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DSNews: Real Estate Market Trasitions Into ‘New Normal’

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As the real estate market begins to recover, new research from the Urban Land Institute (ULI), a nonprofit education and research institute, says the “old normal” will not be returning.

According to Housing in America: The Next Decade, a new research paper authored by John K. McIlwain, senior resident fellow of ULI, emerging trends in demographics and consumer behavior will become major drivers of new housing opportunities, resulting in a residential market vastly different from the one that existed prior to the recession.

“The ‘old normal’ will not return,” McIlwain said. “Over time, a new mode of metropolitan development will emerge, presenting opportunities and stiff challenges. Those who fail to understand these new trends will find themselves building what is no longer in demand.”

Although housing stabilization has begun in the nation’s strongest employment markets, McIlwain predicts overall home prices will likely decline an additional 10 percent in 2010. He said the growing number of consumers who are choosing to walk away from their mortgages suggest a fundamental change from the long-held notion of home ownership as the ultimate “American dream.”

As those entering the housing market will be more apt to rent longer and to place more emphasis on buying for shelter rather than investment, McIlwain believes the disillusionment over homeownership as a way to build wealth could persist for decades to come.

According to McIlwain, the lasting stability of the U.S. housing market depends on how and when the private home mortgage finance system is revived. As the federal government now supplies virtually all new mortgage funds through mortgage purchases or securitization, McIlwain said reducing this massive support will entail revamping or replacing mortgage suppliers and tightening risk requirements for mortgage issuers to restore investor confidence in mortgage-backed securities.

“Re-establishing a robust private mortgage market will require both strong market fundamentals and a reformed mortgage securitization structure that eliminates past abuses,” he explained.

In his paper, Housing America, McIlwain made two key predictions for the decade ahead. He said home appreciation will slow considerably to about 1 percent to 2 percent, and he expects the current U.S. homeownership rate, now at 67 percent, to fall to about 62 percent.

The report also cited four major U.S. demographic waves to watch for in the next 10 years.

Aging baby boomers (55 to 64 years old) will keep working even though they are nearing retirement age, and some will be forced to stay in their suburban homes until values recover. Those who are able to move will not choose traditional retirement locations, opting instead for more mixed-age living environments with an urban feel.

Younger baby boomers (46 to 54 years old) will find it difficult to their homes, hampering their ability to move. In addition, this group’s ability to purchase second homes will be greatly diminished, as the recession has left many younger boomers with flat incomes and less home equity. Like their older counterparts, they will be drawn to more connected, compactly designed communities when they are able to move.
As Generation Y enters the housing market, they will be far less interested in homeownership than their parents were when they were young adults. McIlwan said the recession has tempered the interest of this generation, and they will be renters by necessity or choice for years to come. Despite their small incomes, this group will gravitate towards close-in communities, choosing isolated housing on outer edges only as a last resort, and “green” homes powered by alternative energy will have a strong appeal to this generation.

Immigrants will make culturally-motivated decisions regarding housing and location. Already 40 million strong, the total population of legal and illegal immigrants in the United States has an even greater impact when the children and grandchildren are included as a factor. The tendency of this group to cluster and to live in multi-generational households suggests that they would prefer larger homes in neighborhoods with a strong sense of community.

McIlwain said all of these groups have some characteristics that reflect a desire to live in more pedestrian-friendly, transit-oriented, mixed-use environments that de-emphasize auto dependency. In addition, he said urbanization is being driven by the growth of two-person and single person households without children, a halt to baby boomer migration to the suburbs, the likelihood of Generation Y to rent rather than own, and public policies encouraging compact development.

As economic and land constraints make it impossible for urban infill development to accommodate all the housing demand represented by all the demographic groups, McIlwain said suburban development “must adapt or it will be obsolete.”

“The suburban century is over,” he said. “This is the urban century.”