Real Estate Market Poised for Rebound

by John M. Curtis
(310) 204-8700

Copyright December 27, 2011
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                Since the residential real estate market collapsed in 2008, everyone wants to know when the market hit bottom and when the rebound will take place.  New data on building demand in the residential income market now gives some hope to the overall real estate market looking to rebound in 2012.  With unemployment still running at 8.6%, residential real estate demand could remain low in 2012 unless there’s a corresponding drop in unemployment. Less unemployment translates into stronger demand for residential real estate.  “We’re seeing overall work come back and there’s a backlog of contracts to go through,” said Brian Keith, director of urban design and planning at Dallas-based JHP Architecture, inundated with new rental construction business.  As long as unemployment remains high, the demand for income properties also remains high, pulling up the overall real estate market.

            Increased business activity at the nation’s architectural firms mirrors the public’s growing demand for rental properties.  “There’s a strong interest in multifamily units and plenty of pent-up demand,” said Keith, suggesting that increased construction spending on residential income properties could trickle down to sales and construction of single-family dwellings.  Home ownership has dropped from a peak of 69.5% in 2004 to 65.9% in July 2011, edging up to 66.1% at the end of December or Q-4.  Calling 2012 the “year of the landlord,” Morgan Stanley’s Oliver Chang predicted an uptick in real estate sales.  “Rents are rising, vacancies are falling, household formations are growing, and rental supply is limited,” said Chang, suggesting more demand.  When rental demand grows, there’s a corresponding increase in real estate sakes, where buying property becomes the best financial option.

            While President Barack Obama considers asking Congress to raise the debt ceiling, the Federal Reserve Board and Treasury Department must do more to set more doable lending guidelines to make homeownership more accessible, now that we’ve seen a 5% drop over the last seven years.  “We believe demand for rental properties will continue to grow,” said Chang, accepting the current trend that makes homeownership difficult.  When the derivatives’ market crashed in 2008, leaving many top lenders out of cash.  Wall Street likes to blame subprime borrowers for the derivative collapse but in reality market speculators, playing private equity and hedge funds, torpedoed the market.  Groundbreaking for new housing jumped increase 9.3%, to the high levels in 19 months, spelling a rebound in new home sales.  Increases in home sales spell the early signs everyone’s been waiting for. 

            Current improvements in housing construction involve residential income property, mirroring growing demand for rental property.  Rental costs have risen 2.4% in the 2011, 400% increase from 2010 to 0.6%, reflecting the growing demand for rental properties.  Since 2008, most lenders have ratcheted up lending standards so far that most qualified borrowers can no longer qualify.  Showing a 30% increase in 2011 in residential income construction reflects that lack of resale activity for real estate home sales.  Obama must encourage with Treasury Secretary Tim Geithner and Fed Chairman Beranke to pressure Fannie Mae and Freddie Mac to lower today’s overly strict lending standards.  Once borrowing increases, the slow but expected rise in real estate sales should help improve the cash-flow of homeowners, poised to spur consumer spending into the sluggish economy.

            As the real estate market collapsed, defaults and foreclosures skyrocketed, the demand on rental real estate increased.  When real estate investors can’t find loans to buy properties, they’re forced into the residential rental market, accounting for today’s pent-up demand.  If Fannie Mae and Freddie Mac make lending from accessible, demand for rental properties will go down.  Residential construction will be a plus to the GDP in 2012, but house price declines will be negative.  So net, net housing will be neutral or a small drag on the economy,” said Mark Zandi, chief economist for Moody’s Analytics.  Zandi doesn’t see a big jump in residential real estate unless lending standards make homeownership more accessible.  Lenders can’t sit on the cash, prevent borrowers from qualifying without killing the residential housing market.  Adjusting today’s overly strict lending standards should jumpstart the real estate market.

            Predicting tops and bottoms of real estate markets is never easy.  Recent surges in residential rental construction is a good sign for an eventual turnaround in single family home construction and sales.  “Business is slightly down from last years,” said Bill Zach, president of Cleveland-based Zach Building Co., seeing hints of light at the end of the tunnel.  While foreclosures will no doubt depress real estate values in 2012, more positive signs in consumer sentiment suggests improved business activity.  As foreclosures slow, demand for residential real estate should improve, when potential buyers consider lower monthly payments from buying than renting.  “Residential construction is finally beginning to rise from post-recession lows,” said Deutsche Bank chief economist Joseph Lavorgna.  While no one has a crystal ball, presidential election years tend to be good news for real estate and the economy.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.

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