Developer tactics to avoid housing bust

The Aderra condominium project sits on a golf course and has a view of Camelback Mountain in Scottsdale, Ariz. When it opens this fall, the owners of the 312 units will have a couple of pools to dip their toes in when they leave their mission-style abodes.

But there is one thing they won't be able to do: sell their condos - that is, not until the developer has sold every one of the $190,000 to $400,000 units. The reason: "We're selling communities, not commodities," says Robert Lyles, founder of Starpointe, the developer.

Limits on resales, requirements that buyers live in their homes for a year, and mandatory profit sharing with the developers if a home is "flipped" are just some of the ways that home-building communities - and bankers tightening standards - are trying to quell speculation in the housing market. By taking off some of the froth, they hope to keep one of the greatest real estate markets in the nation's history from becoming one of the biggest busts.

Perhaps because of such efforts, housing prices are growing at a slightly less torrid pace. Recently, the Office of Federal Housing Enterprise Oversight found that in the fourth quarter last year, housing prices rose 6.77 percent on an annualized basis, down from nearly 20 percent in the prior quarter. This week, the National Association of Realtors forecast that existing home prices would rise 7.1 percent, compared with 11.7 percent last year.

Still, the housing market has withstood all sorts of pressures that normally might have caused the housing market to slow. The Federal Reserve has been raising interest rates, which cranks up short-term borrowing costs. Property taxes around the nation are rising, which makes home ownership more expensive. And an increasing number of people are subject to the alternative minimum tax, which may eliminate the mortgage interest deduction.

All these factors cause economist Anthony Chan of J.P. Morgan Asset Management to say, "I see a slowing and an ebbing, not a collapse over the next 12 to 18 months."

Others are even more cautious. "My view is we are at the mountaintop, and all roads lead down," says Mark Zandi, chief economist at Economy.com. "It's a question of how steeply."

Mr. Zandi's company recently produced a report that named Boston; Las Vegas; and Reno, Nev., as the metro areas "most susceptible to a severe house price correction." It also called Colorado Springs, Colo.; Denver; Fort Myers, Fla.; San Francisco; and Sarasota, Fla., as "worrisome."

"These metro areas have in common prices well above equilibrium, and an excess supply of single family housing relative to the long-run demand," says the report.

Signs are also growing that the high home prices are making affordability a bigger issue. For example, in some markets the income-to-debt ratios are rising. This is forcing an increasing number of home buyers to borrow through adjustable-rate mortgages (ARMs), which initially have a lower interest rate. Last Friday, a survey by the Mortgage Bankers Association found that 63 percent of all new mortgages are ARMs. Of those, 17 percent are interest-only ARMs, which again have a lower monthly cost, but have a higher total cost.

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