Emerging Trends in Real Estate 2012 - Urban Land Institute

Housing
Strengths
New inventories “aren’t out of whack.” Surviving homebuilders
manage to endure in near-shutdowns, “affordability is the best
in decades,” and the interest rate environment cannot get better.
Markets continue to bump along the bottom, and stronger
neighborhoods register some modest pricing gains. “If you take
out the distressed, foreclosed product, values increase modestly”
in most places, but to levels substantially below pre-crash
peaks. Problems are concentrated in bubble-burst cities where
the premise for building new homes was not job growth but selling
to speculators and retirees. Formerly hot growth places with
more diversified economies like Phoenix and south Florida can
rebound faster than Las Vegas or central Florida. Banks necessarily
go into slow motion on foreclosures, heeding nervous
regulators. “They won’t dump product and make things worse.”
Exhibit 4-22
The S&P/Case-Shiller Home
Price Composite-20 Index
Index
250
200
150
Weaknesses
The surfeit of existing homes for sale and the discouraging
dimensions of underwater homeowners harpoon the prospects
for already-reeling homebuilders “stuck with land they can’t
develop.” Any sudden move to clear the market without some
cushion—either from lenders or the government—could upend
millions of Americans, further deflate already-imploded values,
and rattle the fragile economy. But enormous public sector deficits
and antitax sentiment short-circuit proposals for government
support (“bailouts”) to overleveraged homeowners. Relatively
few potential homebuyers have the confidence, equity, or credit
ratings necessary to acquire homes, and the lugubrious jobs
Exhibit 4-21
U.S. Single-Family Building Permits
Thousands of Units
2,000
1,500
1,000
500
0
1991
1993
1995
Source: Moody’s Economy.com.
*Forecasts as of August 2011.
1997
1999 2001 2003 2005 2007 2009 2011* 2013* 2015*
100
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*
Source: Standard & Poor’s.
Notes: Seasonally adjusted. *Data as of June 30, 2011.
scene will continue to depress the number of house hunters.
The government, meanwhile, delays action on Fannie Mae
and Freddie Mac. Any reasonable regulatory solution likely will
restrict licentious lending practices, necessarily moderating any
future ramp-up in mortgage activity. “We won’t have the same
old formula of homeownership subsidized by the federal government,”
and the long-held belief in buying housing as a secure
investment dies. Deflated second-home markets rely on luring a
shrunken group of affluent buyers who have cash and shop for
bargains. Does America really need another championship golf
course community
Best Bets
Now is a great time to purchase that dream home or retirement
condo in a prime location, but that’s out of the question for
most cash-strapped folks. In good neighborhoods, well-heeled
private investors buy houses to rent and eventually will convert
them back to for-sale homes when the market finally allows. In
the meantime, they can secure rents to more than cover taxes
and other expenses. Land bankers could eventually score
by purchasing tracts for cents on the dollar, but they need to
be prepared to hold nonproductive assets for (quite) a while.
The seniors’ housing wave has only just begun. Developers
should cater to rising demand from downsizing empty nesters
who want urban lifestyles and greater convenience without car
dependency. In-town seniors’ apartment housing could gain
over suburban models. One caveat: the demise of pensions
56 Emerging Trends in Real Estate ® 2012