June, 2006

Market Commentary:

The long march of interest rates.

Last week, new statistics revealing higher than expected inflation rates caught many people by surprise. It spooked markets and ignited fears that further interest rate increases are in store. What’s the impact on mortgage rates?

Wednesday, May 17th was a rough day for equity markets. On that day, the core CPI index was released, revealing that the consumer price index had increased 0.3% in April, relative to an expected increase of 0.2%. Markets reacted strongly to this, and the Dow Jones Industrial Average dropped by 214 points, its biggest decline in 3 years. Concern that inflation is increasing has fueled speculation that the Federal Reserve may continue increasing interest rates.

The Federal Reserve has increased the Federal Funds Rate 16 consecutive times beginning in early 2004. After the latest increase, which occurred on May 10th, there was much speculation that the Fed would end their string of increases, keeping the rate level at 5%. Since that time, there is now a greater sense that the upward shift will continue. Richmond Fed President Jerry Lacker commented that the chance of a Fed pause in June was less likely after the release of the April CPI data. And St. Louis Fed President William Poole was quoted as saying that “The risks on the inflation side are tilted to the upside.”

While mortgage rates do not necessarily rise in lockstep with the Federal Funds Rate, Fed action does have a significant impact. As of last week, the interest rate on a conventional 30 year fixed mortgage was 6.6%. One year ago, the rate was 5.7%. Going forward, both the Mortgage Bankers Association (MBA) and the National Association of Realtors (NAR) predict that 30 year rates will rise to 6.8% by the third quarter of 2006, and then to 6.9% by the end of the year.

Interestingly, both the MBA and NAR predict that mortgage rates will level off at the end of the year. The MBA maintains that in 2007, 30 year fixed rates will stay at 6.9% through the year. Meanwhile the NAR predicts that rates will pass 7%, topping out at 7.1% in mid 2007.

Our recommendations?

First, if you’re in the market for a home, waiting for interest rates to fall is not a wise strategy. It is highly unlikely that interest rates will fall back to sub 6% levels at anytime over the next few years. And as mentioned above, rates are likely to go up.

Second, we don’t believe that 7% mortgage rates will significantly deflate the real estate market. While there are many other factors that could have a negative impact on housing prices, keep in mind that from a historical perspective, 7% interest rates are not unreasonable. As recently as May 2000, 30 year fixed rates peaked at 8.7%. And at this point in time, we are not aware of any forecasts predicting that interest rates will rise to such levels. And in fact, both the Mortgage Bankers Association and National Association of Realtors predict nationwide average home prices to stay relatively level through the year, and then to experience modest increases in late 2007. Of course, certain local markets are likely to fluctuate more significantly.

Notable Neighborhoods: The American Loft

The coolest building in Philly?

We respect developers who deliver a project that’s really out of the ordinary. The American Loft is a great example.

Many real estate developers we know have conservative tendencies. They take great financial risks to deliver a project with the hopes that it will be well received by potential homebuyers and that sales will be brisk. They often temper these risks by designing homes with “tried and true” features that will appeal to a large cross section of buyers. While this can be a smart business decision, it often results in bland architecture.

So, we have a great deal of admiration for developers who are willing to try new things, building edgier projects with unique architecture. The American Loft is one such project.

The American Loft is a condominium building currently under construction in Philadelphia’s Northern Liberties neighborhood, near the art museum. It should be completed by the summer of 2007, and is one of many residential projects currently under development in the city. It’s a mid-rise building consisting of 38 condominiums and 2 town homes.

The building’s architectural concept includes 3 “interlocking L’s” each made of a different material. Glass planes fill in the spaces between “L’s” making a “glass seam” of sorts, allowing for large terraces and creating a very unique appearance. A sloping first story supports a stylish lobby and gym area.

Even parking is unique. Parking spaces are located under the building, with a sloped ramp leading to surface level. The actual parking surface is “grass-crete” -- concrete cells with grass growing in between. The surface varies from 100% concrete at the bottom of the garage to 100% grass and trees at the highest part of the ramp.

The project’s developer is CREI, LLC (Creative Real Estate Innovations) and the architect is New York-based Archi-Tectonics. CREI has three other projects currently under development in the Center City area.

Unit prices range from $292,000 to $1.3 million. According to the developer, the building is 53% sold.

For a homebuyer interested in a unique and stylish property that stands apart from the city’s more “vanilla” condos, we think that the American Loft is an interesting choice. For more information, contact Kathy Davila of Corus Home Realty at 610.825.3225.

Are Maryland residents smarter?

According to Money Magazine, suburban Maryland residents have more graduate degrees than anyone else.

Money Magazine recently ranked cities across America by the percentage of their residents that hold graduate degrees. Amazingly, three of the top five cities are located in the Maryland suburbs of Washington, DC (all within 15 minutes of Corus Home Realty’s Rockville office.)

McLean, Virginia (also in the DC suburbs, and the headquarters of Corus Home Realty) placed in the top 10. And although Corus does not conduct business in New Jersey, Princeton, NJ (#10) is within an hour of Corus’ Plymouth Meeting office.

What accounts for these highly educated Marylanders? We’ll speculate. For starters, Chevy Chase, Bethesda, and Potomac are all in close proximity to the National Institutes of Health, a major center for medical research. Washington also boasts a large population of lawyers, and many of them make their homes in these areas. A large number of highly educated economists, researchers, and analysts performing government-related work also reside in the area.

We can’t necessarily conclude that Maryland residents are smarter, and these three towns are certainly not a proxy for the rest of the state. But if you’re looking for a home in Chevy Chase, Bethesda, or Potomac, prepare to meet a lot of highly educated neighbors.

Notable Neighborhoods: Dubai, UAE

The world’s hottest real estate market.

The world’s tallest building? Giant man-made islands shaped like palm trees? An indoor ski slope? Welcome to Dubai!

Located on a piece of land the size of Rhode Island, Dubai is one of seven sheikdoms that comprise the United Arab Emirates. Many Americans only became aware of Dubai through press coverage of the aborted “Dubai ports deal” in which a Dubai based company proposed to purchase ownership of several American port facilities. Those who are more familiar with Dubai know that it is highly modern and fast growing.

But “fast growing” is an understatement in describing Dubai. Dubai is a boomtown – widely described as a “Las Vegas on steroids.” It is truly difficult to grasp the colossal growth of Dubai and the sheer ambition of its construction projects. And it is not an exaggeration to state that Dubai is becoming a place unlike anything the world has ever seen. Take note:

• There is so much construction in Dubai that 17% of the world’s construction cranes are currently based there.
• Skiing in the desert? Dubai is home to an enormous indoor ski mountain.
• Earlier this month, plans were unveiled for the Asia Asia hotel in Dubai. It will be the world’s largest hotel, with 6,500 rooms.
• Scheduled for completion in 2008, the Burj Dubai will be the world’s tallest building when completed.
• Dubai is home to the tallest, and arguably the most luxurious hotel in the world, the Burj Al-Arab.
• It has been reported that large numbers of wealthy Russians have been descending on the area, buying fast, paying cash and bidding up residential properties. Stories abound of property values doubling in less than one year.
• Currently under construction, an entertainment destination known as “Dubailand” promises to be the world’s largest theme park. At 107 square miles, it is larger than Disneyland and Disney World combined, and is about the size of 4.5 Manhattans. It will feature replicas of the Eiffel Tower, the Taj Mahal, the Great Pyramids, and the leaning tower of Piza, all of which will be larger than the originals.

Even more audacious is a project called The World. The official web site for this project (http://www.theworld.ae/) describes The World islands as “a collection of man-made islands shaped into the continents of the world, located just off the coast of Dubai.” It will consist of 300 small private artificial islands ranging in size from 250,000 to 900,000 square feet and located in the Persian Gulf, a mile or so off the shore of Jumeirah. Each island will be sold to selected private developers and are priced at $6.85 million and up. It is rumored that Richard Branson and Rod Stewart have each purchased islands.

The Palm is yet another offshore residential development. Marketing web sites describe The Palm Islands as the “three largest man-made islands in the world.” Each island, built in the shape of a date palm tree, will support luxury hotels, freehold residential villas, unique water homes, shoreline apartments, marinas, water theme parks, restaurants, shopping malls, sports facilities, health spas, cinemas and various diving sites. Villas in The Palms are currently selling between $750,000 and $2,000,000 and short term rental properties are also available.

How is this happening? Unlike neighboring Saudi Arabia, Dubai’s oil reserves are limited. Realizing the need to diversify Dubai’s income sources, ruler Sheikh Mohammed bin Rashid al-Maktoum has placed a priority on developing the country’s trade, banking, and tourism industries. Although Dubai is not a democracy, the Sheikh has created a decidedly pro-business environment, permitted property purchases by foreigners, encouraging investment, imposing minimal regulations or taxes, and eliminating most of the red tape commonly associated with property development.

His plan appears to be working. According to some studies, tourism to Dubai is growing exponentially, with the current number of visitors standing at 5 million. Some optimistic internal estimates suggest that number may reach 10 million by 2007, and an incredible 40 million by 2015.

Corus News:

Corus is hiring part-time Neighborhood Specialists.

No license or experience is required. Earn extra money with no time commitment.

As part of its commitment to provide clients with the best guidance and expertise in their real estate transactions, Corus Home Realty is hiring a large number of part time Neighborhood Specialists throughout its service areas. On an occasional basis, Neighborhood Specialists will assist Corus Home Realty by providing clients with specific information about their local neighborhoods. Also, Corus will rely on Neighborhood Specialists to contribute local content to the firm’s real estate web site.

No license or real estate experience is required. Hours are minimal, and are extremely flexible. We do not expect Neighborhood Specialist work to interfere with any other full time work. Compensation is variable, and is based on a profit sharing model.

For more information, contact Eric Rossum at eric@corushome.com or Kathy Davila at Kathy.davila@corushome.com.