Real estate outlook: scattered showers of optimism

Mood of the Market

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Jun. 27, 2011

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Mood of the Market

Tara-Nicholle Nelson
Inman News™

Real estate has become the bad news bear of an economy that is trying to break out of bearishness. In fact, I Googled the word "doldrums" the other day and one of the first results was a set of news stories about home values!

After four straight years, the virtually incessant onslaught of downer stories about the housing market is exhausting -- even though these stories may reflect the actual state of affairs, and I suspect signal a new normal of much slower appreciation than we're used to, until the job and mortgage markets find some deeper healing.

However, I have come across a few bright spots in the real estate news lately, which I want to share. Negative consumer sentiment in real estate and most other economic markets is truly a self-perpetuating cycle: the more negative we are, the less likely we are to buy homes, and that further depresses the market.

I think this break from the bad is important, and not just for morale, because it exposes us to new definitions of what the "real estate market" actually is for our own purposes, and widens (or narrows, in some cases) our viewpoint in terms of what information we should be consulting as we each make our own real estate decisions and form our opinions about what's happening in the market.

So, here are the scattered showers of cause for optimism -- not necessarily optimism that the whole market will turn around, but optimism about a specific problem or market challenge -- which I've noticed of late.

Real estate investment trusts, or REITs, are shares of stock in companies whose whole business is investing in and managing various types of real estate, from self-storage companies, to hospitals and retirement homes, to apartment buildings and even dormitories for college students. Over the last two years, REITs have returned over 29 percent annually to their investors: people like you and me who individually buy shares like you would with a stock, or buy them through their retirement plans.

As Americans get older, the REITs that invest in hospitals, surgical centers and retirement homes have, predictably, done very well. And even the rest of the categories are on the upswing, in spite of the real estate recession. Or, maybe, because of it: two of the market dynamics that are perceived as problems or symptoms in what we would traditionally think of as the real estate market have fueled REITs' financials over the last couple of years.

The decline in property prices has allowed REITs to buy at a much lower cost than they were able to before. And the decline in the homeownership rate, including foreclosed homeowners who are now renters and would-be buyers who are now afraid to get off the fence, has created more demand for REIT-owned apartment homes and self-storage units.

Makes you rethink the definition of real estate, doesn't it? Past performance does not in any way guarantee future performance, but I suspect that many real estate investors are looking into REITs as an option.

Stock market sparks one real estate market
Over the last year or so, the tech industry has looked about as opposite from the real estate market as it can get. There is a lot of hiring, loads of new companies, venture capitalists investing billions -- and lots of IPOs (the initial public offerings that launch a startup tech company onto the stock market) in the pipeline.

If you're not familiar with how this works, early employees for these companies take less financial compensation than they might get elsewhere in exchange for stock options.

When the company "goes public," employees are able to liquidate these options for sometimes many thousands or even millions of dollars, depending on when they entered the company and how large their role there was.

Companies like Groupon, Facebook and Zynga, the creator of online games like Farmville, are all set to have IPOs coming up soon; while other tech companies like LinkedIn and Pandora have recently gone public. How is all this related to real estate? Well, the housing market in Silicon Valley is super hot.

Insiders report homes selling above asking, listings receiving multiple offers, and the average age of buyers declining as the techies of the area start to wield their newfound (or anticipated) cash. And the data bears this out: home prices in cities like Cupertino, Menlo Park and Palo Alto are up as high as 20 percent, year over year, compared with the nation's average home prices, which are down 3.6 percent on an annual basis.

You might think this means nothing to you if you don't live south of San Francisco, but that's not so. This is proof in the fabled pudding of the concept we recently covered here: of real estate microclimates.

Even when the nation's market is all the way down in the dumps, it bears keeping in mind that individual states, counties, cities and neighborhoods have their own real estate market dynamics that operate independently of even nearby markets.

And especially keep this in mind as you look to make a rent vs. buy decision, or decide where to buy, or even decide how to operate in your community in terms of advocating for and supporting business-friendly local government initiatives.

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