Looking Into The Crystal Ball: Top 10 Real Estate Trends for 2014

If the real estate recovery is a baseball game, we're in the fourth or fifth inning.

So what will the rest of the game look like?

Experts from the Urban Land Institute unveiled their view of how the rest of the recovery will play out in their Emerging Trends in Real Estate report, released this week at the land use and planning nonprofit's annual conference in Chicago.

The group highlighted a number of housing trends we can expect to see playing out over the next few years, based on surveys and interviews with real estate developers, investors, lenders, servicers and builders.

(1). Millennials are moving the market, but not as homeowners
Though the so-called Millennial generation has been much-maligned in the media, real estate movers and shakers are increasingly interested in where this generation is headed -- quite literally. A number of the cities have seen increased economic activity in the real estate sector led by this generation, particularly Austin, Seattle, Portland and the Twin Cities in Minneapolis.

Minneapolis' place as number nine on a list of the top 10 cities for developers came as a surprise to Andrew Warren, director of PwC, a research and advising firm that co-authored the report with ULI.

"This is a city that's attractive to younger generations," he said, adding that its diverse economic base is helping to bring in a lot of college grads that don't want to leave the Midwest.

However, this same group isn't forming new households, and they're not buying as many homes as their parents' generation were at their age.

(2). Second-tier cities will lead the recovery next year
Investors, developers and builders are losing some interest in the so-called 24-hour gateway cities -- San Francisco and New York City -- and have developed more interested in cities like Dallas and Portland, where there are more housing deals to be had.

For example, in 2011 only New York City and Washington, D.C. had good prospects for real estate investors and developers, according to the ULI report, but now Austin, Boston, Dallas, Houston, Miami, Orange County, Portland, San Francisco, San Jose and Seattle make that list -- and D.C. actually dropped out.

(3). Real estate recovery still hinges on job growth
The slow pace of job growth as well as income and wage growth is still holding back the real estate recovery and that's not likely to change quickly.

Many cities in the Bay Area and in Texas have seen strong housing recoveries based on the strength of their economy, said Stephen Blank, ULI senior resident fellow for finance, so places with low unemployment can expect better recoveries next year, while places still haunted by economic issues won't.

(4). The "smile investing" philosophy is back
Real estate developers are interested once again in a so-called smile investment philosophy, Warren said. According to the philosophy, developers and investors start looking at cities in the Northeast and moving south to cities along the Sun Belt -- Florida, Texas, Arizona -- and then coming back up to the Northwest -- Northern California, Oregon and Washington state. So expect to see more activity in those areas than in the Midwest.

(5). Multi-family apartment building will wane
With rapidly rising demand for apartments during the recession -- boosted by increased demand from homeowners-turned-renters -- multi-family building surged. But that's likely to quiet down in 2014, as supply and demand have swapped places -- and there may actually have been too much multi-family building in 2013, Blank said.

(6). Condo development is still on the back-burner
The recovery in the condo market hasn't matched that of the single-family market, and developers aren't willing to take the risk on putting up new condo buildings.

Instead, builders and developers are taking a dual-track option: They build a rental apartment building with an eye on switching it to condos in 12 to 16 months, depending on market conditions, Warren said.
High-end apartment buildings are also proving problematic for developers, as the interest from well-heeled potential renters simply hasn't been consistently strong.

(7). Inventory is coming back
The experts at ULI are predicting that 2014 will be the last year that low inventory will aid property prices. Distressed inventory is drying up and sellers are looking at better profits than they have in years.

(8). The buyer's market is long gone
Homes right now are priced to please sellers. "For buyers, they're priced to disappoint," Blank said.

Sellers now know they can squeeze buyers eager to buy before interest rates and home prices shoot up even further.

(9). Shadow banking is emerging
There's optimism among those surveyed by ULI that lending standards will loosen next year, but Blank isn't as sure.

To fill the void, a concept called "shadow banking" has started to emerge and may take on a larger role in the lending market next year. Shadow banking is similar to traditional bank lending, but it's done outside banks and can therefore get around bank regulations.
Borrowers going this route will find a hodge-podge of private funds, wealthy individuals, family offices, and refugees from other lending markets, according to the report.

(10). The suburban is going urban
There's not a lot of interest in developing suburban areas, Warren said. But where there is, it's surrounding more urban-minded projects located in spots where amenities and public transportation are easily accessible.

2014 Real Estate Forecast: Experts Give Their Opinion

Christopher Thornberg, economist and founder of Beacon Economics:

Christopher Thornberg

“Fundamentals are improved. Corporations are making money. Income is rising at a better pace. Real estate is starting to turn the corner,” he said. “The biggest problem we have are with our leaders in Washingotn, D.C., who seem disparate to upset the apple cart at some level.”
Referring to the recent federal government shutdown that froze FHA-insured lending activities, small business lending and IRS-document checks to close deals, Thornberg said having the debate has been deferred to 2014 is somewhat unsettling.
“It’s not over,” he said.
Pushing aside the budget debate, Thornberg said there still is no full set of regulations from the banking industry. No one can agree on what a conventional mortgage looks like. Yet, solid fundamentals should keep real estate prices appreciating at a rate of 20 percent in 2014.

Sean O’Toole

Sean O’Toole, founder and chief executive of PropertyRadar:
“For those who are still underwater, I don’t think this feels like much of a recover,” O’Toole said.
O’Toole described 2012 as the year of the short sales. “There were huge incentives for banks to push them through,” he said. Even with all that movement,  short sales and REOs today represent 25 percent of all home sales. “That’s a substantial percentage of the market.”
The very price appreciation that got the ball rolling now is starting have a different effect. Hedge fund investors are starting to make an exit. ”Prices have risen to a point the ROIs — return on investment — are no longer attractive.”

Mark Palim, vice president of Applied Economic and Housing Research with Fannie Mae:
Speaking to concerns mortgage rates will rise appreciably in 2014, Palim said the popular view that prices drop when lending rates rise isn’t the case, historically.

“Generally speaking, interest rates rise when the economy is doing better,” Palim said. When the economy is doing better, people have higher incomes and they can afford a larger payment. The exception is if there is a large increase in rates over a short period of time. ”In two instances, we saw a slow-down in sales and prices continued to appreciate, but not as fast as before.”

Mark Palim

Debra Still

 Debra Still, chair of Mortgage Bankers Association:

Calling attention to rules on the Ability to Pay and servicing, Still said the total page count stands at 1,800.  The big concern is, If lenders aren’t ready on Jan. 10 to put the rules in motion, does all lending stop? There are a lot of provisions directed at small creditors.
“Get a good attorney to see if you can play in that space.”
Clearly, the pendulum has swung too far in one direction, Still said.

John Burns

John Burns, president, John Burns Real Estate Consulting:
Builders, traditionally holding a big piece of the GDP, at the moment, are optimistic about where the real estate industry is headed.
“The problem is, they can’t grow business because zero dollars were devoted to land entitlement in the downturn,” Burns said.
One reason construction isn’t stronger here is because of the shortage of land, he said. In sub-markets, where builders wrote off 90 percent of what they paid when land was selling at premium rates, the deals brought back to corporate have to look smoking good. Land in Ontario and Rancho Cucamonga is closing at close to peak prices for lots in chief locations.

Leslie Appleton-Young

Leslie Appleton-Young, chief economist of California Association of Realtors:
Markets do turn on a dime, and 2013 has shown that the big changes that happen can be hard to forecast.
When I look backwards to February 2012, it changed dramatically from projections made in 2012 of 6 percent home price increases.

That said, Appleton-Young pointed out that  sustained improvement will take  stronger job growth than the region has now.

“It all circles back to where are the first-time home buyers going to come from? No where, if they can’t move out of the parents’ house and get a job with decent income.”

First-time home buyers, faced with challenges from a good paying job and lack funds to make a down payment to student loan debt, are also likely to be competing with investors, tight lending standards, higher FHA loan fees and lower loan limits.

“This issue of first-time buyers is absolutely critical,” she said. “We are gearing up for a huge affordability problem, and we need to reach out to first-time buyers to help them get into the ballpark.”