There was an article in Bloomberg Business Week recently with the headline “Foreign Buyers Heat Up Miami’s Condo Market”. The story went on to describe how rapidly the condominium market in Miami has completely turned around.
The perfect storm of overbuilding by tens of thousands of units combined with the economic and housing downturn produced a housing market in 2008 and 2009 with record numbers of foreclosures and vacant and near-vacant buildings across the skyline. What a difference two years has made as home sales jumped by a record 46 percent last year and median monthly rents are up by 30 percent from 2009, thanks in large part to Latin American buyers who have recognized and enthusiastically responded to phenomenal values. With average prices of downtown Miami condos now at $400/s.f., down 20% from their peak in 2007 but up one-third from the bottom of $300/s.f. two years ago, that is still a 43% better value than Bogota, 64% better than Sao Paulo and a whopping 71% better than Rio de Janeiro.
Miami is admittedly a special marketplace, the “gateway to Latin America”, and thus enjoys an immense and unique potential target market far greater in numbers than could be generated by primary usage or even domestic demand. But it took homebuilders and developers who saw the potential to pick up ground at the rock bottom market prices a few years back – they are the ones now smiling all the way to the bank.
I am not suggesting that “Karma”, with which the title of this blog is most commonly associated, is the cause of this reincarnation of the Miami condominium market nor that any other religious principle or intervention is necessarily involved. While many homebuilders and developers certainly prayed for a return of the market, my belief is that the natural laws of causation or, as more usually referred to in our industry as “cycles”, were responsible.
I have been forecasting a return of the housing market in our country starting in 2012 for the past three years and all evidence now strongly points to the validity of that prediction. The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of the Treasury released the February edition of the Obama Administration’s Housing Scorecard on Friday and the report suggests that investors now believe that the Case-Shiller index has bottomed. I am not a big fan of Case–Shiller as, in my opinion, this index is prejudiced by distressed sales and therefore is neither representative of the housing market as a whole nor reflective of “new” housing values. Nevertheless, investor confidence is a major contributor to a sustained recovery and should help to limit negative media coverage on housing in the future.
The housing recovery will be slow and will still have a few rough spots to overcome and a few specific local markets that will lag the others but I believe that before the end of this decade the USA will be back to 1,500,000 housing starts per year with the great majority of that production being for-sale housing.
That belief in for-sale housing is somewhat contrary to the national media which suggests that the future of housing in America is rentals and one of the largest national homebuilders, Lennar, appears to be embracing that philosophy in several markets. While rental housing has certainly shown strength over the past two years, the longer-term potential for rental development is probably limited and we may well see a surplus of rental apartments in the next few years, especially at the higher price points in which the new developments are concentrating. Historical rates of homeownership in this country have proven to be sustainable for the long term. As the economy and employment continue to improve and bring with them a renewed consumer confidence, I am convinced we will see the return to the American Dream of home ownership.
Personally, I have to look no further than my youngest son who just purchased his first home. While he is five years older than I was when my wife and I purchased our first home, he and his wife followed in the footsteps of their parents and bought a “traditional” single family detached home, a four bedroom colonial. The delay in purchase appears logical for Gen “X”ers (aka 13ers) and Gen “Y”s (aka Milennials) as they also are getting married later in life. But when the time comes and they are ready, they are returning to their roots and that is one of the main reasons why I have complete faith in the future of for-sale housing.
To satisfy the renewed demand that will shortly be upon us, however, does not mean a return to the old ways of doing business. I drove by a defunct Arby’s restaurant this evening which highlighted the need to adapt to properly respond to things coming back around as they come back differently. I did not mind Arby’s food when they first opened as I thought they offered a decent roast beef sandwich, carved from “real” roast beef. When they switched to what appeared to me to be a processed beef loaf, however, they lost my business. And although they have tried many other restaurant concepts (one of their test kitchens is near my home) over the next several years, none of them made the grade for my lunchtime choice and, judging by the number of other Arby’s which have closed, apparently not for other consumers either. I would have thought that their natural evolution would have been to become the leader in cheese steaks as they already had the ingredients and that product seems to be doing well at Charley’s and several other chains. But I claim no expertise in the restaurant industry except as a consumer.
While the homebuilding market is now visibly coming back around, it brings with it today a new paradigm for success. Well-crafted strategies based on intelligent market research will be required that create Unique Selling Propositions appealing to the new markets and their way of living and purchasing:
─ better community planning that creates attractive and livable environments;
─ more intelligent home designs that are cost effective and energy efficient yet provide the features that the new markets require;
─ competent implementation to provide a full product line by design, style, utilization and price that covers the target market segment(s);
─ sales and marketing tactics and programs geared to the “X”ers and Milennials utilizing cutting edge web-based techniques fully supported with social media.
The challenge facing the homebuilding industry today is intelligently evolving to become successful 21st century homebuilders instead of failing to adapt and following Arby’s path to oblivion. But that’s just my opinion.
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