Why American Real Estate loves the Bachelorette

Who hasn't ever the dreaded words, "We need to talk?” You’re having dinner at a nondescript restaurant with bus boys bustling around, waiters taking orders, and then out of the blue you hear those dreaded words: "It's over, Tim.” Then two weeks later your old girlfriend is going out with the jackass nobody liked in high school. I've been watching a little more ABC lately, and that means I’m watching The Bachelorette. The darling of the show has fallen in love with the incorrigible asshole Bentley. Not only is he not the one for our lovable friend Ashley Hebert, it’s obvious he gets some sick kick out of seeing her cry. It seems like since he's left, all she does in every episode is go on dates and wax poetic about him.

The US Real Estate industry is in the same place. We got "done dirty" by loans with bad terms, very easy money, and imbecile regulators.As a result, we are mired in one of the worst real estate markets in decades. Now that we've been shocked back to reality, Congress is trying to put together sensible rules to keep us on the straight and narrow.

The largest hangup for the industry is the Qualified Residential Mortgages (QRM) rules. The QRM guidelines seem like the astute, conservative way to prevent further housing disaster. You know, kind of the safe "ivy league boyfriend." But, true to form, Ashley/people are clamoring for Bentley – the “bad guy,” the exciting, less restrictive mortgage options.


The worst thing is that there are tons of groups that want to get behind this move to lower the QRM standards. Legislators, the National Association of Realtors (NAR), the National Association of Home Builders (NAHB), and NA whatever else you want – just about anybody else who is about to have a big old bite taken out of their pie.

The harsh reality is that in the long run, the conservative Ivy League boyfriend is going to have to be hardworking, but will also ultimately enjoy prosperity.Going with the bad boy Bentley and all his easy lending ways seems to be a one way ticket to all of us living in a trailer with our parents.There are a lot of people with a lot invested in how these QRM rules take shape. The last time those with the most to gain ran amok on a sugar high, the rest of us were left to clean up the mess. Having a defined framework to create reasonable mortgages may be a positive development. Even if that means we have to stop dating guys named after cars, sporting bad hair cuts.

-The Inside Associate

American dream on life support?

If you live in a house right now in suburbia look around and thank your lucky stars. If you live in an apartment take a look a round, I hope you like what you see because you might be there for a while. There are signs from the government, lending institutions, and municipalities that the status quo in buying a home is here to stay.

As we speak Congress is debating the standards that lenders need to play by. These risk retention standards are going to play a major role in how lenders decide to lend to prospective homeowners. The culture in home lending has had a paradigm shift since the early 2000's. Prospects now need a near flawless credit record, 20% down payment, and viable income ratios. In the "good ol days" with nearly nothing down and some paperwork, BAM here's your new home.

Large institutions and multifamily REITs definitely see the writing on the wall. With the impending demolition of Fannie and Freddie, multifamily has cornered a whole segment of the industry. College students transitioning to the work force, aspiring "YUPies" who haven't yet saved 20 %, and just about any other young people that don't have great credit. Multifamily REIT's across the country have buckled down on expenses and now are looking at serious growth as reflected in large stock price increases since 2008. My own employer's who for the sake of this blog we will call "Davidson" recently made major acquisitions in a high profile area looking to cash in. Furthermore, A developer from Urban Housing Group, just yesterday (April 7th 2011) walked into my office to discuss the state of the market. We were discussing the new Class A development they are breaking ground on in July.

The groundwork is laid. A much higher bar to clear to acquire a home loan, a serious demand for space in Multifamily with new college graduates every year adding to the demand. Demand price increases from a burgeoning clientele base will erode the saving power of renters. Gradual macroeconomic inflation increases will also slowly deteriorate the buying power of renters and other prospective buyers. I believe this all culminates in the creation of a new semi permanent renting class, who may not ever have the ability to have the white picket fence.

Who are the primary first time home buyers? A lot of the time they are young married couples. Over two thirds of first time home buyers were under the age of 35 and a house hold size on average of 2.7 people, according to the NAHB. The median income of first time home buyers is $ 67 K. In addition, as of the writing of the NAHB article in 2008, barely over a third of first time home buyers (FTB) had the "conventional" 20 % down payment. So for over 50 % of FTB's, they were either given some kind of leniency or possibly were part of a program that was willing to work with them. Now, we are looking at a future home market where that "assistance" or leniency will be rare or non-existent.

This may seem trivial, "a few more renters is okay". It won't be just few it will probably be a majority of the 18-34 age demographic. The "after shock " of creating this renter class will be a major blow to suburbia, if not the death knell. Since late 2006, we've all heard of entire unfinished subdivisions all across America. We've all heard of someone who's lost a home to foreclosure or has bought a foreclosure recently.


My outlook for the future in a macroeconomic perspective is rather gloomy. The growth of suburbia which boomed through the 80's, 90's and the last decade will come to a very slow crawl. Housing growth was a major economic driver of that time period. For a lot of municipalities, that growth meant blue collar jobs from construction, varying forms of corporate investment to meet the needs of new homeowners, and an increase of the tax base. With new home starts expected to remain at minimal levels, the overall health of the economy will be suspect. The birth and growth of the "renter class" will be a huge windfall for some, but for the rest us it is a reminder the US has seen better days.