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Monday, September 17, 2007

Nostradamus, I'm not, but...


Looking into the crystal ball of real estate. I get asked a lot by clients and friends and acquaintances, “When will we get back to normal in real estate?” The answer may well be that this is the new normal. Not necessarily the high foreclosure rate that we currently are experiencing; although that likely will last through much of next year. But the declining home values and lack of buyers may well last for a few years, as will the housing overstock situation, at least in Michigan.

We live in a shrinking state with a declining economy and it will take years to reach a new steady state. That new “normal” is likely to be unlike anything that most of us have experienced in the past. One has only to look at other states and areas that have gone through the same things as their primary industries collapsed or shrunk – places like Pittsburg and Cleveland and states like Pennsylvania, Ohio and West Virginia, as the steel and mining industries went into decline.

Michiganders, and Detroit area Michiganders in particular, like to refer to the Big-3 automakers as the engines that drive our economy. People on the west side of the state (which it might be noted is doing a bit better) would likely hasten to remind us that Michigan is also one of the office furniture capitals of the world. Anyway, what we really have on this side is the Big-1 and two struggling auto companies whose very survival is still in question (I noticed recently that even the press is starting to call our local automotive companies the Detroit-3 instead of the Big-3). Anyway, these “engines” support a huge base of suppliers and others whose very dependence is based upon the wealth being generated in the plants and engineering facilities and headquarters operations that are in the area. Much of that is shrinking rapidly and the wealth of the “middle class” UAW workers and the thousands of middle level engineering and headquarters workers is shrinking fast with it. Plants are closing, a considerable amount of engineering and headquarters functions are being outsourced (many to overseas locations) and lots and lots of the suppliers and other auto industry hangers-on are going under. How can that not impact the real estate market for years to come? Answer – of course, it will.

So, are we staring into the abyss? Is it time to build another ark? Are we all doomed? No, of course not, but things will never be the same as they were 2-3 years ago; so, we need to adapt to the new reality. Builders have already started to recognize that there will be few buyers for the McMansions that they have been churning out. They will need to find ways to build smaller, more affordable housing. The Baby Boomers may have one last hurrah round of home-buying left in them, but it’s more likely to be their downsizing round as they head into retirement. And, the up and coming Tweeners, Gen-Xers and Gen-Yers are unlikely to jump in and buy up all of that glut of McMansions that the Baby Boomer will leave behind on the market; unless, they can find one in foreclosure at about half price.

But, people still need to live somewhere; so, houses will continue to sell. I’m still showing houses to people; it’s just that fewer and fewer “buyers” are looking at houses at the higher end and more and more are focused right now on the foreclosures and other bargains in the market. I picked up my HUD keys the other day, so that I can start showing the low-cost HUD homes in the area. That may become the new sweet spot in my new “normal.” Maybe this is a blessing in disguise for some of the older communities in and around Detroit. Royal Oak had it’s time in the sun and then got overpriced. Maybe now Ferndale and Madison Heights and other close-in suburbs of Detroit will attract people back towards the downtown area with their stock of affordable housing. That is where the less expensive homes are and maybe that’s where the Gen-whatever’s will end up. I’m still trying to make that out in my crystal ball.

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