One could argue that since the landing of the Mayflower, and perhaps before that, besides religious liberty, immigrants also pursued one other desire: the quest for land. In fact, many have argued that from an economic perspective, it was the claim and cultivation of new frontiers that spurred the Republic’s greatest expansions. Witness the late 1700s, a period centered on an agrarian culture. There was then the Western migration, which created its own major sub-economy that continues to shape our commercial landscape to this day. More recently, we observed the colonization of the suburbs and exurbs, far away from our traditional metropolitan centers. This was marked by the search for more square footage that manifested itself in McMansions and Big-Box retail warehouses. Bigger and better and more has been the hallmark of real estate expansion in this country. The value of real estate has always ultimately proven to be an increasing proposition. By each generation’s end, an investment in real property, whether residential or commercial, has sustained many families. However, we may finally be seeing this undeniable trend reversing.

For the first time since our start, America may be experiencing a downsizing and partial transference away from individual property ownership. The implications of this may dramatically change the complexion of our economic system. Quite possibly, the current credit and mortgage crisis has changed the financial habits of our populace. Where once home or commercial ownership was seen as signs of prosperity, today, it is a burden. The American Dream of a white picket fence has abruptly turned into the American nightmare; this may be the impetus for a new chapter in our relationship with the land we so love.

America’s changing attitude toward Real Estate

Statistically, speculation in real estate has always proven to be a great investment. In fact, from the early 1970s, on an inflation adjusted basis, housing has more than doubled in value until its peak in 2006. Whether consciously or not, Americans have viewed property as a growing “savings account” that also provided shelter. Along with education, these were investments that grew and nurtured the American Dream. As far as real property is concerned, all of that came crashing down with the mortgage crisis.

Since 2006, the average price of a house has fallen more than 35%. Harder to calibrate is the foreclosure rate bearing down on the value of housing stock. According to a recent Wall Street Journal article, when one considers underwater loans and loans with some equity that are facing either strategic or organic default, there may be upwards of 8 million to 10 million mortgages that are in trouble. When compared to the nation’s 55 million loans outstanding, the numbers are staggering. Keep in mind that those statistics are at “last sale,” so to speak. With this amount of “shadow inventory” hanging over the markets, it is hard to believe that real estate prices have reached bottom. It takes a great deal of faith and a strong stomach to jump into the real estate pool in a meaningful way.

More to the point is a shifting demographic in this country tilting away from real property. This is a counterbalance from the Baby Boomers’ hunger for an ever-larger home, or what I call the “Tara Effect.” Combined with cheaper building materials and available credit, the average size of a home grew beyond most family’s needs. In a period of rapidly increasing real estate prices, there was a great satisfaction to all of that additional equity. However, once the bubble burst, the average homeowner was stuck with a declining asset, an outsized mortgage and, most devastating of all, the additional upkeep. Let’s face it, bigger homes require a bigger commitment on a personal basis. Furnishing, landscaping, cleaning and energy costs alone, are enough to sap one’s spirit and bank account. Today, many of those same boomers are looking for a downsized version of that dream, and freedom from the burden they carry. The Internet age has also contributed to that problem with people freely sharing ideas. Where foreclosure was once stigmatized, it is now seen nationally as a strategic way out. We have become a country savvy in the “business” of real estate, or more pointedly, a group of “Little Trumps.”

Traditionally, it was the next generation that assumed the ownership of property, whether through inheritance or new acquisition. Today’s Generation Xers and Gen Ys, have demonstrated shifting attitudes toward home ownership. Perhaps it is because they were raised in a culture where one’s neighborhood could be considered in hundreds of miles and not street blocks. They are also use to college dormitory living, vacations by time share and turn-key apartment or townhouse living. Housing is more of a utility to them and not a goal. They do more of their purchasing via the Internet and not in a store, thus pressuring commercial property prices. Many work from their lap tops. They were raised this way. The “man in the grey flannel suit” might as well be someone from medieval days. Finally, they have experienced living in the “dream house” with their parents. They have witnessed the headaches, and given today’s prospects for price appreciation, would rather skip the ride. While there will always be those who aspire to “the mini mansion,” when viewed on a macroeconomic basis, the dynamic of real estate has been changed.

Where do we go from here? The future of real estate in the United States

Like most of our prognostications, we will follow up in future pieces. In this particular forecast, we would not mind being somewhat wrong since it may take another 36 to 48 months before the housing crisis reaches bottom. Probably, there will not be any meaningful approach to solving the foreclosure mess (the announced $25 billion settlement with mortgage banks notwithstanding) until after the election. Once this is finally addressed, and the shadow inventory is alleviated, we can envision a floor to pricing.

The future may see a proliferation of smaller homes with more sophisticated, technological amenities. It will be easier to maintain, live and eventually move from these residences. Think “Over 50 Communities” on a somewhat grander scale. In this scenario, debt levels will not be stressed, as the government and the banking sector will not want to repeat the current credit crisis. In other words, homes will be more affordable and user friendly. The downside to this value metric will be more sensible and defined.

Along with residential, look for even more commercial real property to be owned by REIT’s, as well as other trusts. More people will rather lease than own, thus limiting their own costs and commitment. In turn, these trusts will be funded by shareholders seeking greater income for retirement. Ultimately, America’s investment in real property will be transferred from one of a “picket fence concept” to a more communal and diversified one.

Every nightmare must thankfully have an end. Conceivably, what we have spoken about may be an arrangement that takes America’s love for the land through a new millennium.

Until the next timeā€¦..The Thoughtful Arbitrageur.

Edward Strafaci is not an investment adviser. Nothing he writes should be construed as investment advice or an endorsement of any particular security. From time to time, a family trust with which he is associated may have positions in the securities he writes about. When it does, he will tell you. What he writes is meant to inform and in some cases to entertain and amuse. HedgeWorld’s Alternative Reality is not an investment advisory site. As a general rule you should not take investment advice from blogs, anyway. Consult a financial professional for investment advice, not a blog.

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