in the metro markets, where prices have gone up the most, prices could fall, and fall hard. That means, for some people, they could end up owing more than the house is worth if they had to sell.
In most of the rest of the country, though, the likelihood is that prices might flatten, but not collapse.
(END VIDEOTAPE)
WILLIS: But today's soaring home prices have many people thinking of real estate as a quick way to make a buck.
Chris Huntington takes a look at one man who's flipping properties for a living, with all its risks and rewards.
(BEGIN VIDEOTAPE)
CHRIS HUNTINGTON, CNN CORRESPONDENT (voice-over): For Frank La Fragola, time is of the essence.
FRANK LA FRAGOLA: Whatever price it is, it doesn't make a difference, and we want to move fast.
HUNTINGTON: La Fragola flips real estate. He buys rundown homes in nice neighborhoods, renovates them, then puts them right back on the market.
LA FRAGOLA: The first thing is always price. But when we come in, the cheaper it is, the better for us, because we know we're not going to have to lay out so much money.
But a lot of times, what really jumps out is when real estate agents list the house, they'll put each "TLC" or they're put "Handyman special." As soon as I see that, I know that's a project that I can tackle.
HUNTINGTON: The plan is always to turn a big profit in a small time frame, usually just three to four months. But his newest acquisition, a two-bedroom, two-bathroom home in Arlington, New Jersey, shows there can be hangups.
LA FRAGOLA: When we bought this place, we paid $250,000. We were hoping to sell for $350,000. But in this business, the longer you sit on a property, the less money you make. So we took a lower price. We sold it for $335,000.
HUNTINGTON: And before he could sell it, La Fragola had to put in another $30,000 worth of work. He redid the bathroom and kitchen, added a patio and a new deck, and hired a contractor to renovate a stairway to the attic. When that contractor failed to get the proper permits, La Fragola had to spend yet another $4,000 on a second contractor.
MICHAEL MARKS, EIC GENERAL CONTRACTORS: Well, we were called in because the stairs here did not meet code. A couple of reasons why. One, there wasn't enough head room. There wasn't proper balusters on the railing, and the stairs weren't wide enough.
HUNTINGTON: That second round of work also meant more time on the project. And more time before a sale means more time carrying a mortgage.
LA FRAGOLA: We've had one project that we were red-flagged. Initially, we thought the project was going to be two months. It turned out to be seven. So we lost a lot of time, and we lost a lot of money.
HUNTINGTON: Lost time and renovation snags make property- flipping a risky business. But by sticking to desirable neighborhoods where buyers often outpay sellers, Frank La Fragola says he's pulled in half a million dollars in just two years.
For OPEN HOUSE, Chris Huntington, CNN.
(END VIDEOTAPE)
WILLIS: Before you flip, decide whether it's right for your market. Flipping works best in rising markets. And with annual price gains at 25-year highs, you have to ask yourself whether your market is poised for a slowdown or even a fall. Unloading a property when buyers are skittish is difficult.
To analyze your market, check if double-digit price gains have been going on longer than three to five years. If so, that's a signal there could be trouble.
Also check out what the pros call days on market. That's the average number of days it takes to sell a home. If that number is double usual levels, your market could face a slowdown.
Coming up on OPEN HOUSE, our weekend project. We're creating beautiful container gardens with the help of a pro. Garden expert Allen Smith shows us how it's done. That's up next.
(COMMERCIAL BREAK)
WILLIS: Forget working on your tan at the crowded beach this weekend. Why not work on your own back yard?
I recently went to Little Rock, Arkansas, for tips on a special kind of garden, with "Cottage Living"'s garden design expert, Allen Smith.
(BEGIN VIDEOTAPE)
WILLIS: We're going to do container gardening?
P. ALLEN SMITH, GARDEN DESIGN EXPERT: You better believe it.
WILLIS: And this is gardening on training wheels. I need the baby steps, OK?
SMITH: Container garden's perfect for beginners. You know, it doesn't take a lot of time. You don't have to have a lot of space. And you don't have to have a big budget.
WILLIS: I love that.
SMITH: Now, when you choose a container, you really want it to work with the style of your house. Or if you just get really turned on by a color or a shape, just go for it.
You need to start with fresh potting soil every year, OK?
WILLIS: Any potting soil? Because I -- that's complicated. You know, you go and you look at the soil, and there's all kinds of (INAUDIBLE)...
SMITH: I know, there's a million different kinds. But to simplify it, go for something that's a container mix, something that has "Container Mix" on it. It's blended by the professionals to work in containers.
And if you get one of these container blends, you don't have to worry about putting gravel in the bottom and that sort of thing. WILLIS: Oh, OK.
SMITH: The soil will drain perfectly.
So we want to moisten it. Doing a good job. And when you grab ahold of the soil, when it's moist...
WILLIS: It's just like...
SMITH: ... and you hold it...
WILLIS: ... it looks like a mudpie.
SMITH: ... and you squeeze it, and you squeeze it as hard as you can, and you open your hand, if it falls apart, you know it's just right.
WILLIS: OK.
SMITH: We want to feed the plant. All right? So what I like to do is, I like to start with a slow-release fertilizer.
Now, when we...
WILLIS: How much, though? Because I know people are always burning out their plants with too much fertilizer.
SMITH: Well, what's great about the slow release, and this one, for instance, I think, will feed up to four months. What I'd like to do here is show you this (INAUDIBLE)...
WILLIS: That looks like salt.
SMITH: ... water-retentive polymer. All right? Now, just -- it doesn't take much of this. For a container this size, about two tablespoons, all right?
But what happens with this little granule is that it will absorb water, and that water will be available to the young plants.
So we've added soil. We've added a slow-release fertilizer. We've used the water-retentive crystal.
WILLIS: Great.
SMITH: So now it's time for the fun part.
You want plants that respond to the same sort of growing conditions for -- you don't want to put a sun-lover and a shade-lover together, because one of them's going to suffer, all right? And you want to make sure that the plant forms all work together. And that means...
WILLIS: You mean the shapes, the (INAUDIBLE)?
SMITH: The shapes of them. So I like to use three different flower shapes if I'm going to do a container, a combination container. You could call this a thriller, filler, and a spiller.
WILLIS: A thriller, a filler, and a spiller.
SMITH: That's right.
WILLIS: That's great.
Well, the results are simply stunning.
SHILLER: Well, thank you. It's so simple and easy to do.
Now how about a tour of the garden?
WILLIS: This is just so pretty.
SMITH: Well, I mean, Gerri, why have a garden if you don't have places in the garden where you can just sit back and relax and enjoy it?
But if you need a flower fix, hey, go back to those containers, and fill those containers till your heart's content.
WILLIS: Sounds beautiful.
Allen, thanks so much for giving us the tour today.
SMITH: Well, you're welcome. Thanks for being here. It's been a lot of fun.
(END VIDEOTAPE)
WILLIS: Another advantage of container gardens, you can easily shelter plants during intense summer heat.
Coming up, a look at next week's show.
But first, the mortgage snapshot.
(COMMERCIAL BREAK)
WILLIS: Coming up next week on OPEN HOUSE, we're heading to the back yard just in time for summer. We'll look at everything for decks to pools to grills.
Thanks for watching OPEN HOUSE.
Coming up, "DOLANS UNSCRIPTED" looks at identity theft.
But first, the day's headlines.
Have a great weekend.
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