Resilience and challenges in the residential real estate market

Real Estate Industry Analysis

The residential real estate industry has been surprisingly resilient in light of the current economic situation. Over the previous two years residential real estate purchases registered into the double digits, while these numbers are down, the market for real estate is anything but out. At a glance, it would appear that realtors do not even know that a recession exists as new properties are springing up from Northern Virginia to California, even Hong Kong is getting in on the action. So what does the future hold for the residential real estate market in the United States and across the globe? This paper will present an in depth analysis of the real estate industry by discussing current trends of the real estate industry while analyzing the strengths, weaknesses, opportunities and threats. Additionally, this paper will also discuss the national and global outlook of the real estate industry as well as potential problems that the real estate industry may encounter in the future.

Strengths

Real estate has been the best friend of the weary investor when the stock markets are down. Investors use the residential real estate market to generate income through rent and thru property appreciation. Additionally, real estate is also favored for its tax advantages; such advantages are not present in other types of investments. For example, a recent survey by Salomon Smith Barney revealed that the Standard and Poor's pretax return was -3.4% however residential real estate property posted returns of a little over 5%. In Florida, residential real estate has posted a whopping 22% return increase in the last year, while the stock markets have yet to post a consistent recovery. Such returns are not exclusive to Florida, as a study by Windmere, the largest residential real estate company in the Northwest finds. According to the study, despite the terrorist attacks of last year, first quarter home sales in the Northwest region rose 22%. In Northern Virginia, just miles away from the site of the terrorist attack on the Pentagon, new homes are blossoming as fast as spring flowers, if not faster. The average price of a new home is over a quarter of a million dollars. It appears as if consumers are purchasing the homes even before they are built. The strength of the residential property market relies on a number of factors including, mortgage interest rates, unemployment rate, consumer tastes and preferences and income among other things.

Weaknesses

The same factors that have been the cause for the boom in the real estate industry recently, may also be the source of its downfall. Despite robust growth in the past 5 years and an even greater spike in the recent 12 months there are signs that the residential real estate industry is experiencing a decline in growth. The Windmere Index, an index which tracks the residential real estate activity in Puget Sound reported that activity declined at a rate of 0.9% in January and February of this year. Parts of the country are beginning to witness a decline in home sales and the effect is starting to resound miles away. When the markets are unfavorable for the residential real estate industry, the numbers will reveal such. A survey of real estate trends conducted by the FDIC showed that markets differ from single family and multi-family homes. Furthermore, depending on the location, markets may be tight or there may be an excess supply. For example, the survey indicates that home sales is increasing in southern areas such as Atlanta and Birmingham but decreasing in metropolitan areas such as Boston, Los Angeles, Detroit and Seattle. Unfavorable indicators such as low demand and high interest rates are the Achilles heel of the industry.

Current Opportunities

The current situation is an encouraging for the real estate industry. Interest rates are at the lowest level they have been in over two decades. Building companies are able to finance funds needed to build new homes cheaply. This low rate has also attracted international investors who view U.S. real estate as a gold mine. Buyers are also able to attain relatively inexpensive financing. Usually, the market is more favorable for either the buyer or seller, not both, meaning that there will be winners and losers. A rare situation is occurring in the real estate industry in that the current economic situation renders it both a buyer and seller market, in effect, everyone wins. Additionally, the residential real estate industry is poised to reap benefits from programs such as Home Sweet Home, which is designed to help people achieve the American Dream of homeownership. Entities such as Freddie Mac, Ginnie Mae and Sallie Mae also offer much needed assistance to those seeking to purchase a home. There is now a large pool of qualified potential homebuyers anxiously anticipating buying a home.

Threats

Even though the current situation for residential real estate has been promising, there is an unwavering uncertainty that is beginning to damper prosperity and growth. The recent terrorist attacks leave the world wondering if and when the next attack will strike. Such speculation threatens to retard growth of many industries, the real estate industry being no exception. Massive lay-offs due to economic turn down and scandals involving billion dollar companies such as MCI WorldCom, Enron, Tyco and Arthur Andersen increase the unemployment rate thereby decreasing the demand for new homes. When interest rates begin to increase, there will less demand for new homes and builders will not be as eager to build due the increased cost of capital.

Global Markets

Global residential real estate markets as a whole, have been faring relatively well. War torn Israel is expecting a strong recovery in 2003, according to Bank Hapoalim chief economist Ptahia Bar-Shavit who stated, "The residential construction sector is expected to slowly recover in 2003, due to the slight increase in demand for housing." However, the demand for luxury homes has caused some penthouses and apartments being purchased in sums close to one million dollars. In Singapore, growth remains stagnant, mainly due to the lack of land available. Demand for housing in the region remains high. The Singapore government is still debated whether it would be beneficial to add land to the country, to meet the high housing demand. Elsewhere in Asia, the global economic slowdown has caused the real estate industry to contract causing retardation in growth in export reliant countries such as Singapore, Hong Kong, Taiwan and Japan revealed by Cushman and Wakefield, a global real estate firm. In the Western hemisphere, the European Union is doing its part to increase growth for its real estate industry by making it easier for non-nationals to purchase property by offering comprehensive listings, legal and tax advice and other helpful data.

Other Factors

This study is limited to the data available, some of which may be flawed. Additionally, as with any analysis it is difficult to control for some factors that may generate inaccurate results. What we do know however, is that the U.S., European and some Asian markets seem to move in tandem, so when the American is down it effects the performance of markets around the globe. Another limitation is that some unknown catalyst could be the resulting data. For example, it has been proposed that following September 11th, American's have been seeking home ownership, as a way to feel safe and connected to loved ones. Such a consumer trend may also have an effect even though it cannot be directly quantified.

Summary

The real estate industry's strengths, weakness rely mainly on fiscal policy, consumer preferences and leading economic indicators. How these factors are exploited determine what opportunities or threats may be encountered. Overall, the economic outlook for the industry is bright as the current situation of the market is expected improve by the following year and lead the way to a full economic recovery both at home and abroad.