[Note: To follow is an excerpt of an interview with Elliott Eisenberg, senior economist of the National Association of Homebuilders in Washington, DC, and Michael Anderson, Managing Member and Founder of Salt Lake City-based RealSource, a leader in multifamily research and tenant in common deals [www.realsource.net/bestoftimes]. To listen to the show archive or download an MP3, go to www.IncomePropertyInvestmentTalk.com/110508.]
Mosca: Where do you see multifamily today and in the immediate future?
Eisenberg: The driving force in the multifamily market is financing. Getting financing has gotten considerably harder and that alone is going to cause new multifamily starts to slow down. There's no question about it. The other driver in multifamily is the spiking of foreclosures in the single-family market. This has led a lot of people from the single-family housing stock that left multifamily years and years ago to buy a house are now returning to rental stock.
Mosca: Is there also a trend of residents choosing rental property because of the amenities and the different packages available?
Eisenberg: There have always been the cases that if people are moving to a community and had a strong urge to rent, they looked into what the community was like. Now, there is an even stronger urge because people are not going to suffer a capital loss if they rent for year or two as prices continue to decline. Bottom line: people choose to rent for a variety of interesting reasons. Interestingly, we don't see a lot of leading back from the shadow rental market. Empty single-family units remain empty single-family and they are not depressing rental prices in the multifamily stock.
Mosca: What are you looking at in terms of 2009-2010 with a new administration coming?
Eisenberg: Economists were joking that oil would be $200 a barrel six months ago and now we're saying $50, so take what I say with a grain of salt. I think that Senator Obama is going to win (correct!). He will reinvigorate HUD (U.S. Department of Housing and Urban Development). He will decide that low-income housing is an important force and improve housing stock for the working classes and lower classes. There will be more incentives in that area, perhaps low-income housing tax credits.
Mosca: I wonder if oil prices will get driven back up regardless of market conditions. One thing I've been concerned about and I've heard our economists talk about is that if we get it back up over the $150 a barrel range which could happen with increasing demand from China and India. What impact is that going to have on the exurbs and some of these communities that are being built further and further from the urban centers as far as cheaper mortgage rates or more affordable housing versus the actual cost to commute back to where the job centers are? Does that have a long-term effect?
Eisenberg: It does have long-term effects. If you think about the drive from the central business district out a mile or out 2 miles or out 3 miles, every extra mile you have to drive to and from your work to home and so on adds capitalized value of about $3000 or $4000 of the capitalized flow of that gasoline. Prices in the suburbs of existing and newly-built units are going to have to come down in some way, shape, or form to compete with the units closer in. Rental units downtown will be more attractive, and it will push construction in because they'll be able to charge a higher price. It's an important issue but as prices now get lower again who knows how that will change people's calculus.
M. Anderson: My family came out of the home building business. The reason we were able to make our housing inexpensive is that we were always on the frontier. We were out on the 'cutting edge' where the city services were, and sometimes we even had to develop the infrastructure. I'm not sure that there is a way today to build affordable housing in these far-reaching suburban areas.
Eisenberg: When I talk to builders I ask about responding to rising energy and financing costs. They say different things such as shrinking lot sizes, unit sizes, and offering slightly fewer amenities like granite countertops and so on and so forth. They are trying a bunch of ways to get the price down to counterbalance all the negative price increases. Is this a long-term response? Is this a thing of the future, a trend of the future or is it just a temporary perturbation brought on by high gas prices and recessionary activity? I don't know. Only time will tell.
Mosca: What is your golden nugget?
Eisenberg: The markets are going to improve nationally. Housing starts are down. We're now building between single and multifamily 700,000 to 800,000 units, and we need to build about 1.7 million a year annually. This market will turn around. It will turn around relatively soon but it will be different rates in different places.
M. Anderson: We are probably heading into the very best opportunities you'll ever see in your lifetime as far as investment options out there. Stop listening to the national news, start looking locally, realize that there are great opportunities for you throughout the country and if you're confused where to invest, give us a call. We'd be happy to help you get pointed in the right direction.