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Survey Suggests Housing Recovery Is On the Horizon

20 April 2012 in Trading Ideas

A recent forecast by real estate experts is calling for a modest recovery in both commercial real estate and housing markets, with home prices finally reversing higher by 2013.

The ULI Real Estate Consensus Forecast, released Wednesday by the Urban Land Institute predicts a wide-range of improvements for the U.S. economy and real estate fundamentals. The report notes that while geopolitical and economic events could change the forecast, survey respondents say most sectors of the nation’s real estate economy will either grow in strength or remain healthy through 2014.

The report expects single-family housing starts, which have been at generational lows, to increase by 2014, nearly doubling from 428,600 in 2011 to an estimated 800,000 in 2014.

With greater demand, home prices, which have been falling since 2007, could rise in 2013, and after three years, could be 3.5 percent higher.
The Wall Street Journal reports that Peter Linneman, chief executive of the American Land Fund (ALF) and a survey respondent, said during an ALF conference call that even with run-up construction during the housing boom, “we’ve actually under-produced” in the last 10 years.

The survey also concluded that real estate capital markets should improve substantially in the next three years, with commercial real estate transaction volume projected to  jump from $211 billion in 2011 to $313 billion in 2014.  The forecast also predicted broader economic improvements for real estate capital markets.

Other takeaways from the forecast include an expected 50 percent increase in commercial property transaction volume, and an estimated 8.5 percent to 11 percent annual return from institutional real estate assets and REIT stocks, compared to an annualized rate of return of 9.3 percent between 1989 and 2009. In the next three years, issuance of commercial-backed mortgage securities, which are commonly used to funk commercial real estate projects, is projected to more than double, and vacancy rates could drop between 1.2 and 3.7 percentage points for office, retail and industrial properties.

Data from the National Association of Real Estate Investment Trusts show REITs are currently yielding higher at about 3.5 percent, and dividend payout as a percentage of funds from operation, in aggregate, is about 70 percent, higher than in the past, according to Morningstar.

Would you consider investing in REITs and real estate in the current economic conditions?