MONEY 42 - REAL ESTATE REVISITED

THIS IS MY 42^ND BLOG ON UNDERSTANDING MONEY TOOLS

In this blog we are going to revisit real estate and trends in that market. I work for several of the major real estate production homebuilders and meet many of their employees to gather information including finances and market trends. I will lend a bit of this information to you, in hopes that it may help.

In 2013 the year started off as gangbusters for the residential market and new homebuilders.  Low interest rates, pent up demand since 2008 and consumer optimism created this. The past foreclosed and bank owned homes have been eased into the market place and absorbed. People who lost their credit ratings, now have credit restored and are back buying.

Sometime around July 2013, the government announced that it could not make payments come October 1^st and would be out of money without Congress approvals for the debt ceiling to be raised.  As usual this went past October 1^st. People/the buying market place became scared and many withdrew from making major purchases, such as homes. Fourth quarter 2013 was not good for most builders and first quarter of 2014 is off projections for most parts of the country, excluding the oil/gas parts of the country such as North Dakota, Montana, Wyoming, and Texas. The other good markets seem to be Los Angels and down the coast to San Diego, San Francisco and especially New York City.

Janet Yellen running the Federal Reserve Board as Chairperson projects a continuance of printing money, buying US Bonds and holding interest rates down through 2015. All governments are concerned about deflation in the economy.  There aren’t many more options remaining to help the economy. I have always said the government needs to step in and help middle Americans start companies and businesses if we are to have a strong future. Right now and past years since 2008, middle income Americans can’t get to money including bank loans. Money is not circulating from the profits made by big business and jobs are not paying what they did 15 years ago. We have had some inflation over the past years eroding peoples’ discretionary income.  Large US companies are relying on other countries, especially in Asia, now for 50% of their business.

In light of the above, home building is now predicted to be tepid across most of the country with very little inflation in real estate, at least for the next year or two.

Commercial/retail building in most places and for the future is predicted to be slow to non-existent.  One reason as we talked about is that there is not the money circulating for buying. Another issue is buying trends. Right now, about 30% of all retail sales is from on-line business/the internet. This is going to increase.  On-line products may be less expensive to buy, cut out the overhead of shopping centers, salaries of retail employees and other costs and you save money. The other fact is that you don’t need to spend as much time driving around, shopping various stores, and in some areas bearing the heat or cold/snow that goes with the climate.

The trend has been back to urban living. In major cities the projected building opportunities will be vertical versus horizontal building. These buildings will provide everything a person would want. On certain floors will find major companies, residential living will be on other floors with nice balconies, and also commercial/retail stores including grocery, restaurants/bars, laundries/cleaners, movie theaters, emergency medical, etc. I see the benefit in that there shouldn’t be any DUI’s given!

Land development for building is very difficult for the private or small company.  The game has changed. Similar in scope to the oil business in the mid-1980s the small or private company can’t get money and compete. As we have discussed the big publicly traded companies can pledge their stock and sell bonds through Wall Street investment banking firms. The large private companies are teaming up with A rated municipalities and selling bonds through Wall Street. Up until 2008 if a land developer took the land to final approvals with all municipalities, a home builder would then put in the infrastructure, such as water, sewer, electrical, fiber optics, etc. and build  homes. Today, homebuilders want the liability to be placed upon the land developer. The land developer borrows the money to prepare each lot, ready for the home building. The homebuilder then requests a partial release of lots, let’s say 6 at a time. What does this do? It places the primary large risk on the land developer. The homebuilder carries little land risk. Very few land developers can carry this amount of debt for an undetermined period of time.

Employment in the real estate industry is changing. Companies are thinking the same way other industries think, how to put more money to the bottom line and get more work out of the employees. Retail brokerages on the residential side know that most people go on-line to look at homes before they work with agents and companies. Residential brokerages will have smaller offices for their agents to work from, and most agents will work out of home and their cars. The offices will be very high tech. The trend is for brokerages to employ more agents, or will go to a salary type of structure with a bonus based on performance, thus the company makes more money.  Even production home builders are viewing a salary structure instead of lucrative commission structures.  As an example, a top agent may make $150,000/year. In the future, because of a surplus of real estate agents a home builder may pay a base salary of $4,000/month and then a bonus based on performance. The end result will be the agent making less than $150,000/year and the company making more money.

Isn’t it amazing to see business trends; companies making more money for the top people and middle America making less! At some point, people won’t be able to afford products, and the system fails. This trend has taken down empires and civilizations throughout history, however we never seem to learn the lessons.