Real estate speculation pushing up prices

updated 12:49 p.m. ET June 21, 2005

WASHINGTON - Home builder Marsha Elliott is selling two units in a brand new stucco and stone duplex. But the buyer isn't planning to move in or rent.

Hoping to capitalize on rapidly rising home prices, the buyer intends to sell the units shortly after the July closing, Elliott says. It's part of the speculative activity in the sizzling housing market that is drawing concerns from Federal Reserve Chairman Alan Greenspan and others.

In Elliott's suburban Chicago development, the buyer locked in a deal months ago to purchase each unit for $775,000, she says. They are currently selling for $840,000 apiece, an 8.4 percent jump in price.

Seeking to discourage such activity, Elliott now includes a provision in her contracts that gives her the option of buying back a property at the original price if the owner wants to sell within 18 months after closing. Other sellers are taking similar steps.

"If the buyer doesn't find someone to flip the property to right after closing, it sits empty. Is it going to be maintained? Is it an open invitation to vandalism? And, does it have a negative impact on the overall community? Absolutely," says Elliott, president of Terrestris Development/MLC Homes.

Three percent of home buyers sell in a year or less, according to a survey by the National Association of Realtors.

While a vacant house can be a turnoff to house hunters, buying and quickly unloading a house to make a profit can help drive up prices.

Speculative activity, surging home prices and renewed interest in risky mortgages such as interest-only loans are all byproducts of the booming housing market.

Federal Reserve Chairman Alan Greenspan said it appears unlikely that a national housing bubble will develop and pop, sending prices tumbling. At the same time, he said, "There do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels."

House prices nationwide rose 12.5 percent over the 12 months ending March 31, according to figures compiled by the Office of Federal Housing Enterprise Oversight.

During that period, Nevada posted the biggest increase, 31.2 percent. California ranked second with a gain of 25.4 percent, followed by Hawaii, with a 24.4 percent increase, the District of Columbia, with a 22.2 percent rise, and Florida, with 21.4 percent.

"Speculative activity may have had a greater role in generating the recent price increases than it has customarily had in the past," Greenspan says. He said a big part of the quickening pace of home turnover may reflect the purchase of second homes — either for investment or vacation.

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