Real estate is going through two cyclical patterns, one traditional and the other counter-cyclical.
In the past real estate was mostly counter-cyclical. Now, depending upon the product, it is partially that. The economy has been soft and porous; home sales and per-square-foot costs have remained hot while apartment rents have been adjusting down. Low interest rates hurt savers, but buyers of cars and homes love them.
People are down-payment and monthly-payment sensitive. They frequently stretch to buy the largest square footage and highest price they can rationalize buying. Builders will tend to concentrate in the same range because it's more fun to design and market more luxurious products, and they can be very profitable.
Building affordable products takes more discipline and political savvy than most possess. Ironically politicians pay more attention to no-growthers because they make more noise. So much for being responsive to need when demand speaks louder.
Because there is a large shortage of apartments, rents have escalated and will remain -- not where they have been -- but as high as demand will allow the owners to charge. The faster the rents have escalated, the greater will be the adjustment. Older rentals make the best buys to purchase, as long as you employ a good construction inspector, have strong and dependable management and calculate improvements carefully so that you don't build an ego-trap.
Because new jobs and re-employment are especially low during this "recovery," office and residential rentals will adjust the most, until those trends are reversed. That will not occur until employers feel more positive about profits and sales. They will continue to keep investments in new plant and equipment to a minimum until that time.
Affordable housing is quickly becoming the noble cause in these parts and nationally. Finally, there is growing political attention to the immediacy of the need. There is no discretion to this; it must be solved or the crisis will grow into revolt at the polls or worse.
Commercial real estate is always into adjustment as there is either saturation of supply or undersupply of existing space. But there is another value: the use of space and the vanity of what kind of space is fast-changing. There are certain professionals who feel that they need both specific location and unusual design characteristics, which I call vanity-space. Law firms come quickly to mind as they diversify geographically.
Today, sellers will tend to hold onto their properties longer than usual, until they can realize the price they feel they can get. There are opportunity funds all over the place, patiently trawling for deals in high-vacancy places which appear to have a strong upside.
During the early portion of this year, sales of apartments, industrial and office had all fallen. Retail remains popular because of the huge amount of immigrant demand available. Yet foreign investors are becoming cautious about investing here as they are shocked by our scandals and the vulnerability of the American Dream that passes from immigrants to successive generations.
Today, there is legitimate fear of another recession (called "double-dip") because of the great unknowns. The Fed is alive to this fear and will tolerate a higher rate of inflation than it usually does because it doesn't want the volatility of the stock market to destroy any remaining optimism on the part of buyers of big-ticket items, or housing.
The stock market is still touted by a multitude of stock oriented and connected people who have little insight into any word except "buy and it will grow." It is a dangerous place to play with savings. Real estate has real experts who can assist decision-making. The stock market is played like monopoly but with real money. There is a great difference that requires self-discipline, personal research and patience. Remember, since 1999 profits have fallen significantly across the board in finance, autos, retail trade, communication, utilities and business services.
Real estate can be bought by individuals, clubs, partners, corporations, and by public organizations. Of course I am part of it and care for it because it is also where people live, shop, work, study, and recreate. It is human in scale and can be personalized as much as the owner of it cares. Stocks are much too often the pressure of touts, exaggeration, and delusion, though it has its rationale side to hopefully you.
Goodkin, an international real estate adviser and strategist, has been a housing analyst since 1956. He can be reached at email@example.com.