Monday, January 28, 2013

Real Estate: What to Do?

In 2008, when I predicted the housing market would not recover until 2013 at the earliest, people either ignored or scoffed at me. I based this prediction on my own experience as a builder/developer, in California, during the savings and loan crisis and the now-almost forgotten Reconstruction Finance Corporation. Home prices in 1994 were roughly what they were in 1988.

I figured the 2008 financial collapse would be worse, even though I did not, and still do not, understand it all. But I still kind of suspected the overall economy was more diverse, more productive and more robust that it had been twenty years ago, and that the recovery would take less time because of that fact.

I was sort of right, and sort of wrong. The long and the short of it is that things are going to be much worse, overall. Yes, there will be pockets of "goodness." But they're just pockets (see below).

Read most newspapers, their Saturday Real Estate or Sunday Business Sections proclaiming that the housing market has turned. They generally quote some real estate broker few have ever heard of. Prices are up. Buyers make multiple offers, and available inventory is low, very low. It's so au courant for real estate and mortgage brokers to proclaim the sad days are over and that now is a great time to buy a house.

Even Warren Buffet said so, as I recall. My respect for Mr. Buffet is huge, but Berkshire-Hathaway, Mr. Buffet's company, has also made an enormous investment in Wells Fargo, who owns one-third of America's mortgage market.

This post is targeted primarily to real estate and mortgage brokers, but any present or future stakeholder--i.e., potential buyers or sellers--needs to take note and consider what forces are impacting the market.

If you ask a real estate or mortgage broker, "Is now a good time to buy a house," what will the answer be?

Right. What has the answer ever been? The same broker who told you to forego a home inspection and pay $400,000 for the house in 2006 because of competition is now saying in 2013 it's worth $200,000 and you'd better hurry up. Some things don't change, and as long as a broker's compensation is tied to the close of the transaction and not the client's best interests, the advice won't be any different.

But if brokers look at the current market and current mortgage rates, he or she might be a certifiable looney if the advice was to wait and see. My own recent experience in home buying supports this advice, which my heart supports but my head questions.

But this series of studies by the Urban Institute makes it worthwhile to consider, in a very personal way, what your goals are and what you hope to accomplish. In my view, the real estate market will not begin to recover for another few years, and even then, it won't be what people think.

Baby Boomers will continue to dominate the market in the short term. Many of them don't need mortgages, and they want what they want. But what happens after that? Being a certified Boomer, I can tell you that what we want is not a two-car garage with a three-and-two home attached in a 'burb miles away from a grocery store or hospital or whatever. Yet, if you look at the homes out there, few of which are for sale, that's what most of them are.

When Boomers die en masse  or move to urban apartments or assisted living or wherever, who is gonna buy all those suburban houses out there? Answer: No one, or, not many.

Gen X and Y are better educated and more underemployed than their parents, and unless the economy improves, they won't be forming the number of households necessary to absorb these mini Castles in the Air. Will the economy improve? Well, probably, but only a little. It will be a long slog.

Put it this way: What if Boomers did a big die-in and their homes came up for sale all at once? Who would buy them? And so many need updating besides. Who will pay for that?

While no one, least of all I, knows, my guess is that we're looking at a huge glut of houses over the next few years. And this doesn't count the new ones optimistic builders are adding.

Of course, the homes won't all hit the market at the same time. But what will happen over the next few years--and this statement is buttressed by simple demographics--is that a larger number of homes will hit the market than there are buyers to absorb them. Moreover, Gen X and Gen Y buyers are not forming families, on the whole, preferring to remain single longer than their forebears, if not forever--and want smaller homes closer to downtowns.

Pockets of good markets remain. Think Carmel, CA, San Francisco, CA, Boulder, CO and other such places are terrific examples. I live in a Front Range suburban area, and in desirable downtown Denver neighborhoods, one- and two-bedrrom condos and town homes are hard to find and will be for some time. Prices will see a steady increase commensurate with the demographic of buyers.

I do not know what all the implications of these trends are. Some are obvious, some are less clear. But if you're like me, you need to think about it. Really, really hard. Deny it or ignore it at your peril.

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