The Housing Crisis is Over

Is it time to start house hunting? Cyril Moulle-Bertaux opined that April 2008 marked the bottom of the U.S. housing market. I totally agree with him that the Florida housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 7-10 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

Mr. Moulle-Bertaux wrote in The Wall Street Journal that the boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the real estate market to weaken.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.

Brett Arends from WSJ also makes a similar argument. He looks at the data on housing starts since 1972, which shows that new housing starts slumped below the one million mark in March. Every time that has happened in the last 50 years, Mr. Arends writes, it proved to be the bottom of a recession.

“It’s bottom-fishing time, I think,” says Wellesley College Prof. Karl E. Case in the column. Mr. Arends says that he is one of the leading experts on the housing market in the country. “There’s got to be bargains in Florida, Arizona and Nevada.”

In the Journal editorial, Mr. Moulle-Bertaux suggests that the housing market will revive, as more first-time buyers are lured in by falling prices and lower mortgage rates. “Homes on average are back to being as affordable as during the best of times in the 1990s,” he writes. “Numerous households that had been priced out of the market can now afford to get in.”

To be sure, as Mr. Arends points out, there is no guarantee that this downturn will follow the patterns of the past. And he notes that prices in many areas are far from a historic bargain. And where there is a glut, prices — obviously — are likely to stay lower for longer. But in many areas, prices are low and buyers may be tempted.

Are you tempted?

Great Time to Buy Real Estate in Florida

I read an article in USA Today that points out more foreign buyers vie for U.S. real estate. As the falling dollar makes the U.S. second-home market more attractive to international buyers, we see more and more foreign buyers express their interests in investing in Florida's real estate market. Fifteen percent of all Florida home sales now involve foreign buyers. Now is the best time to buy real estate in Florida.

More than 100,000 homes are sold to foreigners annually in the international second-home market, particularly to buyers from Europe, North and South America, Africa and the Middle East. Current valuations of the U.S. dollar against foreign currencies have made U.S. property one of the world’s great bargains, and the prestige of owning U.S. property remains high.

Real estate agents are increasingly courting foreigners to buy homes in the USA – hiring agents fluent in other languages, marketing to foreign buyers and in some cases, offering to pay the airfare and hotel bills of foreign shoppers who buy a home.

The agents are eager to win the business of foreign investors who are swooping in to buy property in the USA as home prices plummet and the dollar’s weak value produces eye-popping deals for international buyers.

Because of the sinking value of the U.S. dollar relative to other currencies, a home bought by a foreigner comes with a discount averaging 30 percent, the National Association of Realtors estimates. Between April 2006 and April 2007, about 30 percent of foreign buyers came from Europe, according to an NAR survey.

Nearly one-third of Realtors reported in that survey that they had done business with foreign buyers. Activity is especially busy in affluent cities such as New York and in warm-weather vacation destinations such as Miami and San Diego. Many of these investors, Realtors say, are buying homes as vacation retreats.

Florida Existing Home Sales Improve in March Compared to February 2008

Florida Realtors® statewide reported slight gains in existing home and condominium sales from February to March 2008, according to the latest housing statistics released by the Florida Association of Realtors® (FAR). A total of 9,330 existing single-family homes changed hands in March, a 12.3 percent increase over the previous month when 8,310 homes sold. Existing condo sales statewide rose almost 16 percent, with 3,207 units sold in March compared with 2,765 condos in February.

The median price for both housing types increased slightly as well during the one-month period. The median price of an existing single-family home reached $205,100 in March, compared with $198,900 the previous month. The median price of an existing condo rose to $176,300 in March from $175,600 in February.

In the latest National Association of Realtors® (NAR) housing outlook, Chief Economist Lawrence Yun says, “Existing home sales could start to show a sustained increase within a few months, unless there are some additional economic problems or excessive inflationary pressure. We’re looking for essentially stable sales in the near term, before higher mortgage loan limits translate into more sales in high-cost markets.

In the year-to-year comparison, a total of 9,330 existing homes sold statewide last month while 12,356 homes sold in March 2007 for a decrease of 24 percent, according to FAR. Florida’s median sales price for existing homes last month was $205,100; a year ago, it was $242,800 for a 16 percent decrease. But, looking back to March 2003, the statewide median sales price for single-family homes has increased about 35.2 percent, according to FAR records – at that time, the statewide existing-home median price was $151,700. The median is the midpoint; half the homes sold for more, half for less.

In a year-to-year comparison for condos, 3,207 units sold statewide compared to 4,163 in March 2007 for a 23 percent decline. The statewide existing-condo median sales price last month was $176,300; in March 2007 it was $220,700 for a 20 percent decrease. NAR reported the national median existing condo price was $211,700 in February 2008.

The national median sales price for existing single-family homes in February 2008 was $193,900, down 8.7 percent from a year earlier, according to NAR. In California, the statewide median resales price was $409,240 in February; in Massachusetts, it was $310,000; in Maryland, it was $284,822; and in New York, it was $230,000.

Last month, interest rates for a 30-year fixed-rate mortgage averaged 5.97 percent, down from the average rate of 6.16 percent in March 2007, according to Freddie Mac. FAR’s sales figures reflect closings, which typically occur 30 to 90 days after sales contracts are written.

Several of Florida’s smaller metropolitan statistical areas (MSAs) showed slight gains in existing home sales for the month. Realtors around the state reported more buyer interest as demonstrated by increased phone calls, showings and other positive movement in their local housing markets.

Among the state’s smaller markets, the Fort Pierce-Port St. Lucie MSA reported a total of 387 homes sold in March compared to 338 homes a year ago for a 14 percent increase. The existing home median sales price was $169,700; a year ago, it was $239,700 for a 29 percent decrease. A total of 69 existing condos sold in the MSA last month compared to 87 condos the previous March for a 21 percent decrease. The market’s existing condo median price was $182,500; a year ago, it was $202,300 for a decrease of 10 percent.

Dave Derrenbacker, president of the Realtor Association of Martin County and a broker with Water Pointe Realty Group, agrees that buyers are recognizing the long-term value of homeownership. “There are some encouraging signs,” he says. “It looks like home prices are starting to stabilize and buyer activity is picking up. In many cases, Realtors are able to show that homes in our area are back to a valuation of pre-real estate boom figures. I tell people, ‘If you missed your chance the first time around, then now is a great time to buy.’”

Source: FLORIDA ASSOCIATION OF REALTORS

NAR: Existing-Home Sales Slip in March

Existing-home sales edged down in March, remaining within a narrow range of sales activity that has persisted since last September, according to the National Association of Realtors® (NAR). Existing-home sales – including single-family, townhomes, condominiums and co-ops – were down 2.0 percent to a seasonally adjusted annual rate of 4.93 million units in March from a level of 5.03 million in February, and remain 19.3 percent below the 6.11 million-unit pace in March 2007. A rise in condo sales in March offset a drop in single-family sales. Regionally, sales rose in the Northeast and West but fell in the Midwest and South.

Lawrence Yun, NAR chief economist, says the market is performing unevenly. “Though mortgage rates are at historically low levels, some borrowers are facing restrictive lending practices in declining markets,” he says. “At the same time, many buyers continue to bide their time with a large number of homes to choose from, while other potential buyers remain on the sidelines.”

The national median existing-home price for all housing types was $200,700 in March, down 7.7 percent from a year ago when the median was $217,400. Because the slowdown in sales from a year ago is greater in high-cost areas, there is a downward pull to the national median with relatively higher sales activity in low-cost markets.

A mix of market conditions continues around the country, but areas showing healthy price gains include Des Moines, Iowa; Austin, Texas; and Durham, N.C.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 5.97 percent in March from 5.92 percent in February; the rate was 6.16 percent in March 2007.

“It appears there is some over-reaction on the part of some lenders now in requiring higher downpayment percentages than may be necessary,” says NAR President Richard F. Gaylord. “On the other hand, buyers in many parts of the country are able to take advantage of more lenient policies for FHA loans. However, because lenders don’t have enough underwriting experience with FHA loans in high-cost areas, there are localized bottlenecks in loan processing. Consumers should consult with a Realtor in their area to learn about the kind of financing that may be available to meet their needs.”

Yun offered a caution: “With elevated inflation, the Federal Reserve should be extra careful about further rate cuts. Mortgage interest rates, which do not move directly with Fed funds rates, may rise measurably and hurt the housing recovery if inflation gets out of hand. Monetary stimulus is plentiful – what is needed more at this point is a home buyer tax credit to get buyers off the sidelines and prevent the market from overshooting on the downside.”

Total housing inventory rose 1.0 percent at the end of March to 4.06 million existing homes available for sale, which represents a 9.9-month supply at the current sales pace, up from a 9.6-month supply in February.

Single-family home sales fell 2.7 percent to a seasonally adjusted annual rate of 4.35 million in March from 4.47 million in February, and are 18.4 percent below the 5.33 million-unit pace in March 2007. The median existing single-family home price was $198,200 in March, down 8.3 percent from a year ago.

Existing condominium and co-op sales rose 3.6 percent to a seasonally adjusted annual rate of 580,000 units in March from 560,000 in February, but are 25.5 percent below the 779,000-unit level a year ago. The median existing condo price was $219,400 in March, which is 2.8 percent lower than March 2007.

Regionally, existing-home sales in the Northeast rose 2.2 percent to an annual pace of 910,000 in March, but are 18.8 percent below March 2007. The median price in the Northeast was $284,300, up 4.6 percent from a year ago.

Existing-home sales in the West rose 2.2 percent in March to a level of 940,000 but are 22.3 percent below a year ago. The median price in the West was $285,100, which is 14.7 percent lower than March 2007.

In the South, existing-home sales fell 3.5 percent to an annual rate of 1.92 million in March and are 20.0 percent below March 2007. The median price in the South was $167,200, down 7.1 percent from a year ago.

Existing-home sales in the Midwest dropped 6.5 percent to an annual rate of 1.16 million in March, and are 15.9 percent below a year ago. The median price in the Midwest was $152,600, down 5.3 percent from March 2007.

Source: FLORIDA ASSOCIATION OF REALTORS

St. Johns is One of 10 Most Endangered Rivers

The St. Johns River has been named one of the 10 most endangered rivers in the country by a nonprofit group dedicated to waterway conservation.

The river landed on the Washington D.C.-based American Rivers' list because of plans to allow the removal of up to 262 million gallons of water per day to quench Central Florida's growing thirst.

Opponents of the St. Johns River Water Management District's plan say the withdrawal will harm the river's plant and wildlife. The district counters that early research indicates no such effect, but that it will make a final decision on allowing "significant withdrawals" when a two-year environmental impact study is complete.

"No matter what the problem is, stealing is never an acceptable solution," Rebecca Wodder, American Rivers president, said in a news release. "Yet, instead of embracing water smart solutions like conservation and efficiency, Florida lawmakers seem set on sanctioning this river robbery."

The American Rivers' reasoning for the St. Johns making the list was a two-page advocacy paper with no scientific basis, said Alfred Canepa, the water management district's assistant director of resource management. The proposed withdrawals would account for less than 1 percent of the river's flow.

"The withdrawal from the St. Johns River is not the biggest danger," Canepa said. "The biggest dangers are wastewater discharges and stormwater runoff that add pollutants and nutrient loads to the river."

The American Rivers report will help keep the St. Johns Riverkeepers' fight in the forefront and stir agitation among people who don't completely understand the issues.

The issue isn't just an environmental one but also an economic one, said Riverkeeper Neil Armingeon. He warned that millions of dollars in commercial fishing and recreational activities will be lost if the withdrawals are allowed.

"In a state with theme parks, cruise ships, and any number of other tourism-based ventures, it's simply mind boggling that decision makers are telling those who enjoy the St. Johns to take their money elsewhere," he said in a news release.

Duval County and Northeast Florida are improving conservation by increasing reclaimed water usage and will improve the quality of stormwater by making drainage improvements, which are funded through the new stormwater fee, said Mayor John Peyton in a news release.

Source: Jacksonville Business Journal

New Housing Permits Down 41 Percent

The construction of new housing continued to slow around the nation in March with permits falling by 41 percent.

According to the U.S. Census Bureau, 927,000 permits were issued for privately-owned homes, down from about 1.6 million during the same period last year. The South accounted for 501,000 of those permits, down 33 percent from 753,000 in March 2007.

Housing starts were also down around the nation and in the South. The 947,000 privately-owned houses that started construction in the U.S. in March were 36.5 percent down from about 1.5 million filed in March 2007, and the 499 started in the South were down 35 percent from the 765 started a year earlier.

Lastly, privately-owned housing completions were down 24.5 percent in the U.S. from about 1.6 million in March 2007 to 1.2 million. In the South completions were also down 24.5 percent from 828 in March 2007 to 625 in March 2008.

Source: U.S. Census Bureau

How the Super-Rich Buy Homes

It’s not easy for a movie star, basketball player, or corporate chief to buy a house without attracting a bit of attention.

It requires ingenuity – and help from pricey lawyers – to keep the paparazzi, celebrity bloggers, and stalkers guessing. Last year movie star couple Brad Pitt and Angelina Jolie failed to hide their $3.5 million purchase of a 19th century house in New Orleans’ French Quarter. News got out despite real estate records that listed the buyer as the “Mondo Bongo Trust,” a reference to the Joe Strummer song, Mondo Bongo, which Brangelina danced to in the 2005 movie Mr. and Mrs. Smith.

Other stars have hidden behind trusts with such clever names as “Ingodwe Trust,” “I before E Trust,” “Poopie Trust,” “Senior Moments Trust,” and “Thank You For the Trust Trust” [used by the late actor Heath Ledger], according to Bob Goldsborough, the blogger for bigtimelistings.com who has become an expert at unmasking celebrity home transactions.

Hidden identity

The super-rich also use holding companies to hide their identities and, in some cases, shelter themselves from taxes. But for many elite buyers, who live behind gates or hedges far from the street, privacy is the primary concern. They require real estate agents to sign confidentiality agreements and arrange for private showings during which the owners and all household staff are absent.

Some wealthy buyers do their research on the Internet. They can view photos, videos, and floor plans, and decide without even visiting the home, says Laurie Moore-Moore, founder and CEO of the Dallas-based Institute for Luxury Home Marketing. According to her, a house listed for $100 million kept the most sensitive information such as floor plans and specific inside views hidden on a password-protected site. The passwords were given only to pre-qualified billionaires.

Moore-Moore also reveals that a property of this type often has a three-tiered marketing program. A casual inquirer would get a two-sided brochure with exterior photographs and a little more information on a Web site. A luxury agent with a top client would get a 16-page brochure with exterior views and a few carefully chosen interior shots [with haiku poetry alongside each photograph]. Only a fully qualified client would have access to the password-protected Web site with floor plans, information about the heating and air-conditioning systems, and interior photos and videos, she says.

Discretion advised

Regardless of the house, the buyer might be invisible throughout most of the transaction process. “Screeners” sometimes visit an estate and conduct negotiations on behalf of celebrities or high-income buyers who don’t want their fame to influence the sales price. “If Madonna suddenly expresses interest in buying your house, you might say, ‘Well she can afford it, I’m not going to be negotiable,’“ Moore-Moore says.

Some wealthy sellers also like discretion, especially if they’re going through a divorce, illness, bankruptcy, or some other personal crisis that they’d rather not draw attention to. In some cases, the agent is told not to place the home on the multiple listing service or even to advertise it. The agent might suggest selling the house without a traditional marketing campaign.

A well-connected agent can find a buyer by calling another luxury agent or wealthy client interested in a great off-market listing with unique characteristics.

“Lots of really good stuff, you don’t even need to put on the market,” says Christopher Hain, real estate agent with Hollywood Hills [Calif.]-based Ramsey-Shilling. “Agents facilitate the deal because it allows them to do both ends of the deal.”

Marketing plan

But most clients selling expensive homes are happy to have a strong marketing campaign. Their agents might set up a booth with brochures at an air show or boat show and put an advertisement on the Internet, in The Wall Street Journal, The New York Times, European publications, and niche magazines such as Unique Homes, Moore-Moore says.

“The more expensive a house is, the smaller the pool of potential buyers in the area,” says Rick Goodwin, publisher of Unique Homes, a magazine and Internet site devoted to the luxury market. “As the price goes up, so does the need to expose it outside the marketplace and outside the country.”

But the advertisements frequently provide limited details. Goodwin says it’s common for ads for expensive properties to say “price upon request.” The owner of a house on the market in Beverly Hills asked that the name of the property be digitally removed from a photograph appearing in the magazine; the name was displayed on the welcome mat in front of the house, Goodwin says.

“Some people may not want to make a big deal about it,” Goodwin says. “They might think, ‘I don’t want the fact that I’m selling my house to be a big item in the newspaper.’“

Source: McGraw-Hill

Rail America Moving to Jacksonville

Short line and regional railroad company Rail America Inc. will move its headquarters to Jacksonville from Boca Raton sometime after June 1.

Senior Vice President and General Counsel Scott Williams said the company is in the process of combining with Jacksonville-based Florida East Coast Railway, pending regulatory approval from the Surface Transportation Board. Fortress Investment Group owns both companies.

Rail America said the move will affect the jobs of no more than 95 employees, and that it has made offers to many of those employees and expect between 20 and 30 to relocate to Jacksonville with the company.

St. Joe Auctioning Off 3,000 Acres Online

The St. Joe Co. is using the Internet to auction off more than 3,000 acres of land in the Florida Panhandle.

The bid deadline is May 1 and the offering includes land in three St. Joe properties -- slightly more than 3,000 acres of recreational property in Gadsden County near Tallahassee called Concord, 56 acres in Port St. Joe with plans in place for an 18-lot residential subdivision called Sabel Island, and 29.5 acres in Bay County near Panama City that is residentially zoned for 50-60 lots called Brewton Lane.

During the online auction marketing campaign, buyers will have the opportunity to bid on one or all of the properties at Concord, Sabel Island and Brewton Lane. Clay Smallwood, president of land sales at St. Joe, said the company chose the online auction to reach a national and international market for the land that is not part of the company's strategy for its core development business.

LFC Group of Cos. of Newport, Calif., is the Internet real estate auction marketing firm that will conduct the auction.

Based in Jacksonville, The St. Joe Co. is one of Florida's largest real estate operating companies. It focuses on real estate development and sales, with significant interests in timber. At the end of September 2007, it owned about 718,000 acres, mainly in northwest Florida, and had $1.2 billion in assets.

Source: Jacksonville Business Journal

Safe Harbor for 1031 Exchange

Effective for all exchanges on or after March 10, 2008, Rev Proc 2008-16 creates a safe harbor (meaning the IRS will not challenge the exchange) for “dwelling units” that meet the following criteria:

The relinquished property:

1. Was owned by the Taxpayer for 24 months prior to the exchange, and
2. Was rented for 14 days or more in each of the two 12-month periods immediately preceding the exchange.
3. The Taxpayer’s personal use in each of those years did not exceed the greater of 14 days or 10 percent of the number of days the property was rented at fair rental rates.

The replacement property must meet the same criteria. And the exchange must meet all other §1031 requirements.

It is unknown how the IRS will view properties that do not fall within this safe harbor.

McDonald's Tries Feng Shui Makeover

Feng Shui got mentioned in the press again. This time it's McDonald's, world's largest hamburger chain. I thought I share with you the article published by AP in Hacienda Heights, California:

The only familiar signs at the McDonald's in this large Asian community are the golden arches, the drive-through and the menu.

Gone are the plastic furniture, Ronald McDonald and the red and yellow palette that has defined the world's largest hamburger chain. Leather seats, earth tones, bamboo plants and water trickling down glass panels have taken their place.

The makeover elements are meant to help diners achieve happiness and fortune -- whether they realize it or not.

That's because the restaurant was redesigned using the principles of feng shui, the ancient Chinese practice of arranging objects and numbers to promote health, harmony and prosperity.

The concept is an unlikely fit with fast food. But the restaurant's owners say the designs are aimed at creating a soothing setting that will encourage diners to linger over their burgers and fries, and come back again.

The makeover is part of the attempt by McDonald's Corp. in recent years to remodel hundreds of its restaurants to attract more patrons with unique decor and amenities that might entice them stay awhile.

It also fits into McDonald's larger corporate practice of catering to local tastes, such as a fondue-style burger in France or a pita-wrapped "McArabia" sandwich in the Middle East.

"We can't look too cookie cutter," Mark Brownstein, one of three owners of the restaurant, said about the new decor.

The basic principles of feng shui include placing strategic representations of five natural elements -- earth, water, fire, metal and wood -- around the room to increase the flow of chi, or energy.

Feng shui (fung shway) has been employed in the designs of high-rises, banks, even zoo exhibits, and has been popularized by countless coffee table books and TV shows such as HGTV's "Fun Shui." It's also used in the designs of the Panda Express Chinese food chain.

The McDonald's in this Los Angeles suburb boasts wood ceiling, silver-coated chairs, plus red accents throughout the dining area to symbolize fire and "good luck, laughter and prosperity," said Brenda Clifford, who designed the dining area.

The textured walls patterned after ocean waves symbolize "life and relaxation -- the balanced things that you want in your life," she said.

Customers are responding positively, whether or not they recognize the feng shui elements.

"When we first walked in we were amazed, we were happy we skipped the drive-through and went inside," Andrew Chen said while lounging in a white leather booth with a friend.

Chen, 20, said he didn't notice the feng shui elements. He just thought it was a modern interior.

Two workers at the nearby post office said they've been taking more lunch breaks at the remodeled McDonald's, which opened in late December.

"We're here two, three times a week," Waldo Alfaro said as he munched on a Filet-O-Fish and a salad. "It's relaxing, you don't feel any pressure here."

Nevermind that this is the same McDonald's that's been vilified by critics over its artery-clogging Big Macs and fries.

The buzz about the feng shui McDonald's is starting to attract curious onlookers.

"It's successful as a design. It's got a very clean, open, airy appearance," said Elaine Bjorklund, a professor emerita of cultural geography at the University of Western Ontario in Canada, who was in town visiting a friend.

"I'm not a McDonald's habituee," she added as she snapped pictures of the dining area. "It would be interesting to see if this trend will spread."

Brownstein said he and his partners chose the feng shui makeover because the restaurant is located near a renowned Buddhist temple, which is considered good luck. The designs were meant to appeal to the area's growing Asian population, but were also done in a way that would help all customers tap their inner Zen.

With the help of a feng shui master, the designers added details that only feng shui practitioners could appreciate. They include positioning the doors in a way that would block out bad spirits while keeping good ones inside, Clifford said.

The eight rows of red tiles near the food counter are another symbol of fortune, because the number eight is considered auspicious, she said. Meanwhile, the metal sculptures of a crane and Koi fish adorning one wall represent fertility and prosperity, she said.

Clifford said she made the nearly fatal mistake of putting 44 seats in the dining area, until she learned that feng shui followers consider the number four a symbol of bad luck. So she added an extra seat to make it 45.

"Few people would notice it, but if you're in the know, you'll say 'Oh my God, that's terrible,'" she said.

She went as far as staggering the grout lines in the tiles rather than keeping them straight.

"You want to have obstacles in life, it makes you grow," she explained.

While the menu remains the same, there is a McCafe offering lattes and gourmet coffee drinks.

When McDonald's restaurants in Europe upgraded their decor several years ago by adding hardwood floors, armchairs, TVs and other enhancements, sales went up, Brownstein said.

He said business has picked up at his restaurant too.

Other franchise owners are taking notice. Clifford said her company has been hired to feng shui two more McDonald's in Southern California.

Source: Associated Press