Investors Bet on New Homes Weakened Stock Market Drives Speculators to Real Estate By Kathleen M. Howley Bloomberg News Saturday, April 30, 2005; Page F23
Benedek Investment Group, a two-year-old investment firm in New York, has provided seed money to start-up entertainment companies including Broadcast Interactive Media and Channel M. Now, it's betting on U.S. real estate.
The firm, founded by 32-year-old Stephen D. Benedek with profits from the sale of his family's broadcasting company, is financing the construction of four houses in the Hamptons, the summer resort on the eastern tip of New York's Long Island that attracts movie stars and Wall Street executives. The first of his Southampton houses is for sale at $6.9 million.
Some investors are treating U.S. homes like stocks and bonds -- a chance to make a trading profit. Real estate investors accounted for about 9 percent of home purchases in 2004, up from 6 percent in 2003, according to Fannie Mae, the District-based federally chartered mortgage finance company. In some markets, the share was as high as 30 percent.
"People have been putting more money into housing than they normally would because they're so disillusioned with the stock market," said Roger M. Kubarych, 60, a former Federal Reserve economist who's now a senior adviser at HVB America Inc., a New York-based unit of German bank HVB Group. The Standard & Poor's 500-stock index is down 22 percent since the end of 1999.
Sales of new homes rose 12.2 percent in March to an annual rate of 1.43 million, according to a report this week from the Commerce Department. The gain was aided by 30-year mortgage rates averaging 5.9 percent, which even after a recent run-up remain within 1 percentage point of a four-decade low.
The median house price, which fluctuates depending on which regions are strong and the types of homes being sold, rose 5.4 percent to $212,300 from a year earlier.
Is it an overheated market?
"The timing is perfect," Benedek said in an interview, referring to his Long Island project.
About 1.15 million homes will be sold this year, second only to the record 1.2 million sold in 2004, according to an April 5 forecast by the National Association of Home Builders.
Some policymakers and home builders are concerned that the influx of investors is helping overheat the residential real estate market.
"A couple of years ago, I was fairly confident that the rise in real estate prices primarily reflected low interest rates, good growth in disposable income and favorable demographics," Federal Reserve Governor Donald L. Kohn, 62, said in an April 22 speech at the Levy Economics Institute of Bard College in Annandale-on-Hudson, N.Y. "Prices have gone up far enough since then relative to interest rates, rents and incomes to raise questions" about whether the market is headed for a decline, he said.
The hottest property markets include Las Vegas, where home prices climbed 36 percent in the fourth quarter from a year earlier, the biggest gain in the country. That is almost triple the national average price advance of 11 percent in the same period, according to the Office of Federal Housing Enterprise Oversight.
Others include Bakersfield and Riverside, Calif., and Reno, Nev., where prices rose 30 percent, and the Palm Bay and Melbourne, Fla., region, where prices increased 26 percent.
D.R. Horton Inc., the largest U.S. builder by stock market value, is enforcing a strict "no investors" policy for all its developments.
When buyers place an order for a house, they sign a statement confirming that they aren't investors. Real estate brokers involved in transactions also sign affidavits saying they aren't representing investors. If the statements turn out to be false, the brokers could lose their real estate licenses, according to the Fort Worth-based company.
The pace of home appreciation is boosting interest in real estate as a way to make a "quick buck," said Joseph M. Carreiro Jr., 34, a lawyer who teaches a class for real estate investors at the Cambridge Adult Education Center in Cambridge, Mass.
"People are trying to get in while interest rates are competitive, taking equity out of their own homes in order to turn real estate into an investment vehicle, rather than looking to the stock market," Carreiro said in an interview.
People who buy investment property expecting all profit and no work can end up being disillusioned, Carreiro said.
"Every weekend on TV, there are at least a half a dozen infomercials about turning a quick profit in real estate," he said. "Sometimes that fast buck turns out to be very expensive if you dive in without knowing what you're doing."
Bloomberg staff writer Victor Epstein contributed to this report.
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