At the recent Urban Land Institute (ULI) annual fall conference in Washington, D.C., the question on everyone’s mind was: “When will the real estate market see some normalcy?”
Now that I’m back at the daily grind in San Francisco, I find myself reflecting on the discussions and unique perspectives shared by colleagues from around the world.
A key point continually reiterated was that the real estate markets would not see any type of norm until 2013 or 2014. The good news was that we’re at the bottom, but we may have five years of excess supply, particularly tied to pending and upcoming foreclosures. The average foreclosure takes nine months to a year, creating a hidden and looming supply of properties for the market.
According to Hessam Nadji, managing director research services for Encino, Calif.-based Marcus and Millichap, if we have two quarters of positive growth, then hiring will start. However, the market will also have to absorb two more waves of foreclosures over the next year.
Mike Castleman of Metro Study feels that we typically have a three-year run up, then three years down, followed by three years to fix the fundamentals. According to Castleman, we’re now in the second year of the bottom.
Conversely, Steve Furnary, chairman and CEO of ING Clarion says this is the start of a seven-to-10-year cycle, where one can find higher returns at the end by entering the cycle today. Geoffrey Stack, managing director of Sares Regis says the down cycle will repeat in seven or eight years.
Jonathan Smoke, senior vice president at Hanley Wood, believes we’re past the bottom and will see gradual improvement in the real estate market. We may not get back to the 1.5 million annual new home sales, on the residential side, but 1 million will likely be typical.
Owners or renters?
Is this just a cyclical change or will there be a secular adjustment with a fundamental shift in the housing market? Factors affecting the issue include the expected drop in homeownership to 60%-64% of the population from nearly 70%. That means many more people will rent.
Also, the nation’s Generation Y population is now bigger than the Baby Boomer group. Many young people still are moving back home or going to grad school, postponing real estate-related decisions. A typical member of Generation Y will graduate $23,000 in debt and may be as financially strapped as those in the 1930s. Another factor affecting the real estate market is the decline in immigration over recent years.
But the flip side to this debate is that homeownership will rise again. My feeling is that, unnoticed, many Gen Y members have been buying properties. We are seeing two distinct groups of buyers, the Gen Y and Baby Boomer groups.
As jobs return, the demand from Gen Y is expected to surge, and demand will exceed supply. Stephen East of Ticonderoga believes the surge will continue for a decade.
Expect federal regulations
The U.S. is poised for growth, as the only developed nation with an increasing population. The U.S. population is estimated to grow by 2.5 million 3 million people per year.
Issues with the government-sponsored enterprises (GSEs), Fannie Mae, Freddie Mac, and the FHA, won’t be resolved until the housing market stabilizes around 2013 or later. Some 95% of home sale transactions involve one of the GSEs. New federal regulations are expected to roll out over the next two to three years.
Washington, D.C. has the best housing market in the nation. This comes as little surprise when the area’s unemployment rate is 4.5% and the federal government isn’t laying off workers.
One of the most commended panelists at ULI was Barry Sternlicht of Starwood Capital, who received the greatest round of applause after giving his ideas on education and the environment. He says this country focuses on the short term, just as corporate America does. But investing in education would solve many problems, he notes.
And Sternlicht voiced other opinions, such as that a gas tax might provide incentive to produce cars that get 35 miles per gallon. “Who are we to tell the Chinese about their environment when we are major polluters?” says Sternlicht.
ULI’s Fall Conference offered an amazing platform for leaders in our industry to share insights and plan for the future. This year’s conference was an enlightening experience and it provided a chance to consider the unique challenges we all face in the effort to return to normalcy and learn from past cycles.
Alan Mark is founder and president of The Mark Co., a San Francisco-based real estate firm.