Current economic conditions show indications of a real estate recovery in some market segments and geographic areas; however, foreclosures continue to dampen prices, job and income growth have been weak, and lending practices have limited the availability of mortgages. Global economies continue to stutter, adding to uncertainties about the political unrest in the Middle East, unemployment in the United States, European debt crisis, and concerns about inflation in China, the world’s second largest economy. On June 24, the Fed downgraded its forecast for the U.S. economy for the remainder of 2011 and 2012 (Fed Downgrades Forecast for US Economic Growth). This was followed by Standard & Poor’s downgrade of the U.S. credit rating in August, reflecting concerns about growing budget deficits and ineffectiveness of the political system following the debt ceiling debate (S&P Downgrades US Credit Rating to AA-Plus). These factors indicate a bumpy road on a path to a slow and protracted economic recovery.
According to the Case-Schiller composite 10-city index, home values have reduced by 33 percent from their June 2006 peak by early 2011 (U.S. ‘Underwater’ Homeowners Increase to 28 Percent, Zillow Says). Although new home construction in recent years has been well below levels of activity before the recession, economists generally predict a gradual stabilization and recovery, with rates of new home construction nation-wide approaching pre-recession levels by 2014 (Commercial Real Estate Outlook: Top Ten Issues in 2011). An initial rebound in demand and price points is possible as a result of pent-up demand. Over the mid-term, we are much less likely to see the dramatic boom-bust cycles of past decades; price growth consistent with income growth will tend to be the norm.
For residential uses, smaller rental product is likely to experience a faster recovery relative to larger single-family detached units in many urban locations, especially those with infill prospects in highly amenitized areas. A desirability shift towards smaller lot infill locations and rental units is driven by several trends including the economics of home ownership, socioeconomic factors, rising energy prices, and changing quality of life preferences. Many empty nester baby boomers, seniors, and first-time home buyers are seeking higher density living opportunities in walkable 24-hour locations within proximity to public transit, retail, and other urban amenities.
On a regional level, recovery is likely to be more pronounced in more established real estate markets with stronger economic fundamentals (ULI Emerging Trends in Real Estate 2011). In California, these markets include urban coastal locations with higher skill jobs and higher incomes relative to many inland areas. Primary markets have exhibited a stronger linkage to global commerce pathways and have experienced a less pronounced decline during the recession as measured by lower home price decreases and lower foreclosure rates. For example, San Francisco home prices have decreased by less than ten percent from their 2007 peak, significantly below the Bakersfield metro area’s decrease of nearly 50 percent by early 2011, as reported by RAND (http://www.ca.rand.org/).