The Ramifications of Residential Issues

Housing was not the only thing that took down the markets, but it is one of the main things inhibiting a good recovery. It will be years until the housing market sorts out. That is continued good news for multifamily. For openers, all of the politicians got on the ridiculous band wagon that everyone should own their own home and fulfill the “American dream”. First of all, not everyone has that dream. Second the equilibrium ownership in the US is probably somewhere around 63%-65% in the current economic environment. Third, there is a whole segment of the population who will not care for a home any better if they own or rent. They are just irresponsible slobs, or they will never have the income to properly maintain it. The whole concept that everyone should own a home is political rhetoric and not reality.

The result is we have millions too many houses right now which need to wait until the population growth to population movement catches up. Take Arizona, or Las Vegas or the Inland Empire. Because there is endless land builders foolishly figured there was endless demand and endless mortgages. Nothing is endless other than risk. Land in lousy locations got bought and developed. Commutes got longer for many. Prices went well beyond any intrinsic value. Home builders made excessive profits well beyond anything they ever made before or ever will again. Lending went out of control. Barney Frank covered up for the illegal acts of Franklin Raines at Fanny. Barney also rejected John Snow’s warning in 2002 that Fanny was out of control. Bottom line is we are not going back there.

Now we have investors buying up foreclosed houses and making basic repairs and flipping them or renting them. That is nice where it can be down, but it is not going to solve the lack of demand for new construction. It actually means new building of houses in many areas is a ways off until demand catches up by population growth, which is slow. We are not having a post war baby boom ever again. Yes more people are again moving to Phoenix, but that is a longer term trend. If you buy good land now you still have a long hold in many areas. Las Vegas has other issues related to the casino and hotel industry which Obama killed. While occupancies are up, rate is not and those casino hotels will suffer for years to come. The event planners are just not going to risk the reputation issue for a long time. CA has huge issues and business is not going to be expanding there, so housing demand will be slower to recover than in the past.

That leaves multi as the place to be in residential. Renting is the right answer for probably 35% or more of the population. So as population grows, residential demand grows, and as the economy struggles with high unemployment for another 5 years, renting is the solution for millions. Mortgage credit guidelines are really tough and will remain that way for many years. In fact they are so tough that many people who can afford a house cannot get a loan under current guidelines so are forced to rent. If you have millions in the bank, but do not declare a lot of current income you do not get a loan. That will all change, but not for awhile.

The real risk to multi is that too many developers see the opportunity and as always happens in real estate, everyone wants to build the same thing at the same time and every developer has the best site in town, regardless of where in town it is located. Lenders are looking for loans to make, so of course they make multifamily construction loans. What else would they do. In some markets we will eventually have too much multi and the cycle starts again.

The macro issue is without a robust residential construction market, the general economy will continue to suffer. That segment generates millions of jobs and property and sales taxes. From construction workers, to materials manufacturing and sales, to furniture stores, carpet stores, hardware stores, title work, and on and on. It is probably the biggest generator in the past of multiplier effect on the economy, and that is not happening again for a long time. Home prices will continue to decline a-n many markets for awhile and the psychological damage to potential home buyers and lenders will last for a very long time. The long term impact on retirement nest eggs tied up in home values, and all that flows from that, is going to be felt for a generation, just as the baby boomers are hitting the key age. You need to consider all of this when doing strategic planning for your business and investing. This is a generational macro change, and you need to understand the ramifications.

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Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.