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       Investor's Insight - December 4, 2006           
          "A Digest of Investment Opinion From the 
             World's Leading Financial Advisers"


by Scott Burns

SANTA ROSA, Calif. -- In a laid-back kind of way, the 
Flamingo Resort Hotel and Spa, where I am staying, is 
centrally located. Drive in one direction and you're
less than a mile from downtown. Drive in another and 
you're at a casual shopping center. Drive in still 
another and you're on your way to Glen Ellen and wine

Almost immediately my son Ollie, who lives in Santa Rosa, 
tells me that real estate values are down. A day later, 
the Press Democrat has an article observing that the
median price is down 4.2 percent -- to $565,000. This 
means the median home price here is now only 10 times 
the $55,000 median household income in the area.

Worse, prices have fallen for four consecutive months. 
This means that many of those who bought at the top -- 
which the Press Democrat identifies as August 2005, when 
the median home price in the area peaked at $619,000 -- 
are now upside down. With virtually no down payment and 
creative financing, recent buyers now owe more than their 
house or condo is worth.


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This may be a good time for Californians to talk to Texans 
who went through the Texas real estate crash in the late 
'80s and early '90s. 

Back then I wrote about Dallas "condo slaves." These were 
people who had bought overpriced condos in a rising market. 
They bought them with buy-down mortgages that would reset 
to a higher interest rate in a year or two. They bought
them with very low down payments, often less than 5 per-

Then the market turned.

Prices slipped. Inventory ballooned. Thousands of home-
owners and condo owners walked their mortgages. When that 
happened, prices plummeted. Then the condo lenders dis-
appeared. Condo prices fell some more.<

Those who tried to tough it out found themselves in an 
odd position. They could rent identical units around 
them for less than they were paying on their mortgage 
because the other units had been sold to speculators 
who paid cash. But they could not refinance to a lower 
interest rate because their condo was now worth less 
than their mortgage balance.

They were "condo slaves." They were indentured to their 
depreciated property.

Well, it's starting to happen here. Listen to this story.

Over lunch at Monti's Rotisserie, a friend tells me her 
Tale of Two Transactions.

Now a renter, she sold her townhouse in the mid-$400s, 
nearly three times what she had paid for it seven years 
earlier. Today she rents a smaller townhouse for less 
than $1,000 a month.

Her shelter expenses are way down. The equity from the 
townhouse, after paying off her credit cards, has been 
invested. To celebrate, she replaced her decrepit early 
'90s Honda with a mature but beautifully maintained 

She is a happy camper. She believes the sale of her 
unit last August was the last sale in her entire com-

But the next-to-last sale was to a speculator. 

The speculator, a woman my friend knows, made a $50,000 
down payment (which may have been taken from a home-
equity credit line on her personal residence) on another 
mid-$400s unit. 

The speculator immediately found a tenant at about 
$1,400 a month. That's nice, but it doesn't cover the 
monthly expenses. Figure a $400,000 mortgage at 6 per-
cent, interest only, and you've got a $2,000 monthly 
payment. Add real estate taxes, insurance and home-
owner association dues, and you've got another $700 
a month, at least.

So the speculator is paying about $1,300 a month and 
the tenant is paying $1,400. The place will have to 
appreciate at nearly 4 percent a year just to cover 
the monthly losses.



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Worse, if the unit was sold at a loss of 6 percent plus 
a 6 percent Realtor's commission, the speculator would 
be looking at losing her $50,000 down payment and, may-
be, bringing a check to the closing to cover the remain-
ing loss. The Web site www.trulia.com, which tracks real 
estate prices by ZIP code, shows average and median sales 
price declines of 7 percent and 6 percent, respectively.

The speculator is between a rock and a hard place. She 
may need to hold the property for years before she can 
sell it and break even. If she does hold it, she'll 
have to have enough income from other sources to cover 
the monthly loss.

As thousands who survived the Texas crash will be happy 
to affirm, monthly losses get old really fast.

Does this mean a great real estate crash is coming?

One is coming for speculators who don't have deep pockets. 
That's certain. Without staying power, they will be wiped 

For others it's a question of how great the collateral 
damage will be. The only clear thing is that the great 
real estate party is over, so over. 

You can discuss this issue or any other topic in the new 
Investor's Insight forum. Check it out here...

Investor's Insight Forum

(Investor's Insight reflects the opinions of experts. It does 
not recommend any specific investments, and no endorsement is 
implied or should be inferred. For more information, contact 
the individual firms cited).



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