A year ago, economists predicted 2008 would be a challenging year for the struggling real estate industry. The property market had just come off what seemed then like its worst year ever and signs of a recovery were faint. A year later, after watching property values plummet further, foreclosure rates soar higher, and home sales shrink lower, real estate professionals from Florida to California are now predicting far worse for an industry in ruins.
“The very future of how real estate is bought, sold, and financed is under tremendous pressure,” says veteran Florida real estate economist Lewis Goodkin. “There’s no question that the years ahead will be sharply different from years past.”
One of the biggest questions swirling in property circles these days is how a reeling real estate industry will reshape and redefine itself for the future. Few signs of a quick reversal of fortune exist, but a closer look at the future of the industry reveals important trends and, surprisingly, reasons for optimism.
Falling sales means a dwindling number of brokers. That, experts say, will be good for business. Like mortgage brokers, shrinking rolls of agents will eventually mean brokers are brought in only to do specific parts of a transaction for far less money.
After several years of escalating home prices, construction costs are falling. Lower construction costs will make it easier for developers to adapt to the current market by offering more affordable apartments and condos, rather than aiming for the high end.
The internet will, of course, continue to be a critical and growing part of real estate, as brokers and firms pour more resources into building smarter, more accessible websites. More listings online means more access for consumers. Eighty-four percent of buyers use the internet to search for a new home, and that number is expected grow, according to the 2007 National Association of Realtors Profile of Home Buyers and Sellers.
Homebuilders, meanwhile, are predicting the continued movement toward smaller homes, with more buyers opting for less square footage as a means of saving more. This is likely to result in cheaper homes on the market in many places.
Finally, tighter credit means some will no longer be able to line up easy financing to buy a home. That will lead more prospective buyers to rent rather than own, thus possibly sparing the industry another quick boom-bust scenario anytime soon.
To be sure, the real estate industry will have to dig itself out of a deep hole. Existing home sales fell last year to levels not seen in years, and the median price of a single-family home was off 13.2 percent in November, to $181,300. That’s the lowest price since February 2004, the biggest year-over-year drop on record going back to 1968 and most likely the biggest drop since the Great Depression, according to the National Association of Realtors. Foreclosures also ballooned, with one in 10 American households with mortgages now overdue on payments or in foreclosure, according to the Mortgage Bankers Association. The trade group predicts more foreclosed, vacant homes will be added to already bulging inventories this year, sending home prices spiraling down and putting more mortgage borrowers deeper under water.
The widening credit crisis is sure to have the greatest impact on real estate’s future. Big developers will be particularly effected, as banks pull back from a fast-deteriorating market. In New York, where a forest of glossy, new condominiums are in various stages of construction, nearly $5 billion in development projects has already been scrapped or delayed because of the banking crisis, according to the Urban Land Institute. A lack of construction financing forced British developer CPC Group to default on a $365 million loan for prime land it bought in Beverly Hills as part of a plan to build luxury condominiums. In Las Vegas, the $3.9 billion Cosmopolitan Resort went into foreclosure late last year and was taken over by Deutsche Bank.
"Massive projects are in real peril,” says Laurence Hallier, chairman of Hallier Properties in Las Vegas. The firm has built several condos, including Panorama Towers, where Leonardo DiCaprio owns a home. “Banks will no longer lend as freely and that will certainly force big changes on developers and ultimately reshape the way business is done.”
There is no quick fix to the credit problems, say experts. Until frozen markets thaw, banks will simply not be able to fund as many projects. But that, too, can be good, say industry veterans. “A slowdown is creating more time to plan and tempered expectations,” says Richard Green, a professor of real estate at the University of Southern California. He predicts that developers will be forced to downsize the scope of many projects. “Projects that do get funding will be sound, which will ultimately be good for an ailing industry.”
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