The California Association of Realtors is a trade group with a 2017 Housing Market Forecast that predicts 2017 will be a year where “homes sold statewide will rise slightly between this year and next,” in The Desert Sun on September 29, 2016.
In a Los Angeles Times article on July 14, 2016, Dana Kuhn, a lecturer at Corky McMillin Center for Real Estate at San Diego State University was asked has Southern California residential real estate recovered completely from the recession. Kuhn’s answer is ‘yes’ when it comes to large West coast metro areas. While the Inland Empire may only have recovered 80% to 85% of their pre bubble peak, “the San Francisco Bay Area is priced above its peak numbers of the last decade. Orange County, too and Los Angeles and San Diego are getting very close to their former peaks. Seattle is doing really well. Portland is doing well.
The logic seems very sound. Real estate pricing has gone up thanks to low interest rates, low inventory, and land is increasingly scarce. The LA Times makes two points worthy of following. “The median price of a house in Los Angeles County is above a half-million dollars” which makes it very difficult for first time home buyers. What may be particularly telling is, “As international billionaires get nervous, sales in L.A.’s ultra-luxury housing market slows.”
Real estate is not like buying a car, phone, or refrigerator. With the exception of natural disasters or human acts of war, for example, real estate doesn’t go anywhere. I believe it is the case that no matter the item for sale, one of the best ways to see around the corner is to look at ordinary buying patterns of Americans based on age.
What could possibly have more impact on homes than location, interest rates, and inventory? I asked Harry Dent, Founder Dent Research that question. I found his answer to be quite sobering.
“After this brief bounce in housing demand in recent years, net demand will drop into 2040. Basically, we don’t need to build more houses for a long time, if ever! Knowing that, do you want to be a housing developer, or even invest in them? Yes, residential real estate will never be the same! It most certainly will be nothing like what we experienced in 2005,” Dent notes on February 23, 2017.
Dent went on to say, while we are emotionally attached to our homes, until we need the money, the same story applies to most commercial real estate. When downturns happen businesses willingly abandon leases and locations faster than do households.
Thanks to the U.S. Census Bureau we can see that the average age for Americans to enter the workforce is 20 and leave their jobs in retirement at age 63. When the economy goes through tough times people it is not uncommon for people to work longer when they can.
What we can see here that the fundamental trends “driving commercial real estate have been trending down since 1981, and more so since 2000, and may not turn up until around 2023. Even then, growth may not be nearly as strong as it was in the baby boom expansion,” submits Dent. Further, “baby boomer retirements may peak in 2026, while their deaths may not peak until around 2044.”
“But besides the demographic challenges the commercial sector faces, there’s another demon out for blood. Amazon, among many other Internet-retailers, are taking market share from brick-and-mortar stores. Major warehouses skip the retail level and ship direct, don’t use as much real estate space, and certainly not prime/Main Street space. Unless we have some major catastrophe that sees us return to a world with no Internet, I don’t see this trend reversing,” according to Dent.
In this aging and Internet domain, with declining demand for brick and mortar real estate, here are five areas that may do well.
1. With 10,000 people a day turning 65 through the mid -2030s, according to Jeff Hanson, CEO, Griffin American Healthcare REIT, the best nursing homes and assisted-living facilities.
2. Hospitals and healthcare facilities.
3. Funeral home facilities.
4. Well selected vacation and retirement sectors.
5. Residential real estate found attractive by millennials and retiring baby boomers and is affordable and cash flow positive.
There is danger in complacency. For those who release frozen equity by the sale of residential real estate today there may be opportunity tomorrow. If the mantra ‘buy low/sell high’ works for stocks, the same logic applies to all highly appreciated assets. We can all agree opportunity comes to those with cash.
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The information presented here has been provided by HS Dent. HS Dent is an economic research company that uses various techniques to study the potential impact of various changes in demographic trends in our economy. No one person or strategy can accurately predict market movements. Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
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This material contains forward-looking statements including, but not limited to, predictions or indications of future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.