No Exposure to Mortgages? Think Again

Every time the subject of banks making risky home loans to bad credit risks -- no money down, no questions asked -- the usual retort is that banks sell the mortgages. They aren't at risk. It doesn't matter if the loan stops performing because they don't own it.

That's not exactly true. According to the Federal Reserve's Flow of Funds report for the fourth quarter of 2005, mortgages accounted for 32 percent of commercial banks' financial assets. Throw in agency- and mortgage-backed securities, and the exposure to outright and securitized mortgage loans is 44 percent.

What happens to housing matters to the economy -- and not just because of the effect that reduced equity extraction would have on consumer spending if home prices were to stabilize or decline. It matters because mortgages are the big kahuna on banks' balance sheets. If enough of these loans go bad, as they did in the late 1980s and early 1990s, it could impair the banking system's ability to extend credit, with all that implies for the economy.

If history is any guide -- if this time isn't different -- when the banking system is broken, the economy doesn't work. The Great Depression, the savings-and-loan crisis in the U.S. in the early 1990s, and the lost decade-plus (1990s and early 2000s) in Japan all saw an extended period of bank balance-sheet contraction, which hampered economic growth.

Speculation Shift

In the early 1990s, which saw the biggest number of U.S. bank failures since the 1930s, it took an extended period of low interest rates for the economy to regain its footing.

In the 1980s housing boom, the villain was speculative building. After the bust, regulators clipped builders' wings.

This time around, it's been speculative buyers who have provided the tailwind to the housing boom.

``We've outsourced the speculation,'' says economist Michael Carliner of the National Association of Home Builders in Washington. ``The non-owner-occupied share of mortgages has been rising since the mid 1990s.''

According to LoanPerformance, a unit of First American Corp. that maintains the two largest databases of mortgage information in the country, 17.1 percent of purchase loans were investor or second-home loans. As recently as 2000, that share was 7.7 percent.

Of course, there's an incentive to lie about the nature of a home purchase, claiming primary residence rather than second or investment home to avoid the higher interest rate. While the premium for a mortgage on a non-owner-occupied home has come down over time, encouraging buyers to be more truthful, the statistics probably understate the number of homes bought for investment.

Increasingly Exotic

Turning to the type of loans used to finance home purchases, interest-only and negative amortization ARMs were almost 42 percent of the market last year, up from 32.6 percent in 2004, according to LoanPerformance's asset- and mortgage-backed database, which does not include Fannie Mae and Freddie Mac securities. As recently at 2001, only 1.9 percent of purchases were financed with so-called exotic mortgages.

The good news is that to date, the delinquency rates for loans on owner-occupied homes and second/investment homes are almost the same, according to LoanPerformance.

That doesn't mean there's nothing to worry about, according to Andy Laperriere, a political economist with International Strategy & Investment in Washington. In an article in the April 10 issue of the Weekly Standard, Laperriere outlined some potential ``Housing Bubble Trouble.''

First-Time Risk Takers

-- 43 percent of first-time home buyers made no down payment last year, according to a study by First American Corp.

-- 22 percent of the borrowers with initial interest payments of 2.5 percent or less have negative equity in their homes (the market value is less than the size of the loan); 40 percent have less than 10 percent equity.

-- About one-quarter of the jobs created since the 2001 recession have been in construction, real estate and mortgage finance.

The press has been filled with stories of folks buying houses for the sole purpose of flipping them in a year for a 25 percent profit. Even if the idea of buying a home for the steady rental income had crossed their minds, they would have been disappointed to see how divorced prices were from rents, Laperriere writes.

When prices stop appreciating, the speculative tailwind behind the housing market will abate. At that point, the true measure of outright speculation versus good old-fashioned home ownership should become apparent.

The froth in the housing market finally caught the attention of the regulators last December. The Office of the Comptroller of the Currency, the Fed and the other financial regulatory agencies issued ``guidance'' on ``non-traditional mortgage products,'' highlighting the potential risks and recommending banks perform due diligence on borrowers' ability to repay their loans.

It would certainly be a first if regulators got into the act before any fallout occurred.

China Shows No Signs of Slowing as Investment, Exports Soar

China, the world's fastest- growing major economy, showed no sign of slowing in the first quarter as investment in factories and real estate surged, a government report may show tomorrow.

Gross domestic product in China, which overtook the U.K. to become the world's fourth-largest economy last year, rose 10.2 percent in first quarter President Hu Jintao said on April 16. The government will officially release first- quarter economic indicators tomorrow in Beijing.

China's foreign-exchange controls and relaxed curbs on lending have led to an abundance of cheap credit for real estate and manufacturing projects. The nation's increasing dependence on investment and exports for growth makes government efforts to encourage consumption more urgent, economists said.

``The government's riding a tiger and they are scared of getting off,'' said Andy Xie, chief Asia economist at Morgan Stanley in Hong Kong. China's investment and export- led growth model is ``isn't sustainable. We need to see improvements in social security and healthcare that will help unleash China's consumption potential.''

Two years after Premier Wen Jiabao cracked down on excessive lending to industries such as steel and property, China is still expanding on the back of an export boom that drove three years of 10 percent growth.

Investment in fixed assets in urban areas in the first two months of the year accelerated to 26.6 percent from a year earlier, up from 24.5 percent in the same period in 2005. First-quarter growth was likely barely changed at 26.4 percent, according to a Bloomberg News survey. The trade surplus in the first quarter widened 41 percent to $23.2 billion, the government said last week.

Hu's Concern

The growth figure presented by Hu topped all forecasts in a Bloomberg News survey of 25 economists compiled before his remarks. The president said he was concerned about the quality of China's growth.

``We are concerned about the pace of development and the quality and the effect of our growth,'' he said last week. ``We are also concerned about saving our resources, environmental protection and the improvement of our people's livelihood.''

Investment accounted for 45 percent of China's economy in 2004, the most since 1994, and that ratio could climb to an a record 50 percent this year, the Asian Development Bank said this month. The government has not yet released data allowing economists to precisely calculate the share of investment in GDP last year.

The share of consumption fell to 55 percent in 2004, the lowest since free-market reforms began in 1978, the Asian Development Bank said without giving a forecast for this year.

Blueprint

In announcing their blueprint for economic development for the coming five years in October, China's leaders said they will encourage more balanced growth and seek to stimulate consumer spending in an economy where per capita incomes are 24 times lower than in the U.K. and 10 times lower than in South Korea.

``If you look at the growth pattern in the first quarter, it's going against what the government wants to see,'' said Ha Jiming, chief economist at China International Capital Corp., the nation's largest investment bank. ``If China keeps growing like this we could see more overcapacity and deflationary pressure on the economy.''

Rapid growth in the money supply, fuelled by higher savings and surging foreign exchange reserves, is providing banks with a flood of capital to lend for investment projects, threatening to inflate asset prices and add to the $162 billion of bad loans at the nation's banks.

M2, the broadest measure of money supply, grew 18.8 percent from a year earlier in March, close to the fastest pace in two years. The central bank targets 16 percent expansion this year.

Lending

New yuan lending jumped 70 percent from a year earlier in the first quarter, to 1.26 trillion yuan ($157 billion), the central bank said April 14. That was equal to half of the bank's 2.5 trillion yuan loan growth target for the full year.

``The recent data has strengthened the central bank's view that overinvestment is a systemic problem in the economy and that asset bubbles are everywhere,'' said Stephen Green, a Shanghai-based economist at Standard Chartered Bank. ``We are going to see some serious policies introduced over the next few weeks.''

The central bank may raise the ratio of deposits that banks must keep as reserves and allow the yuan to rise faster against the dollar to stem liquidity growth, according to economists including Green and Grace Ng at JPMorgan Chase & Co.

Foreign Exchange

Faster appreciation of the yuan, which has gained only 1.2 percent against the dollar since a 2.1 percent revaluation in July, may help moderate growth in the nation's foreign exchange reserves and rein in money supply growth.

The nation's foreign-exchange reserves are now the highest in the world, surging 32.8 percent from a year earlier to $875.1 billion at the end of March, the central bank said last week.

The government's focus on raising consumption to sustain the nation's pace of growth could take years to achieve, economists said.

``China is at a point in growth where South Korea was in maybe the mid-to-late 1960s,'' said Standard Chartered's Green. ``It took Korea another couple of decades before it got to a situation where it was a much more consumer-reliant economy.''

China Shows No Signs of Slowing as Investment, Exports Soar

China, the world's fastest- growing major economy, showed no sign of slowing in the first quarter as investment in factories and real estate surged, a government report may show tomorrow.

Gross domestic product in China, which overtook the U.K. to become the world's fourth-largest economy last year, rose 10.2 percent in first quarter President Hu Jintao said on April 16. The government will officially release first- quarter economic indicators tomorrow in Beijing.

China's foreign-exchange controls and relaxed curbs on lending have led to an abundance of cheap credit for real estate and manufacturing projects. The nation's increasing dependence on investment and exports for growth makes government efforts to encourage consumption more urgent, economists said.

``The government's riding a tiger and they are scared of getting off,'' said Andy Xie, chief Asia economist at Morgan Stanley in Hong Kong. China's investment and export- led growth model is ``isn't sustainable. We need to see improvements in social security and healthcare that will help unleash China's consumption potential.''

Two years after Premier Wen Jiabao cracked down on excessive lending to industries such as steel and property, China is still expanding on the back of an export boom that drove three years of 10 percent growth.

Investment in fixed assets in urban areas in the first two months of the year accelerated to 26.6 percent from a year earlier, up from 24.5 percent in the same period in 2005. First-quarter growth was likely barely changed at 26.4 percent, according to a Bloomberg News survey. The trade surplus in the first quarter widened 41 percent to $23.2 billion, the government said last week.

Hu's Concern

The growth figure presented by Hu topped all forecasts in a Bloomberg News survey of 25 economists compiled before his remarks. The president said he was concerned about the quality of China's growth.

``We are concerned about the pace of development and the quality and the effect of our growth,'' he said last week. ``We are also concerned about saving our resources, environmental protection and the improvement of our people's livelihood.''

Investment accounted for 45 percent of China's economy in 2004, the most since 1994, and that ratio could climb to an a record 50 percent this year, the Asian Development Bank said this month. The government has not yet released data allowing economists to precisely calculate the share of investment in GDP last year.

The share of consumption fell to 55 percent in 2004, the lowest since free-market reforms began in 1978, the Asian Development Bank said without giving a forecast for this year.

Blueprint

In announcing their blueprint for economic development for the coming five years in October, China's leaders said they will encourage more balanced growth and seek to stimulate consumer spending in an economy where per capita incomes are 24 times lower than in the U.K. and 10 times lower than in South Korea.

``If you look at the growth pattern in the first quarter, it's going against what the government wants to see,'' said Ha Jiming, chief economist at China International Capital Corp., the nation's largest investment bank. ``If China keeps growing like this we could see more overcapacity and deflationary pressure on the economy.''

Rapid growth in the money supply, fuelled by higher savings and surging foreign exchange reserves, is providing banks with a flood of capital to lend for investment projects, threatening to inflate asset prices and add to the $162 billion of bad loans at the nation's banks.

M2, the broadest measure of money supply, grew 18.8 percent from a year earlier in March, close to the fastest pace in two years. The central bank targets 16 percent expansion this year.

Lending

New yuan lending jumped 70 percent from a year earlier in the first quarter, to 1.26 trillion yuan ($157 billion), the central bank said April 14. That was equal to half of the bank's 2.5 trillion yuan loan growth target for the full year.

``The recent data has strengthened the central bank's view that overinvestment is a systemic problem in the economy and that asset bubbles are everywhere,'' said Stephen Green, a Shanghai-based economist at Standard Chartered Bank. ``We are going to see some serious policies introduced over the next few weeks.''

The central bank may raise the ratio of deposits that banks must keep as reserves and allow the yuan to rise faster against the dollar to stem liquidity growth, according to economists including Green and Grace Ng at JPMorgan Chase & Co.

Foreign Exchange

Faster appreciation of the yuan, which has gained only 1.2 percent against the dollar since a 2.1 percent revaluation in July, may help moderate growth in the nation's foreign exchange reserves and rein in money supply growth.

The nation's foreign-exchange reserves are now the highest in the world, surging 32.8 percent from a year earlier to $875.1 billion at the end of March, the central bank said last week.

The government's focus on raising consumption to sustain the nation's pace of growth could take years to achieve, economists said.

``China is at a point in growth where South Korea was in maybe the mid-to-late 1960s,'' said Standard Chartered's Green. ``It took Korea another couple of decades before it got to a situation where it was a much more consumer-reliant economy.''

Doors Close for Real Estate Speculators

Investors who sought quick profits buying and selling real estate in the Washington region are in full retreat, dampening demand for homes, most notably for condos.

What is becoming apparent, market watchers say, is how big a part speculators played in the region's real estate boom of the past few years. Not just condominiums, but also townhouses and single-family houses, were snapped up by investors using no-money-down financing and non-traditional loans. They helped send prices soaring at unprecedented rates. And now many are trying to sell, or rent at a loss. Some may eventually dump properties at low prices to get rid of them. That could weigh down values for everyone.

Sales of new condos fell 43 percent in the first quarter of the year, compared with the first quarter of 2005, according to one report, and there are almost four times as many existing condos for sale than last year.

"We think the softness of the market is largely due to the pulling out of investors," said Gopal Ahluwalia, staff vice president for research at the National Association of Home Builders. "They have not only pulled back, they are canceling purchases."

David Bath, a retired dentist in Reston, rode the boom up. A condo he bought in Vienna for $97,000 sold for $250,000 in a single day. He was able to sell another condo in Herndon for an even bigger profit.

Now he wants out. He has had no luck finding buyers for two investment houses and a four-unit apartment building he owns in Florida. He has been stuck making mortgage payments on vacant houses that took a lot of time and money to repair.

"It's a lot of work and I don't see the returns anymore," he said. "I'm going to the table to cash my chips in."

While condominiums were the product of choice for investors, luxury neighborhoods also fell prey to real estate speculation, leading to the prospect of price drops even in affluent subdivisions.

"Here we had it even in $1 million homes," said Kenneth Wenhold, Virginia and Maryland director for Metrostudy, a real estate information firm.

Robert Toll, chairman and chief executive of Toll Brothers Inc., which builds luxury homes, said in a recent conference call with analysts that the Washington market was the hardest-hit in the nation by investors who bought properties intending to flip them, and who have put the homes up for sale. "We can feel the impact of speculative play coming back into the market," he said.

Nobody knows exactly how much of the real estate boom was driven by investment and speculation. Experts say that between 15 and 30 percent of all purchases were made by investors, rather than by people who bought homes intending to live in them. Some bought the properties for cash, sometimes with equity they pulled out of their own homes, so there is no loan record. Other buyers pretended on loan applications that they would live in homes they really intended to flip, so that they could qualify for better loan terms or get around developer restrictions on investor-buyers.

Some projects became particular investor magnets, and, more recently, the subject of real estate blogs criticizing speculative excesses. For example, the local Internet blog Bubble Meter focused last month on what it called "the bubblicious bench." At one recently completed condominium called the Halstead at Dunn Loring, a luxury condominium complex in Fairfax County, a park bench outside the building bristles with real estate agent lockboxes to permit vacant units to be shown to prospective buyers or renters. On a recent morning, there were 49 lockboxes there, outside a building that has about 200 units.

Manuel Tagle, a real estate agent with Fairfax Realty in Falls Church, is representing two units there, both owned by investors, one of which is for sale and one for rent. He owns a unit there himself, which he has rented out.

"There's a very high concentration of investors," he said. "I have seen a lot of investors selling now. They see values going downhill."

The prevalence of investors -- and now their disappearance -- is causing real problems for owner-occupants who want to sell, sometimes against competitors willing to cut prices substantially because of profits they made in 2003 or 2004. Mike Pugh, a real estate agent with Re/Max Allegiance in Arlington, is trying to sell a condo at the Halstead for a woman he says bought it for her retirement home, then became ill and went to live with family. Pugh said his client, who he believes was one of the few purely owner-occupants in the complex, is likely to lose money she had saved over a lifetime.

"We aren't investors, but we are being punished by the market as though we were," he said.

They face plenty of competition. Delta Associates, an Alexandria real estate research firm, said there are about 25,853 new condos being marketed locally now. But only about 1,996 new condos were sold from January to March, down from 3,520 in the first three months of last year. And the area's multiple-listing service, which lists mostly previously owned properties, showed about 5,500 condos and co-ops for sale in March in Washington and the close-in suburbs. That was about a fourfold increase from about 1,400 listed in March 2005 with the service, Metropolitan Regional Information Systems Inc.

Some developers are struggling to sell units in the face of competition from the investor-buyers who want to dump the properties. Many had sought to protect themselves against an invasion of investors for just this reason.

A National Association of Home Builders survey of builders last year found that about 52 percent of builders tried to sell only to owner-occupants, 33 percent prohibited renting the unit out during the first year after settlement, 29 percent declined to make multiple sales to people with the same last name and about 28 percent kept the right to buy back the unit at the same price if the owner sold in the first year.

But many failed to ferret out investors or could not resist the buzz of a fast sell-out when speculators flocked to purchase. A quick sales pace allowed the builders to ratchet up prices more quickly for those who got to their doors behind the early birds.

Speculative buyers at the hottest part of the market were able to put down a $20,000 deposit on an uncompleted unit, then close on the transaction and sell it to someone else the next day, pocketing $60,000 or $70,000.

That spawned a "get-rich-quick" mentality, said real estate agent Frank Borges Llosa, of FranklyRealty.com, who said that the people who got in earliest made the most money, while those who came later are at greater risk. Unlike with stocks or bonds, which can simply be sold, a seller of real estate has to find a willing buyer or renter because a mortgage obligates the owner regardless of the value of the asset.

"People who got caught are in trouble," Borges Llosa said.

Some investors are holding on to the properties they have, but they are not expanding their empires. Ruben Cuya, 37, a Peruvian immigrant who works as a quality control technician at Cuisine Solutions Inc. in Alexandria, bought his first rental property, a townhouse in Lorton, in 2002, using the equity from his own home for the down payment. Then he bought an additional rental property in that same way each of the next two years.

"This year I'm not buying," Cuya said. "It's not a good year to buy."

The situation has made home shoppers more wary about making purchases. Real estate agents say many are so leery about where prices are headed that they are engaged in a kind of stare-down with sellers as they seek to negotiate for lower prices and more concessions.

"The buyers are there, there are people who want to buy," Borges Llosa said. "But they see no immediacy to buy now versus next week."

Some buyers are even walking away from transactions. Lawyer Angana Shah, 36, almost bought a new one-bedroom apartment in Adams Morgan last month for $454,000, but as the settlement date approached, she found herself "petrified" over the high price and worried that values would fall.

Then, during the walkthrough, she learned the place was smaller than she had been promised. The developer was unwilling to cut the price, so she decided to walk away from the sale and got her money back. She was glad she did because prices have flattened and she can now afford a two-bedroom instead.

"I don't want a one-bedroom anymore," she said. "I want a two-bedroom. Now people are begging people to buy one-bedrooms. The market is better. I couldn't have bought a two-bedroom last fall and prices for one-bedrooms are falling."

Doors Close for Real Estate Speculators

Investors who sought quick profits buying and selling real estate in the Washington region are in full retreat, dampening demand for homes, most notably for condos.

What is becoming apparent, market watchers say, is how big a part speculators played in the region's real estate boom of the past few years. Not just condominiums, but also townhouses and single-family houses, were snapped up by investors using no-money-down financing and non-traditional loans. They helped send prices soaring at unprecedented rates. And now many are trying to sell, or rent at a loss. Some may eventually dump properties at low prices to get rid of them. That could weigh down values for everyone.

Sales of new condos fell 43 percent in the first quarter of the year, compared with the first quarter of 2005, according to one report, and there are almost four times as many existing condos for sale than last year.

"We think the softness of the market is largely due to the pulling out of investors," said Gopal Ahluwalia, staff vice president for research at the National Association of Home Builders. "They have not only pulled back, they are canceling purchases."

David Bath, a retired dentist in Reston, rode the boom up. A condo he bought in Vienna for $97,000 sold for $250,000 in a single day. He was able to sell another condo in Herndon for an even bigger profit.

Now he wants out. He has had no luck finding buyers for two investment houses and a four-unit apartment building he owns in Florida. He has been stuck making mortgage payments on vacant houses that took a lot of time and money to repair.

"It's a lot of work and I don't see the returns anymore," he said. "I'm going to the table to cash my chips in."

While condominiums were the product of choice for investors, luxury neighborhoods also fell prey to real estate speculation, leading to the prospect of price drops even in affluent subdivisions.

"Here we had it even in $1 million homes," said Kenneth Wenhold, Virginia and Maryland director for Metrostudy, a real estate information firm.

Robert Toll, chairman and chief executive of Toll Brothers Inc., which builds luxury homes, said in a recent conference call with analysts that the Washington market was the hardest-hit in the nation by investors who bought properties intending to flip them, and who have put the homes up for sale. "We can feel the impact of speculative play coming back into the market," he said.

Nobody knows exactly how much of the real estate boom was driven by investment and speculation. Experts say that between 15 and 30 percent of all purchases were made by investors, rather than by people who bought homes intending to live in them. Some bought the properties for cash, sometimes with equity they pulled out of their own homes, so there is no loan record. Other buyers pretended on loan applications that they would live in homes they really intended to flip, so that they could qualify for better loan terms or get around developer restrictions on investor-buyers.

Some projects became particular investor magnets, and, more recently, the subject of real estate blogs criticizing speculative excesses. For example, the local Internet blog Bubble Meter focused last month on what it called "the bubblicious bench." At one recently completed condominium called the Halstead at Dunn Loring, a luxury condominium complex in Fairfax County, a park bench outside the building bristles with real estate agent lockboxes to permit vacant units to be shown to prospective buyers or renters. On a recent morning, there were 49 lockboxes there, outside a building that has about 200 units.

Manuel Tagle, a real estate agent with Fairfax Realty in Falls Church, is representing two units there, both owned by investors, one of which is for sale and one for rent. He owns a unit there himself, which he has rented out.

"There's a very high concentration of investors," he said. "I have seen a lot of investors selling now. They see values going downhill."

The prevalence of investors -- and now their disappearance -- is causing real problems for owner-occupants who want to sell, sometimes against competitors willing to cut prices substantially because of profits they made in 2003 or 2004. Mike Pugh, a real estate agent with Re/Max Allegiance in Arlington, is trying to sell a condo at the Halstead for a woman he says bought it for her retirement home, then became ill and went to live with family. Pugh said his client, who he believes was one of the few purely owner-occupants in the complex, is likely to lose money she had saved over a lifetime.

"We aren't investors, but we are being punished by the market as though we were," he said.

They face plenty of competition. Delta Associates, an Alexandria real estate research firm, said there are about 25,853 new condos being marketed locally now. But only about 1,996 new condos were sold from January to March, down from 3,520 in the first three months of last year. And the area's multiple-listing service, which lists mostly previously owned properties, showed about 5,500 condos and co-ops for sale in March in Washington and the close-in suburbs. That was about a fourfold increase from about 1,400 listed in March 2005 with the service, Metropolitan Regional Information Systems Inc.

Some developers are struggling to sell units in the face of competition from the investor-buyers who want to dump the properties. Many had sought to protect themselves against an invasion of investors for just this reason.

A National Association of Home Builders survey of builders last year found that about 52 percent of builders tried to sell only to owner-occupants, 33 percent prohibited renting the unit out during the first year after settlement, 29 percent declined to make multiple sales to people with the same last name and about 28 percent kept the right to buy back the unit at the same price if the owner sold in the first year.

But many failed to ferret out investors or could not resist the buzz of a fast sell-out when speculators flocked to purchase. A quick sales pace allowed the builders to ratchet up prices more quickly for those who got to their doors behind the early birds.

Speculative buyers at the hottest part of the market were able to put down a $20,000 deposit on an uncompleted unit, then close on the transaction and sell it to someone else the next day, pocketing $60,000 or $70,000.

That spawned a "get-rich-quick" mentality, said real estate agent Frank Borges Llosa, of FranklyRealty.com, who said that the people who got in earliest made the most money, while those who came later are at greater risk. Unlike with stocks or bonds, which can simply be sold, a seller of real estate has to find a willing buyer or renter because a mortgage obligates the owner regardless of the value of the asset.

"People who got caught are in trouble," Borges Llosa said.

Some investors are holding on to the properties they have, but they are not expanding their empires. Ruben Cuya, 37, a Peruvian immigrant who works as a quality control technician at Cuisine Solutions Inc. in Alexandria, bought his first rental property, a townhouse in Lorton, in 2002, using the equity from his own home for the down payment. Then he bought an additional rental property in that same way each of the next two years.

"This year I'm not buying," Cuya said. "It's not a good year to buy."

The situation has made home shoppers more wary about making purchases. Real estate agents say many are so leery about where prices are headed that they are engaged in a kind of stare-down with sellers as they seek to negotiate for lower prices and more concessions.

"The buyers are there, there are people who want to buy," Borges Llosa said. "But they see no immediacy to buy now versus next week."

Some buyers are even walking away from transactions. Lawyer Angana Shah, 36, almost bought a new one-bedroom apartment in Adams Morgan last month for $454,000, but as the settlement date approached, she found herself "petrified" over the high price and worried that values would fall.

Then, during the walkthrough, she learned the place was smaller than she had been promised. The developer was unwilling to cut the price, so she decided to walk away from the sale and got her money back. She was glad she did because prices have flattened and she can now afford a two-bedroom instead.

"I don't want a one-bedroom anymore," she said. "I want a two-bedroom. Now people are begging people to buy one-bedrooms. The market is better. I couldn't have bought a two-bedroom last fall and prices for one-bedrooms are falling."

Real estate boom pushes up rents

The residential lease market has seen a 12-15 per cent rise in prices in the last one-year in and around Muscat fuelled by corporates’ demand for quality and affordable housing.

Many real estate companies, mainly in the capital area, have attributed to the rise in rental prices due to a number of factors, including the growing cost of construction, land value and general trends in the region.

Market watchers say that while lease prices in areas like Ruwi, MBD, CBD, Hamriya, Darsait, Muttrah, Wadi Kabir have gone up when compared to 2004; the rent have seen major movement in Madinat Al Sultan Qaboos, Qurum, Al Khuwair, Al Ghubra, Azaiba, etc. (See table. Source: Hamptons International).

First Choice, one of the leading names in the leasing business in Muscat, says that some of the factors which have led to rental hikes include the rise in cost of construction materials, transportation, and hike in land values. While admitting that there has been a rise in rents in the last one year, sources at First Choice said that the cost of the rent is not uniform in all buildings and areas. The rent prices vary, depending upon factors like the type of building (old or new); the quality of accommodation (tiles, marbles or ceramic); kitchen facilities offered; in-built cupboards, almirahs, etc.

It was thought that since most rented accommodations are occupied by expatriates, there would be a loss of customers after the Omanisation process began in the middle of last year.

But the Omanisation of foodstuffs and certain driving categories, does not seem to have had any effect, with most of the real estate dealers claiming ‘houseful’ in most of their properties.

This is also corroborated by the population figures by the Ministry of Manpower, which says, the total number of expatriate workers holding valid labour cards has in fact gone up by 1.9 per cent from 424,788 in December 2005 to 432,909 at the end of February 2006. Sources in Al Habib, a name synonymous with accommodation in Muscat, say that they are unable to cope up with the demand for rented houses and flats.

K. Rithesh Shetty, marketing executive of Al Habib, disclosed that they have witnessed a big expatriate exodus from Dubai. “We have seen lots of families coming from Dubai and now we do not have a single bedroom to offer to customers, especially in areas like Al Khuwair,” explains Shetty.

The prices of flats leased by Al Habib have also gone up between the range of 10 and 15 per cent, Shetty said.

Christopher Steel, head of Arabia Operations, Hamptons International, stated in a report that making up for lost time, the year 2005 and the first two months of 2006 have seen property values correct themselves but they still remain, in general, lower than the regional norm which is witnessing high levels of activity.

Azaiba and Ghubrah are now firmly established as “prime” rental areas, with rentals often competing with their southern neighbours.

Another interesting development as far as the real estate is concerned is that apart from the capital area, even other towns like Sohar are witnessing a spurt in real estate prices. With many new industries being set up in Batinah region and Sohar industrial area in particular and total investments in the region hovering between $10-15 billion, real estate has become dear in Sohar.

Times of Oman has found out that in some areas of Sohar, the real estate prices, especially rental rates, are in fact higher than that of Muscat. People, who have shifted from Muscat to Sohar because of their jobs, have affirmed this scenario.

An interesting factor, noted by Hamptons, is the setting of rigid rental budgets for employees of newly establishing corporates. This has, at times, led to acute shortage of properties within the relevant price bands. As a result, mostly it is the employees who feel the pinch, as they have to pay the difference from their pockets.