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Ten Innovations That Will Reduce The Amount of Energy We Use

By Rebecca Smith

From The Wall Street Journal Online

America is facing a crisis when it comes to electricity. But also a tremendous opportunity.

The forces that put us here look grim. Energy prices are high, supplies are increasingly tight, and anxiety is growing about climate change. But that dark outlook is driving consumers, utilities and public officials to finally take advantage of innovations that could radically reshape the nation's power consumption without lowering the standard of living.

Some are technological fixes, from more-efficient light bulbs to variable-speed motors that use less energy when the load on them isn't as heavy. Others involve public policy. States are rewriting their building codes with an eye on conservation, and Washington is trying to lay down efficiency standards for more household appliances and electronic goods. Utilities are joining the effort as well, offering consumers rebates for buying efficient appliances and urging customers to use electricity more wisely.

The good news is, "we haven't found a major use of electricity for which there aren't great opportunities for savings," says David B. Goldstein, director of energy programs at the Natural Resources Defense Council and a recipient of a MacArthur Foundation award for his work on appliance-efficiency standards.

Of course, we've all heard revolutionary promises like these before. But the promises seem to fade as each crisis recedes. So what makes this time different? Forces are converging to make the prospect of big change much more achievable.

Most urgent, of course, is the skyrocketing demand for electricity -- and the tightening supply. Many parts of the country set new records for electricity use in July and August, which sent a warning signal to officials that they have little time to act. Conservation seems a much more feasible solution than quickly building dozens of new power plants to add generating capacity -- especially if reducing emissions is a goal. The fact that the nation's energy bill totaled $296 billion last year, up nearly 50% from 1993, also provides impetus.

We've also gotten smarter about saving energy. New technology makes it possible to build more-efficient hardware without breaking the bank. And public officials now have much better data to draw on when they plan conservation efforts. They know what's worked in the past and can build on that success.

Some experts expect a transformation more profound than any since the 1973-74 Arab oil embargo. As a result of that six-month crisis, U.S. electric utilities largely weaned themselves off oil and shifted to coal and nuclear fuel for their power plants. The federal government set efficiency standards for automobiles and appliances, and building codes were revised. But much is left to be done. After all, 80% of U.S. buildings were built before 1980.

At the very least, the current push should produce considerable savings for consumers and unmistakable environmental benefits. "If you consume a lot less energy, it solves a lot of other problems," says Peter Darbee, chief executive of PG&E Corp., the San Francisco utility that serves one in 20 Americans.

Indeed, James E. Rogers Jr., chief executive of Duke Energy Corp. and president of the utility industry's leading trade group, the Edison Electric Institute, calls energy efficiency the "fifth fuel." By that he means that it's an alternative to coal, natural gas, hydropower and nuclear fuel.

Here's a look at 10 innovations capable of making a big difference immediately and in coming years:

1. Let the Light Shine

Lighting was the first market for electricity, and it's still one of the costliest. But because lighting is ubiquitous, it tends to get less attention than other big power burners like air conditioners. And that means some tremendous improvements in lighting have gotten overlooked.

Technology has improved conventional lighting systems, making them much more efficient. Take compact fluorescent bulbs, which have bases so small they can fit inside a standard screw socket. These bulbs can often cut lighting costs by 75%, and they last at least eight times as long as regular incandescent bulbs. Many even offer a soft white light that mimics incandescent light.

The bulbs are readily available in stores, and prices have dropped substantially recently. Sales volume has increased, and many utilities are offering rebates that cut the cost of 24-watt fluorescent bulbs that produce as much light as 100-watt incandescent bulbs to $1 or $2 apiece.

If each U.S. household replaced one regular bulb with a compact fluorescent, according to the Environmental Protection Agency, consumers would collectively save more than $600 million a year. The energy saved, meanwhile, would be enough to light seven million homes, and the greenhouse-gas reductions from power plants would be equivalent to taking one million cars off the road.

Then there's LED, or light-emitting-diode, technology, which is based on semiconductors. This method already has slashed power use dramatically for many cities as a replacement for conventional traffic lights. Typically, an 11-watt LED unit in a traffic light replaces a 140-watt incandescent unit, producing a 92% energy saving.

Now LEDs are poised to sweep into more industrial applications, such as supermarket refrigeration cases. For now, white LED light is more difficult to make, and thus far more costly, than colored LEDs. But lighting experts say they expect the price to drop enough in the next couple of years to permit broader use of white LEDs.

Meanwhile, a host of new methods are being adopted by consumers and companies, such as systems that "harvest" daylight, concentrating it and shooting it indoors so that buildings don't need to use as much artificial light. Nature's Lighting, of Park City, Utah, manufactures solar dishes, lined with mirrors, that sit on flat roofs and project sunlight through skylights into buildings. Diffusers distribute the bright light.

Mike Basch, a founder of Federal Express who's now chief executive of Nature's Lighting, says warehouses, auto makers and big-box retailers have been especially keen on the systems, which employees like because of the full-spectrum light.

At Wal-Mart Stores Inc., electricity is the leading expense after labor costs, exceeding $1 billion a year. So the retailer has been perfecting harvesting techniques to channel daylight into stores through prismatic skylights that concentrate the light without radiating heat. Sensors automatically adjust the store's fluorescent lights up and down in response to the amount of natural illumination available.

Wal-Mart now uses the system at nearly all of its stores, representing 330 million square feet of floor space. The systems cost about $200,000 per location and pay for themselves in two to three years through reduced electricity and cooling costs. "It's a pretty sophisticated setup," says Charles Zimmerman, Wal-Mart's vice president in charge of the initiative, who adds that Wal-Mart will gladly share its equipment specifications with anyone who wants them.

2. More-Efficient Hardware

The past few years have seen tremendous advances in the energy efficiency of hardware. For instance, new developments in industrial motors promise huge savings for businesses. Currently, the motors represent 67% of industrial energy use, according to Clark Gellings, vice president of innovation at the Electric Power Research Institute in Palo Alto, Calif. But older motors waste lots of power because they constantly switch on and off.

Now many companies are turning to variable-frequency drives. Instead of constantly turning on and off, the drives "let motors change speed in response to the load on them," says Mr. Gellings.

MGM Mirage, the big casino and hotel operator, is installing 22 of the new variable-speed drives on refrigeration units at its Las Vegas properties. The $4 million retrofit will pay for itself through reduced energy costs in about 2½ years and thereafter will save the company about $1.6 million a year.

Big gains also are being realized in air conditioning. New federal efficiency standards took effect in January for central air-conditioning units used by homes and businesses; the least-efficient units sold must be at least 30% more efficient than last year's least-efficient models. In industry parlance, that's a 13 SEER, short for seasonal energy efficiency rating, versus a 10 SEER, the standard that had been in effect for 14 years.

According to the Department of Energy, the higher standard will save a total of 4.2 quadrillion British thermal units, or "quads," of energy from 2006 through 2030 -- enough of a saving that utilities will be able to forgo building 40 new power plants nationally. Consumers, meanwhile, will save about $1 billion by 2020.

The saving might even be more pronounced than that. Many central-air units can achieve ratings in excess of 14 SEER at only slightly greater expense -- and manufacturers say consumers are very interested. One reason may be utilities like Austin Energy, a city-owned utility in Austin, Texas, which is offering a 20% rebate on air conditioners with SEER ratings of 14 or greater.

3. Smarter Sensors

Manufacturers are designing their products to be more intelligent, using advanced sensors to better control energy use and drive down operating costs. Sensors selling for a few dollars can save thousands of dollars over the course of a few years. And more companies are taking advantage of the technology.

For example, custom-sensor maker Kavlico Corp., of Moorpark, Calif., is seeing robust sales for semiconductor-based controllers used in commercial refrigeration equipment. Sensors tell a controller when to begin the defrost cycle in the freezer case, replacing automatic timers that put equipment through unnecessary heat-up-and-cool-down cycles.

The new controllers "result in a 25% to 30% reduction in power use," says Scott Farrenkopf, general manager of Kavlico, a unit of Schneider Electric of France. He says auto makers and equipment makers are ordering more custom-tailored sensors for systems designed to improve fuel economy and energy efficiency.

4. Better Measures

Consumers, meanwhile, are getting better tools for tracking energy use around the house with tools that are inexpensive and readily available. Eric Bier, a retired group-home administrator in San Diego, got concerned about his rising home utility bill. So he bought a device called a Kill-A-Watt meter, made by P3 International Corp. of New York.

He plugs the gadget, which cost about $40, into a standard wall outlet. Then he plugs various other devices into the meter, and it tells him how much power they're consuming. By multiplying this kilowatt-hour reading by his local utility's rate, he can easily figure out the monthly cost of operating the device in question.

Mr. Bier was surprised at the results of a recent home test. He learned that his new computer and accessories were using 242 kilowatt-hours of electricity a month, costing $48.50, because he never turned them off. Once he began shutting them down at night, the monthly cost dropped to about $18.80 a month for 94 kilowatt-hours of energy. On the other hand, his Roomba vacuum cleaner, from iRobot Corp., provided a pleasant surprise, vacuuming 8,960 square feet of floor space automatically each month for a total of $1.17 in electricity. "Considering how much work it does, it's a baby," he says.

Tom Lynch, director of sales and marketing for P3 International, says sales of the meters took off last winter. Sales in the first quarter of 2006 exceeded sales for all of 2005, he says, lifted by consumer worries about high utility bills.

5. Setting Standards

The federal government sets minimum standards for energy efficiency on more than a dozen products, including dishwashers, refrigerators, water heaters, room air conditioners and electric motors. From 1990 to 2000, these standards saved consumers approximately $50 billion in energy costs, according to one federal estimate.

The EPA, meanwhile, puts its own Energy Star labels on about 40 products, generally identifying the 25% of products in each category that are the most energy-efficient. In 2005, consumers with Energy Star products saved an estimated $12 billion, as well as enough electricity to power 11 million homes, according to the EPA.

But there are some glaring omissions in the EPA standards, and closing those gaps will bring more savings in coming years. For instance, television sets. The government doesn't impose an efficiency standard on TVs, and the Energy Star label identifies only TVs with low power consumption in "standby" mode -- in other words, not turned on. (Any device with a remote control is never really shut off, unless you unplug it.)

The call for a standard has grown louder as electricity use by televisions has boomed in recent years. Television screens have exploded in size, and add-on devices have proliferated, from satellite dishes to programmable set-top boxes. Some families now spend more money powering home-entertainment systems than they do refrigerating their food.

The International Electrotechnical Commission, which prepares standards for electrical and electronic technologies that often are adopted by governments, is working on common metrics to measure TV electricity consumption. After the IEC concludes its work, some efficiency information may begin appearing on sets in early 2008, the government says. Meanwhile, the EPA says it's considering Energy Star labels that would look at total power consumption by TVs instead of just power use in standby mode to give consumers a valuable tool to use when buying a new television.

The push for better disclosure is receiving some resistance from the electronics industry. The Consumer Electronics Association encourages voluntary labeling, but opposes mandatory efficiency standards for goods like TVs because "the industry has so many products and they change so fast," says Brian Markwalter, the group's vice president of technology standards.

Activists argue that the speedy evolution of products makes new standards more urgent. "Energy use has changed, and it's time for labeling to catch up," says Chris Calwell, principal in Ecos Consulting in Portland, Ore., a firm that specializes in energy issues.

6. New Building Codes

All states have building codes for health, fire and safety. But 40 also have codes for energy efficiency. The rules require, for example, at least minimal amounts of insulation in new buildings. The Department of Energy estimates code changes saved consumers $4.7 billion in lower electric bills between 1991 and 2005.

Now some of the 10 states that don't have statewide energy-efficiency codes, including Mississippi and Alabama, are considering adopting them, in part because they're facing lots of hurricane-related rebuilding. Meanwhile, several states that already have efficiency codes are considering adopting the latest version of a model code, released last winter by the International Code Council, a membership organization that creates the building codes often adopted by governments.

Experts say the latest version is shorter and less complex than the previous one; for instance, it divides the nation into eight climate zones instead of 19. At the same time, the new rules set more-ambitious goals for energy savings. The code hasn't yet been certified by the Department of Energy, but many states are moving ahead to consider it anyway. Energy-efficient building codes are expected to reduce primary energy use in the U.S. enough to save consumers $10 billion annually by 2010.

7. Incentives for Utilities

Most utilities earn higher profits as energy use rises; that's the way their rates are structured. So conservation efforts undermine their ability to make money and get reimbursed for their costs.

But many states have changed that pricing scheme to remove the disincentive for utilities to sponsor energy-reduction programs. California and some other states assess a larger proportion of a utility's costs in basic service fees, not volumetric charges based on the number of kilowatt-hours of power consumed.

In July, dozens of utilities, big energy users and regulators pledged to attack the rate-structure problem in states where it still exists and promote energy efficiency through resource planning, giving conservation more attention. Rather than build a new 500-megawatt power plant, for example, states would see if they could cut demand by 500 megawatts more cheaply and without environmental harm.

Utility regulators from more than half of these states have endorsed this National Action Plan for Energy Efficiency. The industry is engaged because most state regulators are confronted by "new plant proposals and rising rates" that they would prefer to avoid, says Diane Munns, a utility commissioner from Iowa and a leader of the effort. If the plan were adopted nationally, U.S. energy bills could be reduced by $20 billion annually, according to the EPA, a proponent of the effort.

Meanwhile, the California Public Utilities Commission is considering creating special monetary incentives for utilities that promote conservation. Says Michael Peevey, president of the commission, "I want to see utilities get a return on energy efficiency comparable to what they'd get for putting steel in the ground."

8. Variable Pricing

One of the more ambitious conservation efforts utilities are trying out -- both on their own and at the urging of regulators -- is a new kind of metering. Sophisticated electric or gas meters monitor how much energy is consumed by individual customers, taking automatic soundings several times a day instead of monthly.

This makes it possible for utilities to charge different prices by time of day or season. Regulators might use higher rates when the electric system is stressed or when fuel prices are especially high to suppress demand so fewer power plants need to run. Mr. Peevey of the California Public Utilities Commission says some consumers balk at the idea, "but when people understand this is the more environmentally sensitive option, they are supportive."

Nationwide, about 6% of electric customers have the meters in place, according to a recent study by the Federal Energy Regulatory Commission. Pennsylvania, Wisconsin, Connecticut, Kansas, Idaho and Maine have the highest usage rates, ranging from 14% to 53%.

California soon will make the list with a massive remetering project expected to cost about $3 billion. Five million customers of Southern California Edison, a unit of Edison International, will receive new meters beginning in 2008, for example. The meters will be two-way communication devices, able to send the utility instantaneous readings as well as talk to other devices like smart thermostats, which allow remote control of temperature settings. This will let consumers better control energy use -- for example, by cutting use at periods of grid stress or especially high prices.

9. Rebates

Many utilities also offer rebates on energy-efficient appliances and equipment, trying to permanently reduce demand by getting obsolete equipment retired. When New York offered a $75 bounty for old air conditioners in 2002, 160,000 units were turned in, saving enough juice over 10 years to equal a full year's output from a large power plant.

California, where consumers pay about $20 billion a year in electricity charges, has committed to spend $2 billion of customer funds on energy-efficiency programs from 2006 through 2008, a record expenditure for any state. Elsewhere, states are considered aggressive if they get utilities to spend the equivalent of 1% to 2% of electricity revenue on energy-efficiency programs.

PG&E's Pacific Gas & Electric utility will spend $974 million and expects to permanently cut demand by 600 megawatts, eliminating the need for one large power plant and 30 to 50 years of fuel. About 250 megawatts of reductions will come from lighting alone.

Some of these efficiency programs involve big rebates. GMH Capital Partners LP, a real-estate investment firm, bought a big apartment complex in Richmond, Calif., last year. It spent $327,428 rejuvenating the nearly 20-year-old structure, installing new lights, water heaters and heat-reflecting roofing materials. The expected annual energy savings: $112,000, most of which will be realized by renters at the 1,008-unit complex.

For its trouble, GMH got a rebate check for the full amount of the equipment and installation. The local utility, PG&E, made the move because most property owners won't do expensive retrofits if renters reap the savings. "It's a tough market to crack," says Beverly Alexander, vice president of customer energy at the utility.

10. Customer-response programs

Getting customers to trade up to energy-efficient equipment permanently reduces energy use. But there are ways to temporarily cut consumption, particularly among big energy users. These "demand response" programs will be more visible in coming years, especially in places like New England that are having trouble getting new plants built.

Early programs paid big energy users to reduce energy use, sometimes forcing them to curtail production. One current approach cuts consumption more painlessly, with the help of controls that dim lights or cycle air conditioners and pumps when requested by the utility.

In response to a directive from Congress, the Federal Energy Regulatory Commission recently surveyed the electric-power industry and found existing demand-response programs can cut consumption by 37,500 megawatts when activated, equivalent to the output of 75 big power plants.

In July and August, when U.S. electricity markets set new records for energy use, the outfit that runs the high-voltage electric grid in the mid-Atlantic region got big energy users to cut their usage in exchange for payments. This benefited all consumers by cutting wholesale power costs by about $650 million.

Many experts think that well-designed programs, backed by the right technology, can easily cut peak energy use by 5% to 10%. In fact, California did better than that in the 2000-01 energy crisis.

Jon Wellinghoff, a member of the Federal Energy Regulatory Commission, says consumers "easily could save billions of dollars annually" with only a modest expansion of existing programs and no impact on productivity. What you need, he says, is "a willingness to try new things."

Some utilities seem willing to go down that road. Rick Green, chief executive of Aquila Inc., a Kansas City, Mo., holding company that owns utilities in five Midwestern states, says utility executives gradually are becoming convinced they can't build their way out of the current situation, as they did in the past.

He says one employee in Colorado recently told him that when he talks to conservationists, "I don't say 'no' anymore. I say, 'Yes, if...' "

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Commercial Real-Estate Cycle Peaks and Will Pull Back in 2007

By Ryan Chittum

From The Wall Street Journal Online

The commercial real-estate cycle appears to have reached its peak and will begin pulling back in 2007, according to a new survey of industry executives.

The Urban Land Institute, a Washington-based nonprofit planning and research group, and PricewaterhouseCoopers surveyed more than 600 developers, investors, brokers, consultants and lenders this summer for an annual report on the industry, dubbed Emerging Trends in Real Estate 2007.

The survey suggests commercial real estate is beginning a return to its norm as an income-producing investment rather than the wildly appreciating asset class it has been this decade. The easy lending of the past several years will tighten next year in part because of worries about the economy, surveyed executives said. Investors will have to turn to asset management and operating performance to raise returns as investment inflows slow because of lower return expectations, respondents added.

"I think it's a clear mandate from people that you're going to have to make money the old-fashioned way," says Stephen Blank, an Urban Land Institute senior fellow who specializes in real-estate capital markets. "You're going to have to earn it" through leasing, cost control and other asset management.

The report also says real-estate investment trust stock prices "appear to have more downside risk than upside potential over the short term."

Still, those surveyed expect commercial real-estate cash flow to continue to grow as factors such as reduced vacancies and higher rents keep improving across most property types. One reason: High construction costs are putting a damper on new construction.

While the commercial real-estate market has exhibited some signs of a bubble in recent years -- driven by low interest rates and an influx of investment -- it has differed from the residential market. A key difference is that supply and demand have been more tied to vacancies and rents and not as closely linked to the rising interest rates that have cooled the housing market.

The report advises investors to sell marginal properties and hold on to well-performing ones, with an eye to improving their performance in advance of a potential economic downturn. It advises developers to "hunker down," saying most property markets don't need much new space.

A pullback in the galloping commercial real-estate market will raise capitalization rates -- the initial return on investment in the first year -- by as much as 0.7 percentage point in some property types and restrain the increase in property values, the report says. Falling cap rates mean investors are willing to take a lower return for their money. Cap rates are already rising in some areas, especially in lower-quality properties, after dropping between 2.5 and three percentage points to record lows over the past five years. Cap rates vary by property type, but high-income apartments, for instance, averaged a 5.66% cap rate in July, while limited-service hotels brought a 7.93% cap rate.

The property sectors with a "buy" in the report are warehouse, which the executives interviewed said will boom on the East and Gulf Coasts because of overflow import traffic from the West Coast, and moderate-income apartments, especially on the coasts. Retail property fared worse, with executives suggesting consumer spending will be "middling" and advising investors to sell weak properties while holding strong ones.

Those surveyed said Seattle is the best office market to invest in right now, with office rents set to rise and supply tight. The city is also sitting in a prime position to benefit from explosive growth in Asia and has the best potential of any American city to become the next "24-hour" hub like New York or San Francisco, according to the report. The report lists five U.S. cities as "global pathways" with bright futures for real-estate investment: New York, Seattle, San Francisco, Los Angeles and Washington.

Philadelphia and Chicago are ranked among the worst markets for investment in all property types in the survey. Chicago is being dragged down by economic problems, the "Midwest malaise," the report says, while investors question Philadelphia's future as a global city since it lies between New York and Washington.

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Pinnacle Books Show Evidence That It Raised Over $60 Million

By Zachary M. Seward

From The Wall Street Journal Online

A court-appointed receiver examining the books of Pinnacle Development Partners LLC has found evidence that the shuttered real-estate investment firm raised more than $60 million in the past year, higher than initial indications, a person familiar with the matter said.

Earlier, in a complaint filed on Wednesday, the Securities and Exchange Commission accused Pinnacle of operating a Ponzi scheme, and said the firm had raised "at least $30 million" from more than 2,000 investors in 33 states. The U.S. District Court in Atlanta shut down Pinnacle's investment operations and put the firm under receivership. The court also froze the assets of Pinnacle and its owner, Gene A. O'Neal.

The SEC said Pinnacle, which promised 25% returns in as little as 45 days from deals in foreclosed real estate, had misled and defrauded its investors. The commission also accused Pinnacle of offering an unregistered security in a national advertising campaign and on its Web site.

Mr. O'Neal's attorney, Michael J. O'Leary, said, "We emphatically deny that Mr. O'Neal or anybody else at Pinnacle was involved in any kind of an effort to defraud the individuals who entered into partnerships with Pinnacle."

Pinnacle investors fretted about whether they would ever receive their money back. "I barely could sleep last night," said Marvin Reyes, an information-technology specialist in Floral Park, N.Y., who invested $25,000 with Pinnacle on Aug. 31. Others, identified as investors in Pinnacle, gathered on an Internet message board and argued over who should get their money back first.

Those decisions -- if any money is recovered -- will be guided by the receiver, S. Gregory Hays, of Atlanta-based Hays Financial Consulting LLC. He was at Pinnacle's offices yesterday, according to an SEC lawyer, and couldn't be reached for comment.

William Hicks, an SEC lawyer in Atlanta, said that Pinnacle appeared to own property but he couldn't say what it might be worth. "Any property or assets that the receiver can collect, I think, would be used after expenses to compensate investors," Mr. Hicks said.

Pinnacle had told investors that it purchased foreclosed properties from banks in Atlanta, performed minor refurbishments and sold them at a profit. But the SEC said that in reality, Pinnacle had transferred the properties from one of its investor partnerships to another, without ever selling to an independent third party.

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U.S. Home Prices May Fall But Drops Will Be Mild

By Brian Blackstone

From The Wall Street Journal Online

U.S. housing prices may decline "a little" within the next year, but any such drop is likely to be mild and inconsistent with a bursting housing bubble, according to a paper written by a Federal Reserve economist.

Based on an analysis of housing futures and options and derivatives of housing-related company shares, "market participants expect home prices to decelerate sharply or actually decline a little within the next year," wrote J. Benson Durham, an economist with the Fed's monetary affairs division. However, the anticipated drop in prices "is mild compared to some estimates of the purported overvaluation of the housing market," he added. The paper, dated September, was posted on the Fed's Web site Thursday.

Mr. Durham cautioned that deep and liquid markets needed to signal future home-price trends don't fully exist and that housing futures and options have only been trading on the Chicago Mercantile Exchange since May 22. Still, implied volatility on CME housing options are greater than the historical average, "which suggests that investors see more risks to home prices going forward," he wrote. That higher uncertainty, however, is "generally inconsistent with the perception of a "bubble,'" he added.

Mr. Durham also examined options on shares of certain homebuilders to gauge whether investors see upside or downside risks to home prices. Those options "are only marginally negatively skewed at the present time," he wrote. "This suggests that market participants do not, in fact, view the risks to home prices or, perhaps more accurately, to the broader housing sector as especially tilted to the downside," Mr. Durham concluded.

The paper's conclusions seem in line with the thinking of Fed officials that the sector will slow substantially through the rest of 2006 and into 2007 but is unlikely to derail the economic expansion.

In the minutes of the Sept. 20 Federal Open Market Committee meeting, the Fed said housing "seemed to be cooling considerably" but that the overall economy should strengthen next year "as the housing correction abated." Officials also continue to remark that higher inflation poses a greater risk than a slower economy.

Housing data had declined markedly in recent months, raising fears of a housing-induced slowdown severe enough that it would eventually require Fed rate cuts. But there have been tentative signs of stabilization of late. The National Association of Home Builders index rose in October, albeit by only one point, but nevertheless breaking a string of eight straight declines. And housing starts unexpectedly rose in September, breaking a string of three straight declines.

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Real Estate Terms b

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Mean Home Price (of New or Existing Homes Sold):

The mathematical average of the prices of all homes sold in the period. The mean price of homes sold generally runs higher than the median price due to the number of very high-priced homes. The National Association of REALTORS® usually releases home price figures for existing homes sold on the 25th of the month for the previous month; corresponding figures for new homes are released a few days later by the Bureau of Census.

Median Home Price (of New or Existing Homes Sold):

Of all the homes sold during the particular period, precisely half sold for more than the median price, and half sold for less. When determining the median, only one home price matters - that of the home in the middle. Because homes sold for exceedingly low or high values only count as one unit when determining the median - i.e., their values don't matter - median home prices are generally a better indicator of home price trends than mean, or average, home prices (where all the values matter). The National Association of REALTORS® usually releases home price figures for existing homes sold on the 25th of the month for the previous month; corresponding figures for new homes are released a few days later by the U.S. Census Bureau.

Mortgage:

Mortgage loans are long term loans, usually spanning 15 or 30 years, that are directly tied to a home or other piece of real estate property. The borrower acquires a mortgage loan in order to take possession of their home. While the borrower, also known as the mortgager, has ownership and use of the property, he or she does not hold the actual title until the mortgage loan has been paid back in full. Mortgage loans come in many forms and with many options and terms. Some common types are fixed and adjustable-rate mortgages. Borrowers can either lock in a fixed interest rate or let the rate change as rates change in the market. Even though mortgages are long term loans, they can be paid off in full through a process known as refinancing. Essentially, the borrower gets a new mortgage on the home and uses the proceeds to pay off the existing mortgage. If you are considering refinancing your home, there are several factors you should think about before making your decision. These factors include the interest rate on your current mortgage, the current market interest rate, how long you plan to live in your current home, and whether or not you need money for other things such as home improvements, a new car loan, or paying off credit cards.

Mortgage Application Index: Purchase:

An index published weekly by the Mortgage Bankers Association of America which gauges the number of applications submitted for the purchase of a home. The survey covers about 40% of all retail residential mortgage transactions and is released every Wednesday for the week ending the previous Friday.

Mortgage Application Index: Refinance:

An index published weekly by the Mortgage Bankers Association of America which gauges the number of applications submitted for the refinancing of a home. The survey covers about 40% of all retail residential mortgage transactions and is released every Wednesday for the week ending the previous Friday.

Mortgage Broker:

Many lenders use the services of a mortgage broker to perform what is known as the "Origination" of the loan - to meet with and pre-qualify the borrower, verify the credit and property aspects of the loan, and then provide it to the lender for actual funding. Mortgage brokers represent the consumer. Their goal is to try to understand the needs of each consumer as well as possible and then identify and source the best loan possible for that consumer. Mortgage brokers typically generate their customers either from marketing directly to consumers or through referrals from happy customers. Be sure that you ask for customer referrals when selecting a mortgage broker.

Mortgage Loan:

A mortgage loan is money lent for the purpose of buying real estate. Mortgage loans are secured by the property that they are used to buy. If the borrower or "mortgagor" fails to pay back a mortgage loan, the lender can seize the property in a process known as foreclosure. There are many different types of mortgage loans available and each one is designed for a specific purpose. Some are more flexible that others and it is important to learn a little about each type to better determine which one is right for you. It's like shopping for anything else. You need to see all of what's out there before you can make the final decision.

Mortgage Quote:

A mortgage quote is an interest rate offered to a borrower by a lender for a home loan. The mortgage quote is tied to a number of factors including the loan type, loan length and the credit history of the applicant and can vary quite a bit among lenders. Mortgage quotes are an important step in purchasing or refinancing a loan. Mortgage rates can change hourly so it is important to check rates frequently and when you do make a decision, make sure you find out if the mortgage quote you have been given has any expiration period associated with it. When considering a mortgage rate, be sure to understand not only the specific interest rate you are paying but also whether or not your loan is an interest-only loan or you are paying off principal at the same time. You should also be sure to understand the term of your mortgage, is it a 5 year, 10 year, 30 year or one of the many hybrid variations available. Depending upon the number of years, the amount you end up paying in interest and principle and vary enormously. Lastly, be sure to find out if there are any other costs associated with closing your mortgage that are not included in your mortgage quote. Generally mortgage quotes do not include closing costs, property taxes, insurance costs, PMI costs and other miscellaneous costs which are all important costs to understand when thinking about what you can afford.

Mortgage Rate:

A mortgage rate is the amount of interest charged on the money lent for the purchase of a home. Mortgage rates are expressed annually as a percentage and have fluctuated greatly over the years. These rates are tied specifically to the purchase of real estate property and the loans associated with them are secured by the property. Mortgage rates can also vary greatly by lender and borrower and are based on many factors including market conditions, the loan type, geographic location, the loan term and the credit history of the borrower. When mortgage rates go up, it becomes more expensive to borrow money for the purchase of a home. As mortgage rates drop, consumers are able to afford to borrow more money and purchase a more expensive home. When mortgage rates drop, existing homeowners with fixed-rate mortgages should consider refinancing to lock in the lower rate.

N

New Home Sales:

The Census Bureau surveys builders nationwide and bases their figure on the number of contracts signed for new homes. Because it reflects contracts rather than closings (as is the case with existing home sales), new homes sold should more quickly reflect changes in mortgage rates and the economic environment. The reported figure is generally a seasonally adjusted, annual rate.

R

Refinance:

Refinancing is when you get a new loan to pay off an existing loan on the same house. Your new home loan may have different terms, a lower interest rate or be larger than the amount of debt owed on your existing loan. In the case of the latter, you would end up with a cash surplus known as "equity take out." Your are taking equity from your home and converting it into cash to pay for other things. Home refinancing is often done when interest rates drop because home owners can lock in a lower rate and lower their monthly payments. It is also a great way to consolidate bills and pay off expensive credit card debt.

S

Searchitis:

An uncontrollable addiction to checking home listings multiple times per day. Please remember to feed your cat/dog/fish/kids.

Second Mortgage:

A second mortgage is a mortgage on real estate which has already been pledged as collateral against another mortgage, the first mortgage. The second mortgage typically has rights to the same real estate but those rights are subordinate to the rights of the primary or first mortgage. When getting a second mortgage, the lender will typically only lend up to the difference between the total estimated value of the real estate minus the first mortgage. Like all mortgages, lenders will also consider your cash flow to ensure that you can afford to make their interest and principal payments on top of your other mortgage payment commitments. Like standard mortgages, second mortgages can have varying terms, ranging from a year up to 20+ years depending upon your personal situation. Second mortgage rates and costs tend to be similar to other mortgage rates and costs although sometimes second mortgages are more expensive to reduce the risk lenders are taking by being subordinate to the primary lender.

Securitization:

The pooling of mortgage loans into a mortgage-backed security. The principal and interest payments from the individual mortgages are paid out to the holders of the MBS security.

T

Turtling:

An overwhelming urge to pull your shirt up over your head and hide from the world as you try to grasp all the real estate industry jargon. Consult a doctor if it lasts

U

Underwriting:

The determination of the risk a lender would assume if a particular mortgage loan application is approved. Ability and willingness to abide by the mortgage loan terms, as well as the value of the property involved, are critical to the underwriting analysis.

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Real Estate Terms a

www.realestate.aol.com

A

Adjustable-rate Mortgage (ARM):

An Adjustable-rate Mortgage (ARM) is a mortgage loan with an interest rate subject to change over the term of the loan. The interest rate is tied to the performance of a specified market rate, such as the cost of funds index calculated by the 11th District of the Federal Home Loan Bank Board, or the yields on one-year or six-month U.S. Treasury securities. The amount of times the interest rate can change and how often it can change are usually determined at the time the loan is created. Usually there is also an interest rate maximum that is set for the loan. One thing to remember regarding adjustable rate mortgages is that even a minor increase in interest rates can greatly affect the monthly payments on a mortgage loan. For example, a 30-year mortgage on a $250,000 loan at 5.5% results in a monthly payment of $1419. If, over time, interest rates rise to 7%, the monthly payment jumps to $1663 for a difference of $244 per month or almost $3000 more per year. When reviewing an adjustable rate mortgage loan, make sure that interest rate changes and subsequent increases in monthly payments will not stretch your budget beyond its limits. The benefit of an adjustable rate mortgage is that it generally has lower fees and a lower interest rate than a fixed rate mortgage. There are also many more variations of adjustable rate mortgages, allowing borrowers more flexibility and ease when getting that first home loan. Also, if rate drop significantly, borrowers with adjustable rate mortgages will automatically benefit from a lower rate without having to refinance. Something to consider regarding adjustable rate mortgages is that if interest rates are hitting their all time lows and are expected to rise in the near future, it may be a good time to refinance to a fixed rate mortgage loan and lock in the low rate.

Amortization:

The paying down of principal over time. In a typical mortgage loan, the principal is scheduled to be paid off, or fully amortized, over the term of the loan.

B

Basis Point:

One one-hundredth of a percentage point. For example, if mortgage rates fall from 7.50% to 7.47%, then they've declined 3 basis points. A full percentage point is 100 basis points.

Bill of Lading:

The receipt for your goods and the contract for their transportation. It is your responsibility to understand the bill of lading before you sign it. If you do not agree with something on the bill of lading, do not sign it until you are satisfied that it is correct. The bill of lading is an important document. Don't lose or misplace your copy.

C

Cash-out Refi:

A refinancing of a mortgage in which the new principal (the borrowed amount) exceeds the outstanding principal of the original loan by at least 5%. In other words, the homeowner is taking equity out of the home. Of the mortgages it owned that were refinanced during the first three quarters of 2000, Freddie Mac estimates that more than 4 out every 5 were cash-out refis.

Conforming Mortgage Loan:

Any mortgage loan that's at or below the amount that Fannie Mae and Freddie Mac can purchase and/or securitize in the secondary mortgage market. For 2001, the loan limit is $275,000. In 2000, it was $252,700.

Consumer Price Index (CPI):

A measurement of the average change in prices paid by consumers of a fixed market basket of a wide variety of goods and services. The broadest, and most quoted, CPI figure reflects the average change in the prices paid by urban consumers (about 80% of the U.S. population). The so-called "core CPI" excludes the volatile food and energy sectors in an attempt to determine the underlying rate of inflation. Strictly speaking, the CPI is not a "cost of living" index because its fixed market basket does not allow for the substitution of goods and services due to price changes. The CPI is released by the Bureau of Labor Statistics in mid-month for the previous month.

Conventional Mortgage Loan:

Any mortgage loan not guaranteed or insured by the government (typically through FHA or VA programs).

Credit Rating:

A seemingly arbitrary number that determines if your money situation is healthy, in need of a little cold medicine or a full body cast.

Credit Report:

A credit report shows borrowing and repayment history. It shows the amount of an individual's past and present debts and whether any debt payments have been missed. Debts can include money owed on credit cards, auto loans, mortgages and more. Credit reports also show an individual's address history, indicating how often and to what extent a person has moved. Lenders use the credit report information to determine a loan applicant's borrowing potential and interest rate. A credit report that shows late payments on debt may cause a lender to charge a higher interest rate or not lend at all. In addition, a credit report that shows little or no history of borrowing can also raise the interest rate. Lenders prefer to see some history of borrowing and repayment rather than none at all. Three main companies track the credit histories of individuals and issue credit reports. These are Equifax, Trans Union and Experian. These companies get their information from a variety of sources including creditors and public records.

Credit Score:

A credit score is a number based on an individual's credit report that indicates overall credit risk. If a borrower has a high credit score, he or she is considered more likely to be able to pay off debt in a timely manner. A low credit score indicates higher credit risk and may cause a lender to charge a higher interest rate or not extend credit at all. The most common type is called a "FICO" score, named after the Fair Isaac Company that created it. FICO scores range from 350 to 850 with the median score falling around 720. A score above 750 gives a borrower the best chance of securing the lowest possible interest rate on a loan. High scores qualify for lower interest rates and increase the number of lenders competing to provide the loan. Components that determine an individual's credit score include their borrowing and payment history, the length of this history, the amounts currently owed, the types of credit used and the level of recent credit history.

E

Existing Home Sales:

Based on the number of closings during a particular month. Because of the one-to-two month period between a signed purchase contract and a closing, existing home sales are more influenced by mortgage rates a month or two earlier than the prevailing mortgage rate during the month of closing. New homes sold, on the other hand, are counted when the purchase contract is signed. The reported figure is generally a seasonally adjusted, annual rate. Data are released by the National Association of REALTORS® on the 25th of each month (or the following business day) for the previous month.

F

Fannie Mae and Freddie Mac:

The nation's two federally chartered and stockholder-owned mortgage finance companies. Forbidden by their charters from originating loans (that is, from providing mortgage loans on a retail basis), these two Government-Sponsored Enterprises (GSEs) purchase and/or securitize mortgage loans made by others. Due to their directive to serve low-, moderate-, and middle-income families, the GSEs have loan limits on the purchase or securitization of mortgages (in 2001, the conforming loan limit is $275,000). The difference between these two entities often comes down to size (Fannie's larger), business strategy and execution.

Federal Funds Rate:

Also known as the fed funds rate, this is the rate that banks charge each other on overnight loans made between them. These loans are generally made so that bank can cover their daily cash flow and reserve requirements. As the rate rises, banks have an increased incentive to keep more of their own cash on hand - making less money available to lend out to households and businesses. The Fed doesn't actually set the fed funds rate, which is determined by supply and demand of the funds; instead, it sets a target rate and, through its own purchases or sales of securities, affects the supply of funds.

Federal Open Market Committee (FOMC):

The arm of the Federal Reserve that sets monetary policy, the FOMC is scheduled to meet eight times a year. The 12 members of the FOMC include the seven governors of the Federal Reserve System, the president of the New York Federal Reserve Bank, and, on a rotating basis, four of the presidents of the other 11 regional Federal Reserve Banks.

Fixed-rate Mortgage (FRM):

A fixed-rate mortgage (FRM) is a mortgage loan with an interest rate that does not change over the term of the loan. At the time the loan is created, the rate is set and the borrower will not be subject to fluctuations in interest rates due to changing market and economic conditions. A fixed rate mortgage usually comes with higher fees or interest rates than an adjustable rate mortgage and is best when rates are expected to rise significantly in the future. While borrowers with fixed rate mortgages don't benefit from drops in interest rates, they still have the option of refinancing the mortgage loan to take advantage of the lower rate and reduced monthly payment. The only drawback is the cost of refinancing which should, if you are refinancing at a significantly lower rate, be offset by your savings in interest payments. To recap, the main risks of a fixed rate mortgage are higher closing costs and potential additional closing costs when the borrower refinances to take advantage of a drop in interest rates. The main benefit is the peace of mind knowing that the mortgage rate and monthly payment on your home loan will not change, even if market interest rates triple.

H

Home Equity:

Home equity is the difference between the current value of the house and the amount of money owed on the mortgage. For example, if you owe $75,000 on your mortgage, there are no other liens on the property and the current market value of your home is $125,000, then the home equity amount is 125,000 - 75,000 = $50,000. The down payment that you make when purchasing a home will provide you with some initial equity.

Home Equity Line of Credit:

A home equity line of credit (HELOC) is a loan that allows you to borrow money when you need it. The amount you can borrow is based on the appraised value of your home and you can borrow and repay as much and as often as you like. The only requirement is that you make a monthly payment to cover the cost of the interest on the amount borrowed. A home equity line of credit is like having a credit card with a low interest rate and high credit limit. Because it is secured by the value of your home, lenders can offer much lower interest rates than a standard credit card company. And your credit limit can be up to 80 percent of the appraised value of your home so you have a potentially much greater borrowing capacity.

Home Equity Loan:

A home equity loan is a loan that is secured by a home and limited by the current market value of the home and any additional liens or mortgages that exist. A home equity loan is also known as a second mortgage and home owners can sometimes borrow up to 125% of their homes appraised value. For example, if the home is worth $200,000 and there is a mortgage on the home of $150,000 with no other liens on the property, then the amount available for a home equity loan may be as much as $250,000 - $150,000 = $50,000. The full 125% of the appraised value may not be available in all cases and every lender will have unique requirements and limitations. Home equity loans are used in place of other types of loans when cash is needed for bills and other expenses because the interest is tax deductible and the interest rate is lower in many cases. Borrowers can still use the money from a home equity loan to buy cars or pay for a child's college tuition. Unlike a home improvement loan or construction loan, the money does not have to be spent on the home itself and can be used for anything the borrower wants. With home equity loans, borrowers can put their home equity to work for them by using the equity to buy income property or other sound investments. One thing to remember is that a home equity loan will reduce your equity in the home by the amount of the loan and will increase your monthly mortgage payment. As with any financial or investment decision, you should first consult with a financial advisor.

Home Improvement Loan:

A home improvement loan is money lent to a property owner for home repairs, updates or remodeling. Home improvement loans are not necessarily secured by the property they are intended for and may simply be classified as home improvement loans by the lender. These loans can be secured or unsecured and are usually short term. Home improvement loans are intended to increase the value of your home so it is important to think carefully about where best to put the money. After all, the money spent on home improvements is added to your overall cost of the home and you want to be able to recoup this cost if and when you decide to sell.

Home Loan:

A home loan is money provided to you by a bank or lending institution to pay for your home. In return, the bank holds the title to your home until you've paid back the loan plus interest. The money lent to you in a home loan is "secured" by the home itself. This means that in the event that you are unable to pay back the loan, the lending institution has the right to sell the property in order to pay back the loan in a process known as foreclosure. A home loan is also known as a mortgage and has many variations with different terms and interest rates. One of the key benefits of a home loan is that the interest paid on the loan is tax deductible. Home owners can deduct interest on up to one million dollars of their mortgage debt. This can translate into huge savings in income tax.

Homeownership Rate:

The number of households residing in their own home divided by the total number of households. Late in the month following the end of each quarter, the U.S. Census Bureau releases an estimate based on a quarterly survey. A record homeownership rate of 67.6% was reached in the fourth quarter of 2000.

House Price Index:

A quarterly measure of the change in single-family house prices. The HPI is a repeat sales index, meaning that it measures average price changes in repeat sales or refinancings on the same properties, and is based on mortgages purchased or securitized by Fannie Mae and Freddie Mac. Homes with mortgages above the Fannie/Freddie conforming loan limit (in 2001, it's $275,000) are not included in the sampling, nor are homes insured or guaranteed by the FHA, VA or other federal government entity. This index is distinct from the similarly constructed Conventional Mortgage Home Price Index published by Freddie Mac. Indexes are available for the nation, nine Census regions, each of the 50 states and the District of Columbia, and 329 Metropolitan Statistical Areas (MSAs). Released by the Office of Federal Housing Enterprise Oversight (OFHEO) on the first business days of March, June, September and December for the previous quarter.

Housing Starts:

The Census Bureau's monthly count of the number of private residential structures on which construction has started. Data for a particular month is released about two weeks into the following month. Data on permits issued is also released. The reported figure is generally a seasonally adjusted, annual rate.

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ERA Absolute Realty is part of honored network

Home News Tribune Online 09/17/06

NORTH BRUNSWICK — ERA Absolute Realty is part of the international global real estate network which was recently named the recipient of the 2006 J.D. Power and Associates Award for "Highest Overall Satisfaction For Repeat Home Sellers Among National Full Service Real Estate Firms."

This marks the third year in a row ERA Real Estate has received an award from this prestigious organization.

Last year, the company was the recipient of the 2005 J.D. Power and Associates Award for "Highest Overall Satisfaction For First Time Home Sellers Among National Full Service Real Estate Firms."

In 2004, ERA Real Estate received the award for "Highest Overall Satisfaction For First Time Home Buyers Among National Full Service Real Estate Firms."

"Being recognized for customer satisfaction once again by a well-respected organization such as J.D. Power and Associates is a testament to the dedication and commitment of our sales associates and staff," said Scott Lauri, Broker/Owner with ERA Absolute Realty.

"This award is a reflection of our promise to our customers to be "Always There For You' throughout the home-buying and -selling process," he added.

Locally, ERA Absolute Realty offers a host of products and services dedicated to meeting the needs of sellers such as the ERA Sellers Security Plan, a guaranteed sales program that offers sellers the freedom to close on their next home even if their current home hasn't yet sold.

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Median U.S. Home Prices Fall

http://www.realestatejournal.com/

Sales of previously owned homes in the U.S. fell less than expected in August, as prices fell compared with a year earlier, the National Association of Realtors said Monday.

The median home price was $225,000 in August, compared with a revised $230,000 in July. Last month marked the first year-to-year median price decline since April 1995, and it was the second-biggest in the survey's 38-year history.

Home resales fell to a 6.30 million annual rate, a 0.5% decrease from July's unrevised 6.33 million annual pace. Inventories of unsold homes rose to 3.92 million, a 7.5-month supply at the August sales pace, the most since April 1993.

The weakness in existing home sales followed a report last week that construction of new homes and apartments plunged by 6% in August, pushing building activity to the lowest level since early 2003.

The housing sector, which had enjoyed five boom years of record sales, has been slowing sharply this year under the impact of rising mortgage rates and a slowing economy.

NAR chief economist David Lereah said an anticipated decline in prices compared with a year earlier has begun and is likely to continue until the end of the year, helping to support sales. "With sales stabilizing, we should go back to positive price growth early next year," Mr. Lereah said.

The August resales level was above Wall Street expectations of a 6.20 million sales rate for previously owned homes. The average 30-year mortgage rate was 6.52% in August, down from 6.76% in July, according to Freddie Mac.

Existing home sales were mixed regionally. Sales rose 0.7% in the Midwest and 1.9% in the Norhtheast. They were down 2.3% in the West and 0.8% in the South.

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Your Second Home: Should You Sell, or Pass It Down to Your Kids?

By Robert Powell

From MarketWatch

http://www.realestatejournal.com/

To some it's a source of family harmony. To others, however, it's a source of great family division, anger and strife. Yes, it's the old family cottage or vacation property or compound or camp or call it what you will. And now with summer coming to a close, many Americans are trying to figure out what to do with their piece of heaven on earth.

Should they sell the property that has produced fond memories of times spent with loved ones? Or should they give it their children? Or should they do something entirely different?

Andrew Lee, a lawyer with Schaden Katzman Lampert & McClune in Broomfield, Colo., says families should deal with the issue in four steps.

1. Have a heart-to-heart

The first step is a sit-down between the family cottage owners - the parents usually - and their children. "It's best to talk about it ahead of time," he says. "Otherwise it could be a huge mess."

The parents need to ask their children straight out whether they want the property long before asking an estate-planning attorney to draft some expensive legal document. In his experience, Lee says there is a good chance, about 50%, that the kids don't want the property for one reason or another.

In some cases, the kids already have their own second home. In other cases, some of the children may live very far away from the cottage. And in still other cases, some or all of the kids may not be able to afford the property or its upkeep.

Indeed, parents should not be surprised to learn that the only reason children and grandchildren go to the family cottage is because of the parents or grandparents and if the senior generation were to pass away the kids would have no interest in visiting the property, says Lee.

"Often parents find that keeping the cottage in the family is more trouble than it's worth," he says. So, if the parents determine that the next generation has no interest in owning the family cottage, well, case is closed and the parents have saved a bundle in legal fees.

Children who do have an interest in the property, however, must go into it with their eyes wide open. They need to know the monthly nut: the mortgage, if there is one; real estate taxes; utilities; any management fees or association dues and the like. And if the family cottage doubles as a rental-income property, they'll need to know what sort of income the property generates.

In some cases, parents will learn that some but not all of the children will want the cottage. In that case, Lee says the parents will have to figure out how to pass on their assets; the house goes to the kids that want it while more money goes to the kid that doesn't want it.

2. Transfer the property

Getting a handle on whether and who wants the cottage is one piece of the puzzle. Figuring out the right way to pass the property down is the other big puzzle piece.

Often, families will use the cheap and easy way to transfer property, says Lee. They will simply add members of the next generation as joint owners with rights of survivorship or they will completely transfer the property to the next generation during the owner's lifetime by deed.

"Though easy to implement, these types of lifetime transfers can often have unintended consequences," says Lee.

For instance, adding a family member to the title of property or completely transferring the property to a family member is a taxable gift that, in some cases, could trigger a current federal gift-tax bill, he says.

In addition, if a child is co-owner on the property, then it would not qualify for the marital deduction, a tax break given to the first to die of either parent. Again, Lee says putting a child as a co-owner could create an unintended estate tax bill.

And in still other cases, adding a child as owner to a family cottage could result in a transfer tax and, worse yet, higher real estate taxes.

3. Create an LLC

Figuring out what "legal entity" should hold the family cottage must also be addressed, says Lee. Lee prefers using a limited liability company or LLC rather than a trust or "C" corporation to hold the property. The LLC is tax friendly. Plus, the LLC reduces exposure to liability.

"If mom and dad can get the kids to agree now and they are bound by those agreements there'll be less problems later," says Lee, who also recommends that family-cottage owners create an LLC to hold the property whether or not they have designs on passing it down to future generations.

4. Draft an operating agreement

Not matter how the family cottage is owned, Lee says it's crucial that there's an "entity agreement" in place that becomes the law of the land. The operating agreement, for instance, will spell out how the bills will be paid and the source of those funds.

In some cases, family members who don't use the family cottage as often as others will feel they may not have to pay as much toward the bills. The agreement will address that. In other cases, family members will collide on who gets to use the family cottage, especially around the holidays. The agreement will address that. Lee recommends that a family member serve as the calendar manager and another server as the operational manager.

And in still other cases, there will be disputes. The agreement will address how decisions will be made and how disputes will be resolved. That's especially important when it comes to sell the family cottage or one member of the LLC wants out.

In the latter case, Lee says the operating agreement will address how a member's share will be valued as well as perhaps how often a member can cash in their share of the family cottage.

-- Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News.

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Key Indicators to Examine When

Key Indicators to Examine When
Measuring the Housing Slowdown

From The Wall Street Journal Online

With the housing market clearly sagging, economists and investors are watching a variety of gauges to get a handle on the severity of the contraction.

Last week, the Commerce Department reported that construction starts on new homes dropped 6% in August from July, to an annualized 1.665 million. That "housing starts" figure was about 5% lower than forecast and 20% lower than the year earlier 2.075 million. The month-over-month decline was the sixth one this year and put housing starts at the lowest level in more than three years.

The government estimates housing starts by surveying a sample of people who have applied for building permits. In places where permits aren't required, the process includes driving around looking for new-home construction.

Other gauges track new-home sales, existing-home sales, median house prices and the inventory of unsold homes.

New-home sales for August will be released by the Commerce Department Wednesday, and are expected to be down about 17% from a year ago. July's sales were down 21.6% from a year earlier, to an annualized 1.072 million homes sold.

New-home sales figures reflect market trends more quickly than do existing-home statistics. That's because new homes are counted as sold when the contract is signed, and existing homes are counted as sold only when the deal closes, which may be 30 to 60 days later.

Existing-home sales data, coming Monday from the National Association of Realtors, are expected to be down about 13% from August 2005. The annualized rate of 6.33 million existing homes sold in July represented an 11.2% decrease from last year.

The median sales price of existing homes, which is a good indicator of the market's momentum, was $230,000 in July, up 0.9% from the July 2005 price of $228,000, according to the Realtors group. That's smaller than the double-digit year-over-year gains posted in 2005.

Some parts of the country, including the Northeast, the Midwest and the West, are reporting falling home prices. The Realtors association has said the national median house price may fall in coming months, although any decline is expected to be limited. August numbers will be announced with the existing-home sales figures Monday.

Meanwhile, there's been a spike in the number of existing homes for sale. The Realtors group says 3.86 million homes were on the market last month, up from 2.76 million a year earlier. In addition to reflecting a diminished appetite on the part of buyers, that growing inventory may reflect the unwillingness of sellers to lower their asking prices enough to tempt buyers. With more houses for sale, buyers have less incentive to bid up prices, and home builders have fewer reasons to start construction on more units.

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Bankers and Regulators Clash Over Surge in Real-Estate Loans

By Bernard Wysocki Jr.
From The Wall Street Journal Online

Federal regulators are trying to hit the brakes on commercial real-estate lending. That annoys Bradley Rock, the chief executive officer of Smithtown Bancorp Inc.

Wheeling his black Lexus sedan toward the clubhouse of the Fox Hill Golf & Country Club, Mr. Rock gazed at the lush fairways of the 175-acre property, appraised at more than $15 million. The owners of the club owe $2.7 million to his bank. "You could sell the property for massively more than the debt," Mr. Rock said. "It’s impossible for the bank to lose money."

Like thousands of community banks across the U.S., Smithtown, of Hauppauge, Long Island, has feasted on commercial real-estate loans. About 80% of Smithtown’s $800 million loan portfolio is concentrated in that category, which Mr. Rock calls "the last safe, profitable niche" for community bankers trying to compete against giant banks. The banks consider these loans — the $1 million to $10 million loan to a home builder or strip-mall owner — to be their sweet spot.

To bank regulators, the rapid growth in commercial real-estate loans — up 16% in 2005 alone to $1.3 trillion — is alarming. In January, four regulatory agencies, including the Federal Reserve, proposed a clampdown. In a draft of new "guidance," they said banks exceeding certain levels of lending in construction and commercial real estate should step up risk monitoring or add capital, or both.

The proposed guidance wasn’t a hard rule and didn’t impose limits on lending, but the bankers went bonkers. The Independent Community Bankers of America, the American Bankers Association and more than 1,000 banks wrote protest letters. The community bankers, citing the government’s own reports, said commercial real-estate loan performance is healthy and growth is driven by employment and population growth. Bankers argued that their lending practices had become far more sophisticated since the last real-estate bust in the early 1990s, while the regulatory guidance had all the finesse of a meat cleaver.

A hearing on the issue before a House subcommittee is set for Thursday. Regulators probably will issue final guidelines sometime after that, and the implications could be significant. If regulators are too lax, there could be a raft of bad loans. If they are too tough, they could prompt a credit crunch, with small business owners unable to get loans. That could cast a chill on the entire U.S. economy.

Commercial real-estate loans "can be the sweet spot — or the tar pit" for banks, says Susan Bies, a governor of the Federal Reserve. It supervises bank holding companies and about 900 state banks, including the Bank of Smithtown, a wholly owned subsidiary of Smithtown Bancorp.

The regulators conjure up memories of the late 1980s and early 1990s, when aggressive lending led to overbuilding, vacant properties, price collapses and huge losses for taxpayers. From 1987 through 1994, more than 1,100 banks and nearly 1,000 savings-and-loan institutions failed or required financial assistance, according to the Federal Deposit Insurance Corp.

"It is hard to overstate the impact of that crisis on our economy," John Dugan, the comptroller of the currency, said in a speech to New York bankers in April. Mr. Dugan’s agency, part of the U.S. Treasury, supervises more than 2,500 nationally chartered banks.

Cracking Down

Though the guidance isn’t finalized yet — and, even when completed, won’t include hard-and-fast lending caps — examiners already are cracking down, say bankers. TransAtlantic Bank, of Miami, has cut back commercial real-estate loans in reaction to the regulators’ proposals, while expanding unsecured loans to doctors, lawyers and other business customers. Chief Executive Miriam Lopez says the unsecured loans are actually riskier; the bank has more than doubled its credit department to handle the change in strategy.

"Talk about unintended consequences," says Mr. Rock, who as vice chairman of the American Bankers Association is helping lead the charge against regulators.

The 54-year-old banker grew up in Hauppauge, 50 miles east of Manhattan, where he was a high-school football star. He worked as a lawyer before becoming chief executive at Smithtown in 1990.

He has produced strong results: soaring loan and deposit growth, rising profits and minimal bad loans. The bank says investors who bought its Nasdaq-listed stock in 1995 have enjoyed a more than 20-fold return on their investment.

The Smithtown formula involves gathering deposits, currently about $835 million, at 13 branches on Long Island. The bank then lends out the money at interest rates that are more than four percentage points higher, on average, than what it pays on deposits. Demand is robust in Long Island’s mostly white-collar economy, which has enjoyed strong job growth in health care and education, according to Moody’s Economy.com Inc., although it says high costs could crimp that growth.

The bank mostly steers clear of consumer lending, such as auto loans and credit cards. Residential real estate is just 14% of the loan portfolio. Mr. Rock says Smithtown can’t compete with the big banks that blanket the greater New York market.

"Citibank, Chase, Bank of America, they spend enormous amounts of money on the mass market," Mr. Rock says. "You need to be on television every night" with advertising, he says. "There’s no way we can afford to do that."

Instead, Smithtown has a small lending team of five people who specialize in making real-estate loans to businesses. One banker focuses on loans to homebuilders. Mr. Rock’s 24-year-old son recently joined the bank and is cutting his teeth on mortgages for small commercial buildings. The bank also lends to owners of multitenant office buildings and family restaurants.

In recent years, Mr. Rock has moved into the five boroughs of New York City, lending to smaller developers who might, for example, need a $5 million loan to convert an industrial building in Brooklyn’s trendy Williamsburg section into condominiums or rental apartments.

He has an army of loyal borrowers, such as Vincent Di Canio, a Smithtown developer who has received dozens of real-estate loans from the Smithtown bank over the past 25 years. Mr. Di Canio says he goes to the big banks only when he needs more than $10 million. He is worried the regulators’ guidance will cause Bank of Smithtown to cut back lending. "It would be detrimental to me and all midsized entrepreneurs," he says.

Mr. Rock acknowledges that real-estate busts occur and can be devastating. In his first years as CEO, in the early 1990s, his own bank had several loans go sour. Often, the bank hadn’t paid attention to the income stream on the borrower’s property, he says.

He slows his car to an intersection in Melville, just off the Long Island Expressway, and gestures at rows of 250,000-square-foot office buildings that were built in the 1980s, sometimes with financing from big banks. By the early 1990s, a number of the Melville buildings lay vacant and were sold at a loss.

"Here’s your 1980s real-estate bust," Mr. Rock proclaims. "The biggest amounts came from the biggest banks putting mortgages on the biggest buildings."

Mr. Rock believes most smaller banks such as his aren’t engaging in the sort of indiscriminate lending that caused trouble 15 years ago. Nowadays, he says, he ensures that a developer’s income from property is enough to pay down the mortgage, and he leaves an ample margin of safety in his loan portfolio in case real-estate prices turn south.

Mr. Dugan, who took over as comptroller in August 2005, is less sanguine. A former Washington lawyer with many financial institutions as clients, Mr. Dugan was heavily involved in the savings-and-loan cleanup as a U.S. Treasury official from 1989 to 1993. He declined to be interviewed, but his speeches leave no question about his concerns.

At a conference last October of credit experts from the Office of the Comptroller of the Currency in Atlanta, Mr. Dugan noted that about a third of national banks had commercial real-estate loans amounting to 300% or more of their bank capital. In its simplest definition, capital is equal to a bank’s assets minus liabilities. Under U.S. regulations, banks are required to hold a certain amount of capital, measured in various ways, as a financial cushion. Mr. Dugan urged his credit staffers to continue "carefully monitoring banks where these concentrations could become, or already are, significant."

Warning Letters

Within weeks, the office’s regulators in the field were sending out letters to banks, warning about concentrations.

Community bankers say the letters made them shudder. "I was very upset," says Everett Crawford, chief executive of First National Bank of Artesia, N.M. If he has to cut back such lending, "it will diminish the franchise," says Mr. Crawford, who worries the 103-year-old institution may have no choice but to sell itself.

By all accounts, banks have a much better handle on their loan portfolios these days than two decades ago. Nonetheless, regulators fear standards still aren’t strict enough sometimes.

The letter Mr. Crawford received was from Kay Kowitt, a deputy comptroller of the currency. She didn’t single out his bank but dwelt on several emerging problems among the 400 banks supervised by the western district of the agency. Noting that "competition in virtually all markets is intense," the letter fretted about "liberal terms for speculative land loans" and said some borrowers had only a thin margin between the cash flow from their property and their loan repayments. It also questioned whether some banks are getting fully independent property appraisals.

Regulators also believe new forces in the market are pushing up real-estate prices. One new factor: Unlike small banks, the biggest banks often are selling their commercial loans to be packaged into securities and sold to global investors. That market is making it easier for banks to come up with money for loans, which in turn boosts demand for commercial property.

In April, Mr. Dugan sounded the alarm bells again, this time before the New York Bankers Association. In the late 1980s and 1990s, he said, failed banks had three times the real-estate concentrations of banks that survived. With Mr. Rock looking on, Mr. Dugan also defended the guidance proposed by his agency and three others. It would single out for scrutiny banks that have lent more than 100% of their capital in construction or more than 300% of their capital in commercial real estate generally.

Smithtown’s portfolio is way over the guidelines because its commercial real-estate loans amount to 750% of, or 7.5 times, its capital. Mr. Rock believes it is simplistic to lump all commercial real estate into "a single bucket." His portfolio, he argues, should instead be viewed as "75 buckets" of diverse loans with different maturities and risks. Mr. Rock says he welcomes examinations, but he thinks examiners should dig down and assess the risks of individual loans and various types of loans.

In a June 20 meeting that Mr. Rock and officials from the American Bankers Association held with regulators, Mr. Rock complained that field examiners are using the measures in the guidelines to "beat up" banks with heavy concentrations of commercial real-estate loans. "Susan, here’s the essence of the disconnect," he says he told Gov. Bies of the Fed. "You call it guidance, but examiners are in my bank, criticizing me for having too many commercial real-estate loans."

Gov. Bies, in an interview, says she hasn’t received concrete evidence of overzealous activity by bank examiners, but she says the Fed will start a training program for its staff once the guidance becomes final. Regulators say their metrics are a valuable screening device to flag potential problems. Bankers say the definition of a commercial real-estate loan is too broad.

On a recent afternoon, Mr. Rock drove around Suffolk County, his prime lending area, and stopped outside a medical office building. He has extended a $350,000 line of credit to the doctors backed by the property, which he said is valued at two to three times that amount. He drove past one of Mr. Di Canio’s housing developments, with 34 single-family units under construction, and said his lenders minimize risk by doling out money little by little as the work progresses.

Then Mr. Rock drove a few miles out to the Fox Hill golf club. If the property ever got developed into houses on half-acre lots, he said, it could be worth $40 million or more. "This is just my idea of an absolutely great loan," Mr. Rock said. "But the regulators are saying I have a ‘concentration.’ So if another one comes along like this, I’m supposed to turn it down."

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