Wall Street has been occupied. Mortgage brokers shut down. Bankers, vilified. Even struggling homeowners, behind on their mortgages, receive scant pity as they are forcefully removed from their homes.
But what about real estate agents? By and large, the people paid to advise us on what’s often the biggest financial decision of our lives, have gotten off scot-free, avoiding the scorn so heavily heaped on nearly every player in the real estate game.
It’s a mystery to which every one homeowner – and prospective homeowner – should want an answer. And here it is:
Cirios Real Estate’s Andrew Jeffery chronicles the influential role the National Association of Realtors, or NAR, played in designing US housing policies that enriched real estate professionals by making buying a home cheaper and easier than ever before. NAR argues that by subsidizing home buying, the government can help American families realize the American Dream, making upward social mobility possible for everyone.
But at what cost?
Tracing a path that begins in Depression-Era politics and the New Deal, we follow real estate industry lobbyists through the Great Depression, World War II, the Civil Rights Movement and into the housing boom. We examine accusations that NAR was an essential, albeit often overlooked culprit, in blowing the housing bubble, the bursting of which nearly took down the entire global financial system.
To read this newly published e-book, click here: (Non-Kindle owners can use read.amazon.com to read it online)
Some of the highlights of the piece can be found below:
Critics argue that NAR’s positions are laced with a fundamental contradiction: claiming to believe in free markets even while zealously fighting for generous government subsidies to support homeownership. (read more)
It is a sad irony that the very policies that over decades shaped the U.S. real estate market and eventually culminated in the bursting of the housing bubble were advanced under the guise of supporting the American Dream of owning a home. (read more)
In President Roosevelt’s own words: ‘The number of new refrigerators means something besides just plain dollars and cents. It means greater human happiness.’ (read more)
With FHA insuring mortgage payments and Fannie Mae providing liquidity in the secondary market, homeownership, once lauded for its status as a private enterprise, had become a market almost entirely supported by the federal government in less than a decade. (read more)
With affordable housing options in short supply, swelling ranks of poor minorities piled into inadequately funded public housing. Meanwhile, whites flocked to the quiet suburbs and newly minted single family homes that were being built with government-backed development loans from the FHA. (read more)
In pre-1968 America, private residential development deserved an infamous appendix: ‘Whites Only.’ (read more)
White Americans received an astounding 98% of federally approved mortgages between 1934 and 1968. (read more)
An FHA underwriting manual from 1938 stated that lending restrictions should include property-specific provisions for reasonable items like “adequate light and air,” but also specified “prohibition of the occupancy of properties except by the race for which they are intended. (read more)
Lenders were still reticent to make loans in poor, urban neighborhoods. They were, however, happy to take local residents’ deposits, turn around, and lend out the money to middle class families buying homes in the suburbs. (read more)
The ensuing refinance boom set off a six-year speculative housing orgy, financed by cheap loans and the expansion of a niche segment of the mortgage market called subprime. (read more)
During the boom years of 2002–2006 … real estate agents collectively earned between $400 and $500 billion in commissions. (read more)
As the housing market began to crumble, NAR’s message to consumers was clear: ‘Right now may actually be one of the best times to buy a home. The outlook is for home prices to increase next year.’ (read more)
Perhaps as a thank you for NAR’s $40 million ad campaign, USA Today crowned NAR Chief Economist Yun the top economic forecaster in 2008, despite having an impeccable record— for being dead wrong. (read more)
NAR is advocating for a near-complete abdication of the mortgage market to the federal government—in the same letter that begins with a statement in support of free markets. (read more)
If owners are so much better off than renters, why should mortgage interest and not rent be tax deductible? The answer’s easy—because renters don’t generate real estate commissions. (read more)
As 2012 rumbles out of the gate, the US housing market correction enters its sixth year. By all accounts, it’s been the worst real estate slump in generations. But even this far into the cycle, housing bears continue to troll through data releases looking for ominous warnings that vindicate their view that homebuyers and investors alike should shun real estate. They have a point, but record foreclosures, bloated inventory and home price declines are anything but news.
They are also missing the point entirely: The time to be bearish on housing was in 2005, not 2012.
For those not in the market, who get their color from the blogosphere and headline-selling financial press, the housing market is a mess: Foreclosures persist, unemployment is high, Europe is in turmoil, growth in China and the other BRICs is slowing and banks are doing their best to avoid giving out loans. And that’s all true.
But come December when we look back at how the housing market fared in 2012, this will not be a year remembered for how bad it was, but for how bad it wasn’t. Over the course of the six year housing correction, immense amounts of risk have been bled out of the market to a point where, in general, opportunities for good investments outweigh the risk of further losses.
Below are 12 themes for housing in 2012, and while not all represent rosy optimism, they support my continued view that housing bears are seven years late to the party. And while bulls may be early, the good ones always are.
1. Bottom Calling
All of a sudden its cool again to call the bottom in the housing market. Already, some prominent pundits and analysts have said 2012 will mark housing’s nadir. Goldman Sachs came out with a report in December predicting that the widely-watched Case Shiller Home Price Index would slip in 2012 but find a bottom. Optimism that Goldman’s forecast will come true should be tempered, however, since real estate website Zillow — a company built primarily on providing consumers misleading information about their home’s value — recently published a report of their own pointing to 2012 as housing’s low point. And remember, in 2009, 2010 was supposed to be the bottom. Then it was 2011. Midway through this year, if housing remains weak, look for those bold analysts to backpedal, finding unforeseen circumstances that rendered their predictions null.
2. Robo-signing hangover, cured?
This time last year, the housing market was holding its collective breath as the robo-signing scandal broke, revealing shoddy foreclosure processes, first at Ally Bank (formerly GMAC), then Bank of America, JP Morgan Chase and nearly all the country’s biggest lenders. The repossession machine ground to a halt, resulting in limited supply of new foreclosures coming to market. Banks scrambled to “investigate” their procedures, uncovering a litany of practices that were sloppy at best, illegal at worst. Even firms like Lender Processing Services, which provides back office support and services to the mortgage industry, got wrapped up in the scandal. As a result, foreclosures virtually ground to a halt in 2011, which helped prop up prices up in the first half of the year. In many areas, price declines accelerated into year-end as banks resolved their robo-signing issues again and restarted the foreclosure machine. 2012 looks to be another year heavy in foreclosures, but with hoards of cash buyers looking for distressed properties, it will take a true deluge of inventory to overwhelm pent up investor demand.
3. Geopolitical Uncertainty
The world is a mess. The list of geopolitical tinderboxes that could catch flame at any moment is too long to reprint here. Suffice to say, every asset class on investors’ menus is laced with risk, many of which have little to do with the fundamentals of the investment itself. And with risk at all-time highs and returns on savings at all-time lows, steady, cash flowing assets are starting to be seen as more attractive than they are boring. This flight to quality is one of the reasons cities like San Francisco, New York, Boston and Washington have seen investors flock to their Class A properties. A world where demand dries up in midtown Manhattan or downtown San Francisco is an ugly world indeed, and many view real estate a safe “as long as the world doesn’t completely implode I will be OK” bet.
4. Foreclosure Rental Program
The latest in a string of Washington-directed solutions to the housing market’s woes is the turning of millions of foreclosed homes into rentals. The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, received over 4000 proposals after requesting ideas on how to structure its program to rent foreclosed homes. All the big players tossed their hats into the ring, in additional to financial firms like Fortress Investment Group, Deutsche Bank and Barclays Capital. With rents rising and home prices falling, regulators and politicians alike think they may have found a way to not only keep bank owned homes from pushing home prices down any further, but earn a couple bucks in rental income in the process. And while major lending institutions are playing ball to show they don’t relish in kicking Americans out of their homes, the logistical challenges to managing nationwide rental programs are, in a word, significant. Time, and data on actual REO homes turned into rentals will prove out just how successful the initiative ultimately is, and how much of it is political fluff.
5. Return of alternative lending
So-called “exotic” lending during the boom was one of the chief culprits in the housing market’s eventual collapse. But to think that alternative lending has no place in the market is plain ignorant. Through Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA), government-backed mortgages – and their strict guidelines – dominate the current market for home loans. But increasingly, small originators are gaining market share by offering more flexible loan products. No one will call the loans “Alt-A” or “Subprime,” but that’s exactly what they are. But from the guidelines my firm has has seen, underwriting is far more reasonable and responsible than it was during the boom. Good borrowers with dinged credit or alternative income situations have been locked out of the mortgage market since the crash – bringing them back in will be a positive headwind for housing in the coming years.
6. Multi-family momentum
The hottest sector in real estate right now is multifamily. It seems like everyone wants to buy apartment buildings, in particular in coastal metro markets where rents are going through the roof. Cap rates have compressed to levels not seen since the market’s peak, interest rates are low (although loans are still a challenge to get funded) and money is pouring into the market. In Class A markets like San Francisco and New York, competition is heated for big buildings. But with smaller investors still reeling from the downturn, the small building market (5-20 units) is still awash with opportunities. Strong demographic trends (more below) that favor the rental market lead us to believe that apartments are hot for good reason, and should stay that way for the foreseeable future.
7. Foreign Investors
An often overlooked reason why housing is unlikely to fall off another cliff any time soon is the extent to which investor demand for distressed assets dwarfs supply. This is true for rundown duplexes in Oakland and Manhattan high rises alike. And within that world of buyers stalking the market for deals, a surprisingly large percentage of all cash buyers have names most Americans would have trouble pronouncing. To wit, in the past six months, 19 of the 20 cheapest homes in San Francisco were purchased by buyers of Asian descent. The money keeps pouring in, be it from wealthy foreign businesspeople looking favorable the tax treatment our government gives direct investment, speculators yanking money out of the rapidly cooling Chinese market or Canadian “snowbirds” picking up a desert spread on the cheap in an exclusive Scottsdale development. Our housing market is far from fixed, but when investors look around the world at their asset class options, the US real estate market is benefiting from being best in show at a really, really lousy show.
8. Hazy Future for Fannie and Freddie
Remember Fannie Mae and Freddie Mac? Those little government-sponsored entities no one outside the arcane world of mortgage finance had heard of until they blew up sky-high in September 2008? Since that time, the two companies have needed nearly $200 billion in capital to make up for losses on mortgages bought or insured before the market collapsed. Since Fannie and Freddie were put into federal conservatorship, regulators, market participants and lobbyists have squared off over how to reshape the federal government’s role in housing. Most experts agree that the housing market cannot become truly healed until there is resolution on this issue, and with 2012 being an election year, few expect meaningful progress on this complex, hotly debated issue. (For more on the history of government involvement in the housing market and how the real estate lobby shaped federal policy to support homeownership at all cost, check out my recently published e-book: “Homeownership at Any Cost: How the National Association of Realtors Convinced Taxpayers to Subsidize the American Dream.”)
9. False Election promises of a Silver Bullet
Notably, housing was absent from even the most economically-focused Republican primary debates. Unfortunately, politicians have little to gain by proposing bold steps to fix the housing market, primarily because no such bold step exists. Some programs have been more successful than others, and certain ideas to improve the market have more merit than others, but “solutions” that tap into federal funds are attacked from the right while those that aim to remove barriers to foreclosure receive equal scorn from the left. Trying to fix the housing market at this point is a bit like happening upon a beached whale, long since dead and starting to reek, and pulling out a garden house.
10. FHA Shortfalls
Google “FHA is running out of money” and the first articles that pop up are from 2009, when concerns first surfaced that the Federal Housing Administration, or FHA, was running short of cash. Unlike Fannie and Freddie, who purchase actual mortgages, the FHA provides mortgage insurers that protect lenders in the event borrowers stop making payments. FHA loan guidelines are strict in many ways, but loose on credit and allow tiny down payments in order to provide finding options for low-income or credit-impaired home buyers. FHA squashed rumors of financial troubles in 2009, but concerns were raised again late last year when an independent auditor found that there was close to a 50% chance the FHA would run out of money and require a federal bailout. If FHA is indeed forced to go hat in hand to Washington for cash, the chances of such a request being well-received are, to say the least, somewhere squarely between slim and none.
11. Private Securitization Market Remains Stalled
Since the mortgage-backed securities market’s zenith in 2005, when according to the Securities Industries and Financial Markets Association issuance peaked at $740 billion, the market for private-label securities (those not backed by the US government via Fannie Mae and Freddie Mac) has plunged 99%. But ever since the boom’s big issuers like Goldman Sachs, Morgan Stanley and UBS all but shuttered their mortgage desks, they have been biding their time to when such securities were once again economic to create. Ratings agencies, namely Standard and Poors and Moodys, have altered their models such that issuances are no longer profitable, so precious few new securities have been issued. Redwood Trust, a California-based mortgage investment company, is one of the few firms doing new issuances and all have been of the jumbo variety. Even though others would like to follow in Redwood’s footsteps, until the regulatory landscape becomes far clearer, few will.
12. Housing demographics of young people
After peaking at nearly 70% in 2004, the US homeownership rate has tumbled to around 66%, a level not seen since 1998. Young owners, in particular, have been hardest hit. According to demographer Cheryl Russell, homeownership among 30-34 year olds is falling faster than any other age group: A loss of middle class wealth, student debt loads and uncertainty about the future are just some of the reasons young people are shunning homeownership. Couple that with trends towards transience and a general movement towards smaller spaces and city-centers, and the outlook for rentals starts to look pretty good. It’s no mystery why the real estate investment community can’t get enough of multi-family.
To call the US housing market anything but distressed would be foolish. But to mistaken a distressed housing market for one to avoid would be even more so. And so we plunge, headlong into 2012: Good luck out there.
So, let me get this straight — the Massachusetts Attorney General is suing some of the biggest banks for wrongful foreclosures in its state. Fine, we’ve heard that before. And since the ability to foreclose for non-payment is essential to a lender securing its interest in a property, Ally Bank announced this weekend that they have stopped buying loans in Massachusetts. Yes, the same Ally Bank which is owned 74% by the US Treasury Department.
The anti-foreclosure movement has an ostensible goal of stabilizing the housing market by propping up home prices and keeping Americans in their homes. But the unintended consequences of these policies are impacting the broader housing market, hurting everyone, weakening the already struggling recovery.
The United States may be in danger of losing its status as “the land of opportunity,” but depressed prices have been attracting foreign buyers ever since the housing market went off the rails. Now, Washington wants to make it even easier for overseas investors to park cash in American real estate.
In a rare show of bipartisanship, last week two Senators put forth a bold plan to inject cash into the ailing housing market. According to the Wall Street Journal, Chuck Schumer (Democrat, NY) and Mike Lee (Republican, Utah) co-authored a set of immigration measures that included allocating special residence visas for foreign nationals who spend at least $500,000 in cash on residential real estate.
The visas would not let buyers work in the US, but would allow them to spend more time here and compliment other programs that allow wealthy foreigners to earn visas by investing in job-creating businesses. Proponents argue the program would be a much-needed shot in the arm for high-end housing markets, in addition to attracting more wealthy foreign nationals to bolster consumer spending. Opponents, however, argue that the last thing we need is an artificial inflation of home prices that pushes ever-more Americans out of the housing market.
The plan, despite having some drawbacks, has merit.
Housing demand remains tepid, and far better to bring money in from overseas then recycle tax dollars that could be better spent on infrastructure, scientific research or any number of worthy economically beneficial expenditures. Further, contrary to xenophobes who seem to think the only way to make money outside the US is by peddling narcotics or human beings, most wealthy foreigners earn their money through legitimate business. At a time when our economy badly needs fresh jobs, an influx of foreign ingenuity would be a boon. Would a few crooks slip through the standard criminal background checks for visa approval? Sure, but how many drug dealers or pirates want to register with the State Department anyway?
Banks like Wells Fargo (WFC), Bank of America (BAC) and JPMorgan Chase (JPM) would benefit, as wealthy foreign nationals spending more time in the US would encourage them to set up domestic bank accounts and use other local financial services. Apple (AAPL) and other technology firms could see a pickup in domestic demand. Even if the cash is originated overseas, it would be spent here, creating more demand for employees. And homebuilders like Toll Brothers (TOL), PulteGroup (PHM) and KB Home (KBH) may finally be able to unload some inventory at a time when new home sales are at dismal levels.
Many argue that homes prices are still too high, so we should keep a lid on an already growing pool of foreign buyers to let prices keep slipping back to more affordable levels. But are prices really that high? A recent Deutsche Bank study found that in the nation as a whole, it’s actually more expensive to rent than to buy. This certainly does not hold true everywhere, but if you are expecting another cascading collapse in home prices, you are going to be sorely disappointed — the data just don’t add up.
Opposing foreign home-buying is to ignore that we live in a global economy. Money flows more easily across borders, and Americans are being forced to compete for resources with an increasingly educated global population. So why not embrace our new reality rather than stubbornly erect more rules to keep smart, successful people out of our country just because they happened to be born somewhere else?
Once upon a time this country thrived on competition; we believed that we could outwork, outthink and out-innovate the world. And for a while, we did. But the world is catching up. We are falling behind. Building more fences, or bigger ones, is not the answer. So I say bring on the foreign buyers. I welcome the challenge, the competition — maybe it’s a kick in the pants this country sorely needs.
Despite reporting largely what we already knew, last Friday’s downbeat jobs report has so-called housing market experts running scared. Investors, on the other hand, are licking their chops.
Housing economists awoke smugly Friday morning (July 8), eager for the monthly jobs report to affirm their views on the future of US real estate. Bulls and bears alike were in for a shock, however, as the Bureau of Labor Statistics reported that a paltry 18,000 jobs were created in June, well below even the most dour forecasts. The unemployment rate rose to 9.2% and the report was, in the words of Paul Ashworth, chief US Economist at Capital Economics, “awful from start to finish.”
Housing bean-counters rushed to revise estimates down, tweaking their complex models to reflect a US labor market that simply refuses to get off the mat after being knocked nearly out by the financial crisis and ensuing recession. As HousingWire, an industry publication, reported Friday, “June’s anemic job growth riled housing economists, prompting many of them to lower expectations for home sales and home prices in the second half (of the year).”
So let’s review: From a housing perspective, what new information did the jobs report provide that would warrant such drastic revisions from these supposed economic Einsteins?
*Silence.*
And now let’s review what the report confirmed, which anyone paying even the slightest bit of attention to the economy already knew:
The employment market is downright abysmal.
Wages remained flat, dampening inflation fears and supporting low interest rates in the near term.
Unemployed Americans are staying that way longer, as each month more despondent job seekers are dropping out of the labor market altogether.
The BLS continues to prop up already weak employment figures with its questionable “Birth/Death Adjustment.”
True unemployment — as measured by Americans actually not working, not just those looking for work — remains highly elevated, now above 16%.
Even government, which recently has been the employer of last report, has started delivering pink slips, as red-stained budgets force bureaucrats to fire their own.
I could go on, but what’s the point? None of this is new. The only remarkable thing is that the same economists whose June job creation estimates ranged from a wildly inaccurate 90,000 to an even more wrong 140,000 have even a shred of credibility left.
So then, back to housing. The entire concept of investing in real estate, or any asset for that matter, is to find a way to buy property for less than its actually worth. There is then of course adding value through efficient and effective operating, but as a starting point, simple arbitrage should be at the core of any good investor’s strategy. And if real estate is so very guaranteed to depreciate in the near term, then the so-called smart money should surely be running, not walking, from real estate for sale at anything less than bargain prices.
Nothing could be further from the truth. In nearly all segments, well-priced property is being snatched up in competitive bidding as billions of dollars in capital continues to chase opportunities that are in short supply. Certain market segments even have, wait for it, positive fundamentals.
Such blasphemous reports do show up in the press from time to time, but massive shadow rental demand makes a far less sexy headline than massive shadow foreclosure inventory. Even more boring is the fact that the release of the former is picking up speed, even as the release of the latter remains at a politically driven drip.
And it’s easy to write off as a bubble the fact that companies like Google, Salesforce, Apple, Twitter and Zynga literally cannot hire fast enough to keep up with the growth in demand for their services. Or to forget that household formation has begun to pick up speed after several years of being vastly below the long term trend. Or to ignore that new construction has all but stopped, which will keep a lid on rental inventory even as demand rises.
The point isn’t that we should all rush out and buy homes because a few tech companies are doing well. Despite a recent Fannie Mae poll that a majority of Americans believe it is a good time to buy a home, caution remains the most valuable arrow in a homebuyer’s quiver.
The point is that reports the ship is sinking when its already underwater aren’t all that important. And listening to those who change their view because of facts they should have already known is about as wise as it was five years ago, when housing couldn’t go down.
It doesn’t make nearly the headline fodder as revolution in Egypt (or Wisconsin), but the fate of the mortgage interest deduction, or MID, is a hot topic in housing finance circles this budget season. And while eliminating the MID may sound like a popular, hard-line approach to expensive government subsidies for the housing market, the stark reality is that the MID is not going anywhere anytime soon.
The new Obama administration budget calls for stemming the benefit homeowners get by writing off interest on mortgages. Specifically, the president wants to limit deductions for homeowners earning more than $250,000 in annual income. Meanwhile, deductions on up to $1 million in mortgage debt, loans on second and third homes, and home equity lines of credit would remain in place. The MID isn’t the budget’s largest line-item, but it is no small potatoes, either.
Estimates vary, but the consensus is that the MID is around a $100 billion per year budget item. However, only one-third of homeowners actually get to take the deduction because many homeowners don’t itemize their deductions, missing out on one of the highly touted tax benefits of owning a home.
Lining up to defend the MID are powerful real estate and mortgage special interest groups, eager to promote home ownership (and of course member commissions). They argue that at a time when the housing market is already so shaky, removing this incentive to own real estate would undermine the feeble recovery that already appears to be faltering. Unsurprisingly, the National Association of Realtors, or NAR, the powerful real estate lobbyist group, is up in arms: “NAR opposes any changes that would limit or undermine current law.”
On the other side are a smattering of economists who aren’t sure the MID has much of an effect anyway. And if it does, the tax savings could be put to much better use. In a recent Financial Times piece, Robert Pozen pointed out that in Australia, Canada, and England, countries with similar demographics and legal structures to the United States, there is no MID yet home ownership rates remain higher than ours (which currently stands at its lowest in more than a dozen years).
Others believe that the MID and other subsidies via Fannie Mae and Freddie Mac — in addition to accommodating interest rate policy that has helped boost mortgage-lending profits at money center banks Wells Fargo (WFC), JPMorgan Chase (JPM), Citibank (C) and Bank of America (BAC) — allocate too many precious public dollars to housing. Far better to invest in innovation, or pretty much anything that can’t be boiled down to four walls and a roof.
Ultimately — and unfortunately because much of the discussion over US housing policy falls into this same category — the debate is futile in the near future. The MID in its current form reduces the cost of a home by about 20%. If this sounds astounding, do the math. The mortgage payment for a buyer putting down 20% to buy a $300,000 home and taking out a 5.0% mortgage is $1,288. The buyer gets to write off the $12,000 in annual interest paid, reducing his or her taxes by $3,000 assuming a 25% tax bracket. That’s $250 per month, making the buyer’s effective monthly mortgage payment just over $1,000 per month. The equivalent monthly payment pencils out to a home that costs around $240,000, or 20% below the original $300,000.
Current government policy states an explicit desire to prop up home prices, so expecting a policy that would almost immediately give property values a 20% haircut is untenable, at best. Even the current proposal will have a hard time surviving; a similar one last year got shot down by a Democrat-controlled Congress. Far better to focus near-term efforts on resolving the Fannie Mae and Freddie Mac debacle, as the only way the housing market can truly heal is with a functioning, liquid, private secondary market. As long as the zombie-like Fannie and Freddie are allowed to hang around, housing will remain in a painful limbo.
Almost five full years into the housing downturn, it’s still cool to be bearish on real estate. But cool isn’t always right: Despite headwinds such as looming shadow inventory, a lackluster job market, and geopolitical instability, there are plenty of reasons why rose-colored glasses may be the real estate eyewear of choice.
Below are 10 reasons why it may finally be time to be bullish on housing … but first, one huge caveat.
The local bottom that the broad housing market experienced in April 2009 may yet be surpassed to the downside. If it is, housing bears will pound their chests, stubborn pessimism vindicated. They will be mistaking the trees for the forest. This recovery, which in many areas remains in full force, has been, and will continue to be, highly local in nature. Fundamentally strong markets have thrived, while weak ones have languished. National, state, and even city-level indicators have been masking trends that are ongoing on a neighborhood level. This will continue, and those that ignore it will miss out on countless opportunities.
So without further ado, 10 reasons to be bullish on housing:
1. Jobs. Housing follows jobs. Period. And while the job market is still bunk in many areas, pockets of strength are emerging. After Google announced it would be hiring as many as 6,000 new employees, the Silicon Valley powerhouse received 75,000 applications in two weeks. The company is looking to retain talent in its fight against local rivals like Apple, Salesforce.com and Yahoo, along with social media upstarts like Facebook, Twitter, and Zynga. If housing really does follow jobs, the San Francisco Bay Area may prove to be a bright spot in 2011.
2. Jobs. At the risk of being redundant, housing follows jobs. Consumer confidence is close to reaching last spring’s high point, the most optimistic the US has felt since 2008. And while hiring hasn’t restarted in earnest, firing has slowed to a drip. If you haven’t been fired yet, chances are your job is reasonably secure. Job security drives optimism, planning for the future and … home buying.
3. Pent up demand among young adults. Consider this: 2006 college grads entered the labor market just as home prices began to collapse. Those who still have a job kicked and scratched their way through the Great Recession and are now 27, perhaps married or getting there and kids may be on the horizon. Some were even smart enough to save some money. According to a graph produced by economist Tam Lawler and posted on Calculated Risk, today’s young adults are under-represented as homeowners compared to historical norms, and a disproportionately large chunk are living at home. As the job market crawls back to life, this trend is likely to reverse. And if the apartment market’s snappy performance in 2010 is any indication, it already has.
4. Foreclosures. Frankly, I’m getting tired of people claiming that an impending flood of distressed real estate is going to torpedo home prices. If you’re making that case, ask yourself if you really, truly have any idea what you’re talking about. Banks are rational actors, and as much as Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and the rest are demonized, they rarely willfully destroy the value of their own assets. Which is exactly what flooding the market with bank-owned properties would do. Coupled with political pressure and an ever-increasing maze of foreclosure litigation gumming up the repossession process, foreclosed inventory will continue as its steady stream. It will take years (around four based on current estimates) to work through shadow inventory, but there will be no flood.
5. Inflation. While much is made of inflation in the media, few pundits actually understand it. Inflation expectations, not inflation, is what we should be worried about. Things get scary when consumers start believing that prices are rising, or about to rise. Rational economic actions take hold, and rather than filling their tanks when empty, drivers fill whenever they pass a gas station. The expectation of higher prices, not higher prices themselves, is what changes economic actions. Rising inflation expectations pull demand forward, pushing up prices in an inconvenient self-fulfilling prophesy. Historically, real estate has been a rather good hedge against inflation. As people start to get nervous about inflation, they buy real estate. For more on how good a hedge real estate has historically been against inflation, see my firm’s analysis a few weeks ago: If You Fear Inflation, Should You Buy Real Estate?
6. Higher rents and low interest rates. Ask a prospective tenant in a major metropolitan area how the apartment search is going and the response will not be pleasant. Rents are rising, inventory is down, and landlords are back in the driver’s seat. And despite a recent bounce, interest rates remain historically low. High rents and low interest rates push would-be renters towards buying, particularly in areas with job markets that are relatively less weak than the country at-large.
7. A booming apartment market. Investors are snatching up multifamily properties as positive demographic trends, low interest rates, and perceived values attract professional and amateur buyers alike. Homeownership is at a 10-year low, young adults are moving out of their parents’ basements and into apartments, and leverage is fantastically cheap. What more could an apartment buyer want? The multifamily space typically recovers first, and if history is rhyming in even the smallest way, this is good news for housing.
8. Investor appetite remains strong. From fedora-hat donning, Hawaiian-shirt wearing, clipboard-scribbling, earpiece-whispering professional investors at the courthouse steps to vulture funds armed with hundreds of millions of dollars, investor demand for real estate remains robust. Distressed opportunities — across all types of real estate — have come to market slower than expected, which means buyers have had more time to hit the pavement and raise money. With limited opportunities, competing buyers are driving up prices of distressed assets: For every well-priced foreclosure there are a dozen all-cash buyers looking for a deal. And don’t forget the baby boomers, the first of which turn 65 this year. While many are eying a trade-down into a smaller, more retirement-friendly home, even more are looking for reliable fixed income to pay for rounds of golf and tennis lessons. More than a few gray-hairs view real estate as their path to comfort during the golden years.
9. The stock market. With the Dow Industrials above 12,000 and the S&P 500 topping 1,300 for the first time since mid-2008, IRAs, 401(k)s and trading accounts are feeling fuller than they have in years. The wealth effect is in full effect, as buyers look to sell stock for a down payment and the confidence to pull the trigger on a new home.
10. Confidence. If you’ve made it this far without either scrolling down to question my sanity on the Minyanville message boards or falling asleep, I salute you. And for the precious few readers who are still with me, consider this very important question: Do you feel better or worse about the US economy, and more importantly your own personal economy than you did two years ago? This is not a political statement: Challenges remain, to be sure, but we Americans are a stubbornly resilient, optimistic bunch. Confidence is relative, and for a country that has been through economic hell and back since 2008, we are in remarkably better shape. Confidence in the present builds confidence in the future, and confidence of all types increases risk-taking activities. Admittedly when you have seen the depths of despair, a single ray of dim light can feel like high noon, but it doesn’t matter. Confidence is a trajectory, a transitory voyage through time that is more accurately measured against where you just were than looking at the last time you were here. The fact that most people believe that we’re no longer headed for apocalyptic collapse is, as they say, a good thing.
It often gets thrown around that owning real estate is a good “hedge” against inflation. That is, real estate prices will inherently rise under inflationary pressures. As far as conventional wisdom goes, this seems to be the case. But does this rising inflation = rising real estate prices relationship actually hold true? To investigate this idea further, we looked at three separate data time series: National Median Home Price, Dow Jones Industrial Average (DJIA) and Consumer Price Index (CPI, a measure of inflation).
As you can see in the graph below (all lines are expressed as the percent change starting from January 1963), home prices have consistently outpaced inflation by a wide margin. Even the recent real estate market meltdown hasn’t brought prices back down to inflationary levels. By contrast, the stock market had been growing at below inflation levels until the early 90’s when it exploded, even surpassing home price growth.
As you can see, during the heavy inflationary periods of the early and late 70’s, real estate did indeed provide an excellent hedge against inflation. Home prices essentially kept pace or outpaced CPI growth during these periods while the stock market stagnated. From a basic perspective, therefore, a dollar would have been smartly invested in real estate during this time.
Interestingly, looking at a more recent time period, the late 80’s, real estate again outpaced inflation (much more modest inflation this time than the 70’s). However, over the time period shown here (1986-91), the stock market more than outpaced home price growth at almost all times (the exception being the ‘87 market crash). So in this case, in hindsight, a dollar would have been more smartly invested in the stock market than in real estate.
To conclude, historically speaking, real estate investment has been a good inflation hedge, particularly during periods of high inflation when other market growth stagnates. Of course, this is a vast over-simplification of the picture, as evidenced by the stock market growth of the late 1980’s. Furthermore, individual real estate markets can behave wildly different from national trends. It is also important to note that on smaller time scales, fluctuations in both inflation and home price trends do not correlate exactly, meaning that inflation is not as significant a price driver for real estate than some might have you believe.
In general however, it is safe to say that real estate values are not likely to be pushed down in any material way by inflationary pressures. As diversity is the key to any long term success in investment, real estate has to be included in any portfolio.
