This article is developed from CRE Richard A. Hanson's presentation made at MIPIM in March 2008. The presentation addresses U.S. real estate development patterns and investment in view of current market challenges, global energy consumption and population growth.
AN INDUSTRY IN CRISIS: OPPORTUNITY OR RISK?
There are many factors which compel real estate professionals to use caution when investing in the residential sector in the United States. Today, the U.S. housing industry is in crisis. Land value, homeowners, construction workers, investors, banks, school districts, and appraisers: all have been adversely affected by the declining real estate market. The municipalities that depend upon jobs, home values and tax revenue linked to U.S. housing are now confronting deficits, budget shortfalls and social deterioration.
The crash of the U.S. housing market (Figure 1) and the subsequent drop in home prices are affecting the U.S. economy. The crisis and its causes are complex but can be summarized as a drop in buyer confidence, followed by an increase in foreclosures-much of it the result of unbridled lending and imprudent borrowing. Exactly when we will return to a time of normalcy and confidence in the real estate market isn't known, but it is unlikely to be any time soon. Real estate's importance to the U.S. economy is profound: homebuilding is a major source of employment in America.
REASONS FOR HOPE FOR THE U.S. HOUSING MARKET/INVESTMENT
News reports regarding markets for U.S. housing are negative and grim today. The media provide little confidence for potential investors in housing stocks or related financial instruments. Yet there are indicators that the weakened perception of U.S. residential markets may be more psychological than technically true.
GROWING NEED FOR HOUSING IN THE UNITED STATES
The U.S. population is growing at its fastest pace in 40 years. This is the result of both high fertility rates (births) and immigration. Immigration rates remain consistent, and the U.S. birth rate is boosted by newcomers who are having larger families.
Despite the current bad news and slowdown in U.S. real estate market absorption, the U.S. population is expected to increase by 130 million by 2050 (Figure 2). Such a rise in population growth will create an enormous demand for housing. A report prepared by Virginia Tech estimates that as much as half of all real estate development projected by 2025 had not existed in 2000. This increase represents more than $10 trillion dollars of new investment for residential structures and more than $23 trillion in nonresidential facilities (roads, schools and infrastructure).1
BENEFITS OF HOME OWNERSHIP AND INVESTMENT
With the rapid and consistent increase in the U.S. population, housing prices have also increased, doubling in the past ten years alone. This has made home ownership one of the best investments over the short and long term
* U.S median home prices increased nearly 100 percent from 1997-2007.
* From 1997-2007, the Dow Jones Industrial Average increased 51 percent.
American home ownership is a foundation of the U.S. economy, representing more than $21 trillion dollars in value, with nearly $10 trillion in equity in those homes.
Home ownership represents a significant portion of American net worth (assets/liabilities), with 35 percent of assets positioned in home equity. As Figure 3 suggests, the value of a home purchased in 1997 may have doubled by 2006.
Clearly, U.S. home investments during the past 10 years have been a wise investment, yielding more than 20 percent in annual returns (Figure 4).
Despite the increasing cost of energy and construction, owning one's own home has outpaced inflation. Those who have failed to increase their net worth:
* never purchased a home;
* purchased in 2006 and sold in 2007 or 2008;
* borrowed up …