Housing, rental markets reacting to complex forces

Posted: June 24, 2007

Real estate times, they are a-changing, in so many ways.

Diane Cirafesi has spent many an hour in the last eight months cleaning her West Chester house for prospective buyers.

"Some weeks, there are five; some weeks, three," Cirafesi said. But none of the visits have come to anything, even after she brought the price down to $287,500 and brought in Fred Gusz, a neighbor who is an agent with Piedmont Realty, to work for her after having no luck selling the house herself.

Cirafesi's situation is a little different from that of most sellers: She's not in a hurry to sell the house she's owned for almost 13 years. The proceeds will finance a move to New Mexico, where she plans to be an artist, live mortgage-free, and work part time, probably in advertising, which is what she does now.

"As long as I can live my dream for 18 to 20 years and not have to wait till I'm 65," said Cirafesi, who is in her mid-50s.

In this changing market, however, she's found it necessary to be proactive. So earlier this month, she came up with a list of the top 10 reasons someone should buy her house and posted it on her front door.

"Lots of people immediately started driving by and stopping by, and I gave them a spec sheet," she said.

The top three reasons were location, of course. "West Chester is hot," Cirafesi said.

The others were:

Investment (the house has increased in value more than 300 percent in 12 years).

Systems (new).

Garden (perennials).

History (original from 1830).

Parking (two spaces, off-street).

Interest (rates and taxes still low).

Unique ("This ain't your cookie-cutter house," Cirafesi said. "There's not a lot of people who would buy it, so you have to do everything you can to find that buyer.")

Different ideas for different times, and some could become trends.

These days, there are a lot of trends emerging, and though many are not specific to residential real estate, they point to the fact that buying and selling homes does not happen in a vacuum, but is affected by forces around it and acts upon those forces, as well.

"Real estate is as easy as one, two, three," said Ted Jones, chief economist at Stewart Information Services. "One is jobs; two is interest rates; and three, supply and demand.

"In the last 10 years, the U.S. has been growing jobs 1.22 percent per year, compounded annually," Jones told a recent meeting of the National Association of Real Estate Editors in Philadelphia. "From April 2006 to April 2007, growth was 1.37 percent, almost 13 percent above the 10-year average."

Interest rates were easy to predict until 2002, Jones said, because until then, 30-year fixed mortgages and oil prices "tracked almost perfectly, and you could make money on interest-rate futures."

"What costs more when oil prices go up?" he asked. "Everything, because there is energy in everything."

In 2002, interest rates went down because then-Fed chairman Alan Greenspan "pushed the Fed funds rate below 1 percent, and banks could borrow cheap money," Jones said.

Greenspan did so, Jones said, to create jobs "because he knew that if we could borrow cheap, we would borrow a bunch."

He predicted that interest rates would rise almost 1 percentage point this year. Housing sales will drop 6 to 11 percent in many areas by year's end because the subprime-lending market is gone.

Are we building too much? Depends on your perspective.

"When you look at building permits vs. job creation over the last 12 months, we have 1.2 jobs per dwelling," Jones said, "and when you need 1.25 to 1.5 per dwelling, we are overbuilding."

Mark Obrinsky, chief economist of the National Multifamily Housing Council, said that for the last eight years, multifamily completions for sale or rent (including condos) "have shown a sustained 250,000 to 300,000 annual unit range . . . as steady as we have ever produced."

"It is at about the right level for long-term demand," he told the real estate editors' group.

There's a problem on the for-sale side, however, that also affects the apartment market. The total number of vacant units in all housing categories nationally is at 6.1 million and rising steadily, which is a record, Obrinsky said. And there are about 1.5 million unsold units. More units available for sale tends to reduce average rents.

More important in the apartment market is what's happening in the overall economy, Obrinsky said: GDP growth has shifted in the last two years. It had been just under 2 percent; this quarter, it was 0.6 percent. Yet there are more jobs now, which seems to be a disconnect.

The real estate slowdown and the subprime-lending mess have benefited the apartment industry, he said. "Home-price appreciation has slowed, so that removes some of the urgency to buy. If we can avoid a recession, and if the job market doesn't tank, we have moderately positive outlook for the apartment industry."

The major concern in the apartment market is over "phantom units" - condos coming on the rental market because they can't be sold, said Jonathan Miller, editor of Urban Land Institute's Emerging Trends in Real Estate. "Depending on how many, this could offset the good demographic trends going forward."

Commercial real estate is a mixed picture, he said. This sector has been driven over the last few years by cheap debt, Miller noted, with tremendous profits being made through fees and real estate investment trusts going private, among other factors.

"New York has benefited the most," he said. "There has never been so much money in one place at one time. It's not just real estate, it's the hedge funds, the private-equity markets, and commercial real estate is all part of this capital flow, which at the end of the day is not creating any real new income."

Some commercial segments have done well, he said. "There has been incredible investment growth in retail, even though we have more retail per capita than anywhere in the world." And there have been fewer industrial vacancies in some regions.

Worrisome in different ways is infrastructure, Miller said: There are places in this country that will not do well, especially the suburbs, where living "isn't as pleasant as it was 30 years ago."

Because medical, defense and retirement costs are putting a tremendous burden on the economy already, a deficit is arising in maintaining existing infrastructure, he noted.

"The cost just to fix it is $1.6 trillion," Miller said, "and that doesn't include future needs for another 100 million people in the next 50 years."

The Crisis of Infrastructure

The Urban Land Institute looked at several aspects of U.S. infrastructure, which affects quality of life and the economy, as part of a global survey of such issues.

Roads: Total spending is two-thirds of what is needed to fund necessary improvements. Poor conditions add up to $54 billion in car repairs annually.

Mass transit: Higher bus and subway fares won't make up for funding shortfalls to maintain tracks and trains. Construction costs discourage new projects and improvements.

Wastewater: Over the next 20 years, $300 billion to $500 billion is needed to maintain and improve existing systems, to prevent deterioration and accidental spills.

Power grids: Maintenance spending has decreased since the 1990s, despite increased electrical demands.

Source: "Infrastructure 2007: A Global Perspective"

Contact real estate writer Alan J. Heavens at 215-854-2472 or aheavens@phillynews.com.

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