Last month, in the blistering heat of Denver, participants ranging from economists to green architects addressed some of the most pressing real estate issues at the National Association of Real Estate Editors annual conference.
After hearing from more than two dozen speakers over three days, I took away three points:
Despite a strengthening market, the real estate mess that we are experiencing will last for another two to three years. The solution to this seemingly intractable problem lies with market forces and not government action. And the recovery, now in its third year, by all accounts, certainly has been prolonged by the government’s interference in the market.
Re/Max LLC CEO Margaret M. Kelly pointed out that 4 million seriously delinquent homes have already gone through the foreclosure process, but that there were “4 million to go.” Thus, if it has taken three years to get 4 million homes through the foreclosure process, it may take another three years for the remainder of the so-called “shadow inventory” to make it into the hands of non-bank owners.
Lawrence Yun, chief economist for the National Association of Realtors, said that distressed property sales had peaked and were trending down. In 2011, distressed properties accounted for 50 percent of all sales. So far in 2012, that figure is 25 percent, and Yun predicted that distressed sales will account for only 15 percent of sales in 2013.
On the other end of the spectrum, Yun projected that 2013 could bring an average price appreciation of 10 percent. This rosy scenario is based on the assumptions that the supply of new homes remains static and that federal policymakers do not exacerbate the economy’s problems. Industry overreaction to previous abuses in the appraisal and mortgage underwriting areas were also cited as two significant factors holding back the recovery. Yun even quantified these problems, saying that home prices would be 10 to 20 percent higher with accurate appraisals and 15 percent higher with appropriate mortgage underwriting scrutiny. But since cash transactions account for 33 percent of all transactions, these “frictions are hiding the dysfunction in the real estate market,” Yun added.
Who is buying all these homes? Mark Obrinsky, chief economist for the National Multi Housing Council, said Generation Y (those born 1980-1995) appears to be oriented more toward rent than ownership. As examples, he cited the popularity of services like Netflix, Zipcars and the cloud. The generation’s desire for mobility and its sizeable student loans, he said, also support the conclusion that many 20- and 30-somethings may not be ready to buy a house any time soon.
Still, investors are more than happy to provide them with smaller, more reasonably priced rental units. After all, renting even a small apartment is better than living in their parents’ basement. Renting their own apartment provides the coveted independent feeling that Generation Y’ers seem to crave.
All indications are that investment in rental units will be a fairly good sector in the real estate market for the next few years. “We will have to wait and see if there will be a permanent shift” to a nation of renters, Obrinsky said.
Kelly describes the makeup of homebuyers in the current market as 40 percent who already own a home, 35 percent who are first-time purchasers, and 25 percent who are investors. Those investors are buying 60 percent properties owned by lenders and 33 percent short sales. Seventy-eight percent of these investors are cash purchasers.
Perhaps because no government officials were speaking and the conference was 1,671 miles from the nation’s capital, a decidedly anti-Washington theme emerged. Many participants expressed the belief that the recovery would be further along but for governmental interference.
“Washington is the biggest obstacle to our recovery,” said Robert Jacobs, chief investment officer of Broe Group, a Denver-based real estate investment and development firm. “The best thing they can do is to stop doing anything. The economy wants to grow. Washington is not the solution, it’s the problem.”
Yun of NAR stated that in judicial foreclosure states — where a lender has to seek court approval before completing a foreclosure — seriously delinquent loan inventories remain high.
“Supply is not connecting with demand, so prices are not healing,” Yun said. Echoing this view was Stan Humphries, chief economist at Zillow. “Artificial suppression [of foreclosures] is not helpful,” Humphries said. “Moratoriums are not helpful. These actions have definitely not helped and are keeping home prices down.”
Indeed, Re/Max’s Kelly pointed to the administration’s one-time homebuyer credit as merely accelerating sales into the year of the credit, at the expense of sales in the year after the credit expired. “Stop the artificial stimulus. Let the market settle where it needs to settle,” Kelly added.
Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord and lender. This column is not legal advice and should not be acted upon without obtaining legal counsel. Jacobs can be reached at firstname.lastname@example.org.