'Some froth, no bubble'

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'Some froth, no bubble'
U.S. Trust official says housing slowdown has hit, corrections expected.

By STEPHANIE MURPHY , Daily News Business and Real Estate Writer

Sunday, January 29, 2006

Daily News Photos by Jeffrey Langlois (enlarge photo) A condominium unit at 240 N. County Road recently closed for $655,000, or $20,000 below the list price.   (enlarge photo) An investor who owns three units at Lake Towers, 250 Bradley Place, recently raised the price of one unit by $40,000.

Condominium prices see-saw more than house prices because investors - those who buy expecting a profit - occupy a "significantly higher" chunk of the condo market than they do in the single-family home market, a real estate expert said this week in Palm Beach.

Investors - as opposed to buyers who intend to live in a unit - are what drives perceptions about a real estate "bubble," said Steven Kirkpatrick, senior vice president of U.S. Trust, who spoke to several dozen guests at the firm's island offices. He manages its Special Assets Group, which includes real estate, oil and natural gas, and closely held entities such as the Gardiner Island Trust.

"There is some froth in the market, but there is no bubble. The marketplace is very healthy, and it's working, but a slowdown is upon us, and we should look for modest corrections," Kirkpatrick said.

"I'll bet you that condos will be the frothiest part of the market," he said. "Price appreciation will start to hit a wall in Florida, especially in the condo market." He said one reason is that "a significant number of owners don't have the same emotional connection" to condo units as they do to homes. The condo market is "more efficient - it has a greater propensity to go up and down - and it will be a leading indicator."

Although housing price inflation has peaked nationally, moderate price increases still occur in some regions, Kirkpatrick said, and "home prices regionally are closely tied to income."

Some recent dips in condo prices are nothing to fear, said president/broker Pam Hoffpauer of Martha A. Gottfried Real Estate.

"It's not uncommon to have price changes at this time of year. Historically, it's nothing to be alarmed at. We have a great condo market right now. Larger, three-bedroom units seem to be in demand," she said. "Some people may have overpriced their property. Hopefully, they are adjusting them."

At Lake Towers, 250 Bradley Place, investor James Pappas owns three units. He bought one in January 2005 for $1.65 million, in December for $875,000, and in June for $530,000. He had the last one listed with The Corcoran Group for $925,000 and recently raised the price to $965,000.

Among other recent price changes in condos: a unit at 214 Chilean Ave., down from $895,000 to $845,000; 354 Chilean Ave., $975,000 to $895,000; Palm Beach Towers at 44 Cocoanut Row, $1.49 million down to $1.29 million, $575,000 down to $525,000, and $529,000 to $495,000.

At 3440 S. Ocean Blvd., seller Richard Colardo paid $599,000 for a 2,131-square-foot three-bedroom unit in June 2004. He recently dropped his asking price from $1.39 million to $1.29 million.

Kirkpatrick cited a housing price model developed by National City Corp./Global Insight Inc. that evaluated 299 markets. Those at risk of correction have home price values at least 30 percent above what the model predicts. Greater West Palm Beach is 57 percent overvalued, according to the study, Kirkpatrick said.

Therefore, three years from now prices will reflect a correction, he said, although it would move from "very hot" to "warm, not lukewarm."

Although the study said the typical price adjustment is about 17 percent, "I'm not sure I really believe this, and I'm not sure the authors did, either," Kirkpatrick said. "They hedge themselves and say 'in most markets, you won't see that much correction.' But I wouldn't want to buy a house in Naples right now," which is 80 percent overvalued, according to the model.

The study concluded "no bubble," as well, but said several significantly overvalued markets are "at risk of correction."

Kirkpatrick characterized a correction as a protracted three-year phase in which outright depreciation is uncommon, even in highly overvalued markets.

He said his favorite way to measure prices is the Constant Quality index because it evaluates location and amenities, even high-end appliances such as Sub-Zero.

According to a study by the Federal Reserve Bank of New York, home prices are three times median household income and are at a 15-year high.

Housing demand is fueled by a demographic "tortoise" whose movements create constant, slow pressure on the markets, he said, citing the habits of baby boomers: They form households at a younger age than their parents; one-third are immigrants; upon retirement, they head to warm climates; and many buy more than one "second" home.

The United States has about 275 million people now, but estimates are 420 million by 2050, "so where are these people going to live?" Kirkpatrick said.

He predicted the Fed will stop raising interest rates by the end of the month. Mortgage interest rates will dip to about 5.75 percent for a 30-year fixed loan by the end of the year. Another support for a stable housing market is low unemployment, he said, because, "people don't have to sell."