The cover story in the current issue of Fortune is The Return of Real Estate. While the title is slightly misleading in that it focuses solely on residential real estate, it makes for interesting reading nonetheless (and to be fair, the subtitle of the article suggests the scope of its content).
According to the article, the key factors driving this resurgence are the cost of owning vs. renting and the level (or lack thereof) of new construction. Apparently the pendulum is finally beginning its swing back from glut to dearth.
In support of that proposition, the article says that in mid-2006, there were 53,000 new homes for sale or under construction in Phoenix; currently, that number is only 8,100. In discussing this statistic with one of my colleagues she asked why she should care about what's going on in Arizona when we're here in DC. In responding, I was reminded of John Donne, English poet and lawyer (real estate maybe?) who famously declaimed, "Ask not for whom the bell tolls. It tolls for thee."
Washington DC, Northern Virginia and lower Montgomery County, along with places like Indianapolis, Minneapolis, San Diego, the San Francisco suburbs and Texas, are what the article calls "nondistressed markets." In these locales, housing prices, while impacted, were not battered. These markets will show a healthy resurgence as the economy and, in particular, job growth, improve. The housing market in Phoenix, along with other Sunbelt cities like Las Vegas and Southern Florida, suffered devastating collapses that crushed their local economies.
With job markets showing nascent signs of life, low inventories of new homes mean there is an opportunity for construction to slowly begin anew - notwithstanding the continuing spate of foreclosures nationally, provided that local markets are able to absorb these properties. Why? Because foreclosed properties drive down the price of housing generally, this makes them extremely attractive to investors, who purchase them for use as rentals. As the Fortune article points out, "Remember, the millions who lost their homes to foreclosure still need somewhere to live." Real estate construction, whether it be housing or commercial, has a pervasive impact on local economies; first, construction of a typical new home can, during the course of construction, employ anywhere from 80 to 100 tradesmen such as electricians, plumbers, carpenters, painters, roofers and the like, not to mention the increased business for local mortgage brokers, appraisers and insurance agents, as well as local dealers and suppliers. More than that, however, the revival of the home building industry unquestionably impacts the national economy as well, because new construction means new business for the manufacturers of appliances, plumbing fixtures, floor coverings, paints and wallpaper, furniture, roofing and siding materials, etc., not to mention lenders and insurers.
One can even argue that in today's multinational economy, the effect is global, since it is hard to imagine any new home without several flat screen TVs, WiFi, sound systems and the other amenities of modern life, many of which are made abroad.
If you are actively involved in real estate (or even just interested), I think the Fortune article is a good, informative read and if you're not a subscriber, it's definitely worth the newsstand price.
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