Real Estate Recovery: The Race is On

Real Estate’s journey in 2011 has been a wild ride based on the criteria many use to measure success. Optimistic expectations at the beginning of the year have not produced sustainable returns at year’s end. Or have they? The saga of the real estate recovery in 2011 seems to enact the familiar fable of the tortoise and the hare. Which approach would be the most accurate in characterizing the sector’s performance --- an aggressive approach seeking tangible, quick returns or a more measured approach whose success is measured by long-term results? While the inclination may be for instant gratification, perhaps a “slow and steady” perspective provides the best evaluation of how well real estate has performed this year and where it’s headed in 2012.

2011 started, and the race was on, driven by hopes of a much better year than 2010. In some instances, optimism had merit. There was a general, shared sentiment that the economy, overall, would rebound, creating jobs and a stronger environment for small business to begin to grow again. High-profile commercial property acquisitions and note purchases driving up the values of assets in key urban markets captured the real estate headlines. Businesses felt confident enough to expand into new square footage, while both existing households and newly-forming “echo boomer” households valued renting over ownership which drove down vacancy rates in both office and multifamily sectors resulting in steady revenues for commercial investors.

The average consumer had reason to be optimistic as well, as seemingly negative economic influencers created new opportunities. The deluge of foreclosed homes on the market (which drove sale prices down), combined with political and financial volatility abroad drove fixed mortgage rates tied to Treasury yields to record low levels affording consumers with new buying power not seen in years. Even distressed borrowers had reason for optimism as the government promoted a dizzying number of “Home Affordable” programs; and lenders, under the scrutiny of regulators, slow-tracked foreclosure filings due to processing improprieties like robo-signing.

But along the way in 2011, the hope for a brisk recovery took a cat nap, as evidenced by the following:
• Threat of a “double-dip” recession reflected by anemic GDP growth and stubborn unemployment
• Scarcity of commercial deals in top markets accompanied by a stall in the ascent of commercial asset values
• Homeowners unable to qualify for historically-low mortgage rates to purchase bargain-priced homes
• Decline in equity in non-distressed home values as a result of a market flooded with distressed properties
• Less Americans seeing the long-term value of owning a home versus renting
• Lenders, now confident about their back-office procedures, filing foreclosures at a stepped-up pace starting in the 3rd quarter 2011
• Extremely tight guidelines for loan qualification

Those seeking signs of a speedy housing recovery could point to the above as proof that 2011 was a year the industry should forget. However, the following represents just a few of the areas quietly developing this year to support the notion that real estate is showing signs of improvement:
• Commercial opportunities emerging in “out-of-market” areas (suburban or “B” class office assets)
• New construction to meet demand (unexpected demand for rentals and short supply sparked new construction in the multifamily arena)
• All-cash investors sustaining the market (all-cash investors accounted for up to 31% of all purchases in 2011, filling the vacuum created by the absence of first-time buyers)
• Surge in loan modifications, short-sales as an alternative to foreclosure (over 5 million approved as of the third quarter 2011 involving both interest and principal reductions to keep borrowers in their homes )
• Non-distressed home values appear to be stabilizing in many markets

But perhaps the most important evidence of a recovery can be seen in the segment most affected by the housing crisis: the consumer. As noted before, more borrowers are taking advantage of modifications and short sales to avoid being a foreclosure statistic. Additionally, consumer debt and delinquency levels in mortgage and in all other credit products dropped significantly in 2011. Compared to the consumers during the housing boom of the last decade, today’s consumers are significantly better-educated in managing debt and knowing the consequences. A key component is the accountability of appraisers deciding true values based on the reality on the street and not on the number needed to complete a loan.

When credit conditions make home ownership a viable option again, these consumers will be ready to jump-start a new phase of responsible home purchases from a stable credit footing. And what benefits the average borrower in the future will also benefit the smart investor who is ready to leverage opportunities in a new cycle of real estate growth.

The race isn’t over for real estate. Fundamental gains took place in 2011 that will bear substantial fruit in the years to come for investors and consumers alike. “Slow and steady” wins every time.