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Investor Survey: Housing Market Bottom Will Signal Recovery

ATLANTA — Investors will know an economic recovery is under way when the housing market finds price stability and foreclosures moderate. That’s the majority view of a regional real estate investment group.

“During the housing boom, consumer spending grew faster than income because their wealth was fueled by home equity,” said Sam Chandan, president and chief economist of New York-based Real Estate Economics LLC. “Households lost $5 trillion of wealth in the fourth quarter and about $2 trillion in the third. It’s unprecedented.”

Chandan’s remarks came during a meeting this week of the Southeast chapter of the Real Estate Investment Advisory Council (REIAC), where roughly 165 members voted electronically on current economic topics, offering an instant snapshot of the developers' and investors’ concerns. Kieran Quinn, vice chairman of Bethesda, Md.-based Walker & Dunlop and outgoing chairman of the Mortgage Bankers Association, served as moderator.

When the audience was asked which event would signal that an economic recovery had begun, 39% said the bottoming out of the housing market would be the leading indicator. New job formation followed close behind with 36% of the vote.

“If you look at the 2001 recession, according to the National Bureau of Economic Research, it ran until November of 2001,” said Chandan. “We continued to experience job losses in the recovery for another two years after that. The magnitude of the numbers can’t stay at 500,000 or 600,000 but the job market is going to be a lagging indicator of stability in the economy.”

Others on the panel, including Egbert Perry, chairman and CEO of Atlanta-based Integral Group LLC, a director of Fannie Mae and former director of the Atlanta Fed, agreed.

The relationship between the housing market and commercial real estate is worth noting. “There’s that old axiom that commercial lags residential by six quarters,” said audience member Brian Olasov, managing director of Atlanta-based McKenna Long & Aldridge. “We’re going to top at about 4.5%, which means we’re just at the edge of commercial delinquencies.”

The audience and panelists were also asked to look into their crystal balls and predict when the recovery would begin in earnest. The second half of 2010 drew the most responses at 39%, followed by sometime in 2011 at 25% and year-end 2009 or the first half of 2010, 21%.

An overwhelming number of respondents — 64% — expected unemployment to peak at 10% to 12%. “The unemployment rate, in our view, will creep to 10% to 12%,” said Chandan. “Part of what is being reflected here is a lower labor participation rate. There are fewer people looking for work, a larger number of discouraged workers so the number is a little bit misleading.”

The U.S. Region with the brightest future over the next five years was the Southeast with 57% of the vote. Atlanta was ranked the U.S. city with the brightest future, at 45%. Population trends indicate that 40% of the U.S. population will be living in the Southeast by 2050, according to Perry.

Overall U.S. commercial real estate supply/demand fundamentals over the next two years are expected to weaken significantly with widespread problems of greater severity and duration and many tenant and ownership defaults, according to 53% of the survey respondents. Another 31% expected that supply/demand fundamentals are going to weaken only moderately with serious weakening isolated in specific geographic areas and commercial real estate sectors.

“One area that we should have concerns about of further deterioration that haven’t really been anticipated by the market is industrial warehouse distribution,” said Chandan. “The risk is we could adopt more protectionist policies in the United States. That will limit the flow of goods in and out of the country. Once you separate services and look at the aggregate flow of goods in and out of the United States, it’s down about 35% from a year ago.”

Not surprisingly, participants predicted that retail (52%) will be the weakest sector over the next five years and multifamily (77%) will be the strongest.

In terms of the least problematic solution to the U.S. banking crisis, 45% of respondents said an aggregator bank to remove “toxic assets” and recapitalize banks was the best option.

“I think the greatest transfer of wealth is happening right now as we wipe out everybody’s values,” noted Perry. “But I think the biggest problem we have in an effort to accelerate or purge the problem out of the system, we’re dumping so much product onto the market that the banks themselves by trying to respond to regulation are in fact aggravating the problem.”

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