With
housing values rising With the stock
market spiraling lower and interest rates nearing a 40-year low, real
estate is looking more and more like the best investment opportunity
for the average American, experts say. Home values nationwide
increased by an annualized rate of 5.7 percent in the first quarter
of 2002, reported Freddie Mac in its quarterly Conventional Mortgage
Home Price survey. This rate is more
than double the revised annualized rate of 2.7 percent for the fourth
quarter of 2001, demonstrating the resiliency of housing values in
weathering the economic uncertainty of recent times, said Frank Nothaft,
Freddie Mac chief economist. “Real estate
investments are a safe haven in today’s uncertain marketplace,
and homeownership is an affirmation of the American Dream,” said
Chicago housing analyst Garry Benson, partner in Garrison Partners,
a national consulting firm specializing in new-home sales and marketing. The index also
showed that annual house-price appreciation was a robust 6.3 percent
from the first quarter of 2001 through the first quarter of 2002.
The Midwest registered an annual price gain of 5.4 percent. “A 5 percent
annual appreciation is a strong return in today’s economy, especially
when you consider the weakness of the stock market and one-year certificate
of deposit interest rates in the 3 percent range,” Benson said. While some appraisers
and real estate analysts are wringing their hands about an inventory
of 4,500 new-construction condominiums in Chicago, Benson notes that
this is only a year’s worth of sales. “People tend
to forget the history of condominiums in Chicago,” Benson said.
“Back in 1977, during the height of the condominium-conversion
boom here, some 17,000 units were put on the market. Now, that’s
inventory.” Just how good
is the potential for investment in a new-construction condominium? Let’s assume
you purchase a $250,000 condo in a planned development with two bedrooms
two baths and 1,000 square feet, placing a down payment of 10 percent,
or $25,000. “With a two-year
construction schedule for the typical downtown highrise condo building
and prices appreciating at 5 percent annually, the $250,000 unit would
be worth $262,500 after the first year and $275,625 after the second
year,” Benson said. “That’s $25,625 in appreciation
in two years – or a 100 percent return on the down payment investment,”
he said. Benson said some
developers are offering down payments as low as 5 percent until the
building is topped off. “With only $12,500 down, new-home purchasers
could see a return of 200 percent before they even move in.” And that’s
not including the tax benefits. If the investors move in, they don’t
have to pay taxes on the gain, and they have annual tax write-offs
for mortgage interest and real estate taxes. “Under today’s
federal income tax laws, middle-aged baby-boomer couples can sell
their house in the suburbs, pocket up to $500,000 in capital gains
tax free, and buy a new-construction condominium in the city and start
the investment cycle all over again,” Benson said. Buyers of new
construction are able invest in real estate today using tomorrow’s
dollars, participate in the design process and take virtual reality
tours that give a good sense of the product long before its delivered,
Benson said. “Today’s
technology allows developers to design entire virtual neighborhoods,
even cities, to give buyers a feel for what their final living environment
will be,” Benson said. “This really helps overcome buyer
anxiety. People want to touch the bricks before they buy.” But what’s
the outlook for new construction for the rest of 2002? Freddie Mac’s
Nothaft said he expects growth in home prices to slow somewhat over
the rest of the year, with the average single-family home appreciating
between 4 percent and 5 percent. |