Hitting a Home Run
BY SAM WILLIAMS

[This is a pre-edited draft of a business story that appeared under the headline "Hitting Home Run" in the New York Post, June 11, 2004.]


Sellers and brokers aren't the only ones riding the latest boom cycle in real estate.

From developers throwing up new construction to homeowners squeezing extra cash out of existing dwellings, the wealth effect caused by the latest surge in home prices is lining pocketbooks around the city and across the nation.

"All you have to do is ride through the boroughs," says Randy Lee, president of Leewood Real Estate, a company specializing in low-rise construction. "There isn't a neighborhood out there where you don't see at least some activity."

The New York City Department of Buildings offers solid verification. Last year, the department issued 6,088 new construction permits, 18 percent more than the number of permits issued in 2002. Major renovation permits rose eight percent to 5,889 during the same period.

"There's so much going on even the bad contractors are busy," says Butch Galante, owner of Galante Home Improvement and president of the Staten Island Home Improvement Contractors Association. "It's kind of scary."

Even scarier is the amount of debt underwriting the latest wave of home construction, purchasing and renovation.

According to federal statistics, the average New York City refinancing loan, money borrowed to pay off existing loan debts at a higher interest rate, doubled to $239,000 during the 2000 to 2002 period. Meanwhile, the average home improvement loan -- money lent against existing equity to fund household improvements -- quadrupled to $63,000 during the same two year period.

Although Galante jokingly refers to customers' debt-backed cash as "funny money" the effects on his business have been serious.

"Instead of searching for $10 or $20,000 to do one thing, a bathroom say, people are going after the big $80 to $100,000 renovation loans and building the home of their dreams," Galante says.

In cases where homeowners happen to live in high demand neighborhoods, such investments have their basis in logic. According to the Corcoran Group, a Manhattan-based real estate firm, the average price of a Manhattan one bedroom apartment sold for a little more than $1 million in the first quarter of 2004, a 32 percent rise over 2003 first quarter prices and a full ten percentage points better than the S&P 500 during the same 12 month period.

"In some cases you can do $30 to $50,000 of remodeling work and increase the value of your house by 50 to 75 (percent)," says Gary Matthews, a Manhattan certified public account who has given the green light to clients' home improvement plans.

Such returns, coupled with banks' willingness to underwrite the investment, are a reason real estate and construction, two sectors that have historically provided a bellwether for the U.S. economy showed barely a hiccup during the recent recession.

"We cruised through this one in a way we've never really seen before," says David Seiders, chief economist for the National Association of Home Builders.

Now, with the U.S. economy accelerating once again, Seiders says its hard to tell how the real estate and construction sectors will react. Like many, he expects higher interest rates to put a damper on home improvement and refinancing activity. At the same time, however, the surge in new jobs will bring new consumer dollars into the marketplace.

"We've never seen a real estate housing bust when the economy is in this kind of a stage of expansion," says Seiders.

Ronald Gold, a Manhattan real estate appraiser, is a little less sure that banks, real estate companies, and local home buyers will be able to stave off a correction, even with the economy moving full speed ahead. Looking at recent home sales, he sees a parallel not only between now and the late 1980s, the last time New York real estate prices surged this fast, but also with the dotcom boom of the late 1990s. In both cases, he says, investors who were rich on paper mistook economic activity for legitimate, economic growth.

"We may have reached the top of the market," Goldman says, noting a recent slowdown in deals ahead of the Federal Reserve's anticipated rate increases. "I say that guardedly because the market has been obscene for five years now, but I tend to believe the market is unaffordable in its current state and we've priced ourselves out of reality."