Sunday, 05/15/05
By KEITH RUSSELL
Staff Writer

Kevin Thomas’ hometown of Turlock lies near the heart of central California’s Mother Lode region, where speculators once flocked to mine the gold-laced western slopes of the Sierra Nevada foothills.

More than a century later, Thomas is about to secure his family’s financial future thanks to a different sort of gold rush made possible by California’s hyper-appreciating real estate market. This fall, the 42-year-old electrician expects to pay cash for a newly built $255,000 home in developer Richard Halcomb’s Stone Creek subdivision in Gallatin. The money will come entirely from the proceeds of selling the home in Turlock that Thomas bought for $240,000 four years ago. The expected selling price: $519,000.

”I’m 42, and I’m going to own my house outright,” said Thomas, a Turlock native who owes about $190,000 on his current mortgage. ”That’s almost everybody’s dream. That’s huge.”

Such dreams are becoming a possibility for Thomas and an untold number of other Americans willing to move from high-priced metropolitan areas to places such as Middle Tennessee, where home values have heated up of late but are far from boiling over like markets on the West and East coasts.

The arrival of these coastal migrants illustrates one more way the nationwide housing boom of the past few years has injected life into Nashville’s residential real estate market, which has set records for the number of homes sold and constructed each of the past two years.

Historically low interest rates and a stable economy have spurred record levels of demand from home-buyers across the country, but nowhere more so than in booming markets such as Southern California, the San Francisco Bay area and much of Florida and the Northeast.

In the Los Angeles area, for example, the median price of single-family homes has risen from $290,000 in 2002 to $474,700 at the end of March, an increase of 64%, according to data from the National Association of Realtors. The median price in the Nashville area, by comparison, has risen by about 14% in the past three years, to $154,000 at the end of last month, based on sales data compiled by the Greater Nashville Association of Realtors.

The national median price for a home has risen by 19% since 2002, to $188,800.

For people with homes in these hot markets, their fast-rising property values are affording them the chance to engage in a highly profitable form of real estate arbitrage — a classic case of selling high and buying low.

”The price per square foot in a lot of these places can be double what it is in Nashville,” said Edsel Charles, whose research firm Market Graphics follows real estate trends in Tennessee and 15 other states. ”It’s a tremendous windfall for the people coming in (to Middle Tennessee).”

People such as Thomas are also deciding to sell as speculation grows that California and others are in the midst of a real estate bubble that’s bound to pop sooner or later. He points to the housing market in Turlock, where he said values are skyrocketing thanks to growing numbers of commuters fleeing even higher prices in the Bay area 80 miles to the west.

”We call them BATs — Bay Area Transits,” Thomas said. ”So many people are coming over from the Bay area and are willing to spend tons of money. It’s nuts. I decided it’s best to make the jump now before something happens.”

Moving to the Midstate

Charles said the influx from California and other higher-priced areas is part of an overall increase in the number of people moving to the Nashville area, which has seen its population grow by 7.4% since 2000 to 1.54 million, according to the U.S. Census Bureau. In some new subdivisions, he said builders report to him that as many as 40% of their new home-buyers are transferring from outside the area.

In Summertown, about an hour’s drive southwest of Franklin, real estate investor Richard Campbell is developing Whispering Pines, a 400-acre resort community with room for 60 retirement or vacation homes priced between $325,000 to $1.2 million. Of the four lots that have been purchased, two are residents of the Northeast, including Larry Mead, a former AT&T executive who lives in Morristown, N.J. He intends to build a log home there to use as a retirement base and be near a daughter who lives in Franklin.

”Nashville I think has the highest transfer-in rate of any city in any of the 16 states we track,” said Charles, basing his conclusions on conversations with his approximately 500 home-building clients.

Examples can be found in every segment of the Nashville area’s housing market, although their exact numbers can be difficult to pin down.

Murat Arik, an economist with Middle Tennessee State University’s Business and Economic Research Center, estimates that roughly 18,782 households moved to Davidson and seven surrounding Midstate counties in 2003, according to Internal Revenue Service tax records. Of those about one-fourth moved from Florida, California and the Northeast. About 1,200 households came from California.

Given the lack of hard data, it’s difficult to assess what impact buyers from high-priced areas are having on the local housing market. But Charles said it would likely raise local property values.

”It keeps prices higher, because they see the houses here as so cheap,” Charles said. ”People are more willing to pay full price, or even offer 102% or 103% of a selling price just to get a deal done.”

Reasons for moving

The reasons cited by those coming from booming markets are as varied as the approaches they have taken with their windfall. Many have come as a result of the string of corporate relocations Nashville has benefited from, such as Asurion, a wireless products company that moved its headquarters here from San Mateo, Calif., in 2003. The company has since brought workers from several other cities with high-priced real estate markets, including Miami and the Bay area.

David Houston moved to the Nashville area three years ago to take a senior management position at the Nashville headquarters of Every Nation Churches and Ministries after serving as a pastor with the church in the Los Angeles area for more than 20 years. His family’s 4,800-square-foot home in Tarzana, an affluent suburb in the San Fernando Valley, had doubled in value by the time he sold it for about $1.5 million in 2002.

For the same price, Houston and his wife were able to buy a luxury home twice as big in Laurel Brooke, a gated community in Brentwood.

”In L.A. this might be worth $4 million or $5 million,” said Mary Suto, a managing broker with Crye-Leike Realtors who used to live in Los Angeles and works as Houston’s Realtor.

Houston — who can afford such a large estate thanks to family wealth earned independent from the church — has since put the property on the market but plans to stay in the area as he and his wife downsize after the high school graduation of their youngest daughter.

”Here, it feels like you’re living in a forest,” Houston said of the Nashville area. ”In L.A. the homes are so close to each other.”

Quality-of-life issues also prompted Mark Haining to consider leaving the Los Angeles area, where he worked in advertising and direct marketing of music industry clients. He moved to Nashville two weeks ago with his wife and son Hudson, 3, partly at the urging of friends he knew in the music business who had already made the pilgrimage to Music City.

”In L.A., people are so busy trying to make a living,” Haining said. ”Here, people actually smile at you when you pass by them; they seem sincere. It’s a better environment for Hudson.”

That being said, the Hainings benefited greatly from L.A.’s rising housing market. After seeing the value of their Studio City home appreciate 20% each of the past two years, the couple recently sold the property for just under $1 million. They plan to put the several hundred thousand dollars they earned off the sale to buy a home in a neighborhood near Belmont or Vanderbilt University and possibly invest in one or two rental properties.

Thomas took a slightly more systematic — if unorthodox — approach to choosing the Nashville area after his wife told him she wanted out of Turlock two years ago. He took out a map of the United States and began crossing out regions unacceptable for any number of reasons.

”I don’t want to live near the Canadian border — it’s too cold,” he recalled of his thinking. ”I don’t want to live near the Eastern seaboard or the hurricanes will get me, or the Midwest and places like Oklahoma or Texas because the tornadoes will get me. I don’t want to live in the deep South, and the West has no water. You take a look at the map, and Kentucky and Tennessee are pretty much all that’s left.”

By Richard Courtney
April 29, 2005

David Lereah, the chief economist for the National Association of Realtors (NAR), visited Nashville last week for lectures at Vanderbilt and discussions with members of the Greater Nashville Association of Realtors.

Dr. Lereah is one of the nation’s most prominent housing economists, and has authored numerous books on the subject.

His latest book is titled Are You Missing the Real Estate Boom? and, in spite of its title, explains that there is not a real estate boom at all. Rather, we are in a state of real estate expansion, and have been since 1991 when interest rates dropped below 10 percent for the first time in decades.

Lereah explained that in 1991, mortgage loan originations reached a level of $450 billion, a healthy number. Last year, the loan originations topped $4 trillion. During the same period, individual home sales rose from 3 million in 1991 to 8 million last year. Such growth is unparalleled in any other sector of the economy.

The sustained expansion has forced conventional wisdom to be thrown into the wind as anomaly after anomaly has occurred to the point that they are now the norm.

For example, in 1998 interest rates were at 6 percent. In 2000, the rates rose to 8.3 percent, according to Lereah.

A 33 percent jump in rates should have a profound effect on the housing market. Surprisingly, in 2000, record home sales were recorded. The following year, 2002, the economy went into a recession. Stock prices were negatively impacted, as was most of the economy. That’s why they call it a recession.

In the middle of the recession, house sales again posted record numbers. Not to be outdone by the previous years doom, in 2002 and 2003, almost 4 million jobs were lost. Four million potential homebuyers were taken out of the market from the previous year. Amazingly, home sales rose at a record pace.

This is not a boom. This is healthy expansion as described by Lereah.

Subhed: Fueling the fire

One reason for the continued increase in sales numbers is due to technology, as the costs associated with obtaining a home loan have dropped. Additionally, with the new technology, lenders are able to make more loans.

As the expansion has continued, more money is flowing into real estate. As Lereah said, “Billions of dollars are leaving Wall Street and going to Main Street.”

This has caused real estate to appreciate, and at times that appreciation is dramatic.

Lereah cited the Las Vegas housing market as a good example. In Las Vegas, property values have increased 52 percent in the past year. Yet, Dr. Lereah emphasizes that such growth does not represent a “boom,” for the demand is driven by Californians selling their homes at prices that average in the $800,000s for comparable real estate in Las Vegas for an average price of $285,000.

Even with this 52 percent rise in value, there is room for more growth. Therefore, there is no boom, per se. And, absolutely, no bubble. The real estate bubble is not a reality according to the good doctor. Rather, he sees the expansion as a balloon that may have some air released from time to time, but will not burst.

In Nashville, there has been a shortage of inventory the last two years. Lereah noted that the inventory is lower throughout the nation and attributes some of the problem to the fact that people are living five years longer than they did 10 years ago, As a result of this longevity, homes that would have hit the market are being inhabited for an additional five years. Doggone doctors.

One reason Lereah feels that there can be a depressed housing market is that all real estate is local. If one house sells for less that the market on one street, all of the similar houses all across the country will not follow suit.

In order for even a local residential real estate market to falter, Lereah says there must be a perfect storm. This storm would occur in a market with at least three years of double-digit inflation, an inventory that increased significantly and a negative local economic event. He suggested that Boston is experiencing that storm at present.

As for the future, Dr. Lereah feels that this expansion should continue for another three years minimum, and could go for as long as 10 years. He sees interest rates hitting 7 percent by year end an maybe as high as 8.5 percent the following year. But as you will recall, none of that matters. Real estate is boomproof.