Dog Days of Summer

The dog days of summer are being dogged by less languid thoughts this year. Now that we’re solidly into the second half, cautious optimism has given way to uncertainty, and even pessimism. Consumer confidence remains shaky, and our own second-quarter CPE 100 Sentiment Survey likewise shows fading hopes among real estate’s decision-makers for short-term economic improvement.

The shift in sentiment is hardly surprising, given the economy’s second-quarter stumble. Home foreclosures rose, commercial mortgage delinquencies increased and employment gains continue to fall far short of what most experts deem is necesssary. Recently, the head of the European Investment Bank predicted at least two more years of the eurozone debt crisis. Topping it off, the public’s view of Obamacare remains sharply divided.

Second-quarter declines are hardly unusual, yet experts disagree about what’s to come next, and when. During the National Association of Real Estate Editors’ conference in late June, National Association of Realtors chief economist Lawrence Yun predicted that strong demand will iincrease housing starts or bump prices up as much as 10 percent. On the other hand, National Association of Home Builders chief economist David Crowe sees economic and demographic issues llimiting demand and said that new home production is at the “lowest rate ever seen.” Production will be limited by shortages of land and building supplies, as well as by builders’ inability to obtain financing, according to Crowe and Zillow chief economist Stan Humphries.

Economists were generally more optimistic about multi-family rentals, but also see that demand continuing to exceed supply (by as many as 150,000 new units annually, according to National Multi Housing Council economist Mark Obrinsky). That imbalance can allow landlords to raise rents, but sluggish job growth is limiting price increases. Jobs, of course, represent the big elephant in the room. In closing the NAREE conference, Stewart Title economist Ted Jones declared that although “we will create jobs within the next 30 months,” the United States is producing only half of what it needs. His even more dire view is that the U.S. has yet to achieve genuine recovery. “When’s the next recession?” he asked rhetorically. “You have to get out of the first recession to get into the second one.”

On the other hand, Dr. Peter Linneman in this month’s Economic Outlook predicts a more positive outcome for the jobs situation—and as a result, to GDP. It will take a while and require certain changes in government actions, but he believes the results are coming. Some real estate data forecasters also offer a favorable outlook. Among them are SNL’s reports of generally solid REIT performance, CoStar Group’s projections for increased absorption and IPD’s anticipation of investment opportunities in both the United States and much of Asia (see Data & Analysis).
Are there difficult days ahead? To be sure. But having survived the frosts of some particularly harsh economic winters, perhaps we can bask in the summer sun again before long.