Aggie Real Estate Expert Shares His Thoughts
Source: The Dallas Morning News, 07/19/06
Mark Dotzour, chief economist at the Texas A&M Real Estate Center, is celebrating his 10th year on the job.
Here are two of his opinions on the real estate market:
On housing appreciation: “The average rate of annual appreciation nationwide is still running at 12 1/2 percent. It’s unbelievable that the Fed has been tightening for over two years and home prices are still going up by that much. That tells me that there is intense demand in the United States to buy a home, in part driven by the basic need for shelter, but also by investors’ lack of trust in Wall Street. That is part of the Fed’s dilemma few talk about — the need to create an alternative investment, something else for people to invest in besides real estate.”
Why investors worldwide are buying U.S. real estate: “The big theme that’s affected everything has been a global oversupply of capital, which was largely engineered by the Fed and the Bank of Japan. And even though the global economy is pretty solid, most of the growth is occurring in countries where investors aren’t as comfortable putting their money. Think about it — if India was a state in the U.S., all of the developers in the nation would be fighting each other for a piece of land. If for no other reason than lack of opportunities, many investors — American and international alike — have stayed focused on the U.S. market. As a result, America has been hit with a tsunami of investment capital from all over the globe.”
The full interview is below.
Housing reaches crossroads
A&M real estate economist says market could turn either way
12:00 AM CDT on Wednesday, July 19, 2006
By DANIELLE DiMARTINO / The Dallas Morning News
Last year will be hard to top for Mark Dotzour. At the age of 52, Dr. Dotzour, the Texas A&M Real Estate Center’s chief economist, became a grandfather for the first time and hit his first hole in one.
Chances are, Dr. Dotzour’s best year will coincide with that of the housing market. The National Association of Realtors is forecasting home sales will decline to 6.6 million this year from the record 7.1 million in 2005.
Even so, the moderated pace will still clock in as the third-best year on record.
But housing down-cycles typically last two to five years. Moreover, Texas appears to be one of the last areas in the country that is still booming. The state could be the caboose of the downturn that just turned 1 year old.
That means the real question is what the long-term future holds. With so much of the national and local economy staked on housing, The Dallas Morning News queried Mr. Dotzour for his outlook.
As he approaches his 10th anniversary with the Real Estate Center, he says the housing market and the broader economy are at an “inflection point.” In other words, the crystal ball yields a lot of hits and misses.
The latest figures place total existing-home inventory at 3.6 million units, representing 6.5 months’ supply. Where does that put us in the current cycle?
That is why I think we are at an inflection point. Current levels typically coincide with a balanced market. When you see supply at less than 6.5 months, price appreciation perks up; when it gets north of 10 months, you start to see price declines.
Talk more about where we are in the broader economic cycle.
In my nine years at the center, this is the most difficult environment I have ever seen for forecasting the economy. All that we do know is that we are at a crossroads and that what is to come will be different. It’s no longer a given that we need to prod the economy to keep it going; at the same time, it’s imperative that the removal of stimulus does not turn into a sedative.
Where do you think we will see the evidence emerge of which direction the economy will turn?
The most obvious area is building permits. With a sizable portion of job growth in recent years in the construction sector, the Federal Reserve will know that the tightening is working if construction starts to slow.
But didn’t that just happen – didn’t construction employment just shrink for the first time in almost a year and a half in June?
Construction is just the most obvious thing to watch, but it is certainly not the only indicator the Fed is monitoring. Every time the Fed raises interest rates and then sees new supply continue to come on the market and prices continue to rise, they have reason to keep tightening.
The average rate of annual appreciation nationwide is still running at 12 ½ percent. It’s unbelievable that the Fed has been tightening for over two years and home prices are still going up by that much.
What does that tell you?
It tells me that there is intense demand in the United States to buy a home, in part driven by the basic need for shelter, but also by investors’ lack of trust in Wall Street. That is part of the Fed’s dilemma few talk about – the need to create an alternative investment, something else for people to invest in besides real estate. Today that is cash.
Does that strike you as being a bit ironic? Isn’t the Fed at least partly to blame for the huge amount of speculation we’ve seen in housing?
The big theme that’s affected everything has been a global oversupply of capital, which was largely engineered by the Fed and the Bank of Japan.
And even though the global economy is pretty solid, most of the growth is occurring in countries where investors aren’t as comfortable putting their money.
Think about it – if India was a state in the U.S., all of the developers in the nation would be fighting each other for a piece of land. If for no other reason than lack of opportunities, many investors – American and international alike – have stayed focused on the U.S. market.
As a result, America has been hit with a tsunami of investment capital from all over the globe.
What do you think will be the likely aftermath of this “tsunami”?
It’s hard to say. When you have this enormous flow of capital working in an economy that is growing, but at a modest pace, you end up seeing a lot of developments that don’t look like good deals based on historic standards because the yields are so low.
That’s why you’ve seen apartment and office buildings coming out of the ground when vacancies are still relatively high. Investors are willing to accept a lower return than they were in past cycles.
How is this enormous amount of capital looking for a home playing out on the residential real estate side?
When you combine new and existing homes, you get to four-plus million units. Homebuyers are once again looking at homes as an investment as well as a place to live.
But then it was to be expected. The most promising sector of the U.S. economy after the dot-com bust was the housing market. So it’s reasonable that we’ve seen overinvestment in the sector.
And yet the sales on the residential side keep closing.
In theory, real estate has to have some economic merit or the funding won’t be there.
The key question today is how to define economic merit. The same oversupply of global capital has applied to mortgage lenders who underwrite mortgages just as aggressively as investors competing for equity on the commercial side. Just as it has led to lower yields on the commercial side, the flood of capital has led to lower lending standards on the residential side.
This has introduced the potential for higher delinquencies and foreclosures than in prior cycles.
Speaking of foreclosures, Dallas continues to top the list among major U.S. markets. As of August, postings were running 26 percent higher than they were last year.
It seems like the Dallas experience is unique vis-à-vis other Texas cities. For now, supply is still entering the market, and that may be part of the problem. …
It would seem that we are not going to see significant price declines across the state. The softest place in the Texas market will be in young subdivisions where the developer is still active. … The moral is you want to be one of the last to buy into a subdivision or you need to be able to stay there until the developer has cleared out.