2014 REAL ESTATE FORECAST: WHAT TO EXPECT

By Olumide T. Agunbiade

Whether you’re buying, renting or selling it out this year, here is what’s ahead across the globe.

In Nigeria, the trend in 2013 and with notable projects still in the pipeline, professionals within the real estate sector have expressed optimism that there would be increased investments and consequently activities within the industry in the year 2014.

  The Mortgage Refinancing Corporation (MRC), launched by the government and its prospective impact on housing provision and home ownership in Nigerian has further strengthened the position that the sector will boom in the coming year. 

 The forecast, notwithstanding, the seeming parlous state of the nation’s economy, would be more visible in some states like Lagos, Port Harcourt and the Federal Capital Territory (FCT), Abuja. 

 Besides, they hinted that there is so much interest in the sector from foreign investors especially in the commercial, retail, leisure or hospitality. The service sector is not left behind in the flurry of Foreign Direct Investment (FDI). There is this anticipation that capital transfer into the sector is expected to be in billions of dollars.

 One of the areas where exponential growth is expected is Lekki corridor, situated along the Lagos–Epe expressway, an area that has being touted as the fastest growing location in the sub-Sahara West Africa.

  This axis is still going to be the haven of a bubbling real estate sector this coming year, they say, citing the huge on-going infrastructural development, namely, the expansion of the expressway and the ambitious Lekki Free Trade Zone, where a new sea port and an International Airport are in the offing.

  Already, three major projects have been slated to commence as early as possible in 2014. These are Peninsula Mall at Sangotedo, Royal Garden Mall and Osapa Mall. Apart from malls, major housing estate developers are already doing site clearing in preparation to commence physical development.

In Port Harcourt, places such as Okuru, Orada, Diobu/Oroworukwo, Rainbow Town, Rukpokwo, Rumolumeni Trans Amadi, among others, are said to be attracting huge investment.

  In Abuja, apart from Maitama District, sub-urban such as Nyanya, Mabuchi, Gwagwadala and others are already earmarked for housing estate, both by the government and private developers. 

According to Avison Young, Canada's commercial real estate markets experienced some changes in 2013 that could pose challenges in 2014. However, ongoing development is an encouraging sign that the markets remain strong, offering opportunities for occupiers, owners and investors.

 In the U.S., although delayed by a year due to political gridlock, the return to normal operating conditions and the reduction of monetary easing due to tapering are the catalysts necessary to unlock the capital that has been building up on the balance sheets of investors and occupiers.

And while things will stay competitive for renters and buyers, the real estate market as a whole will likely experience "less drama" over the coming year, says real estate appraiser and market analyst Jonathan Miller of Miller Samuel.

Here is what  real estate experts are saying according to Lana Bortolot:

·        Resale Market will see Modest Gain in Inventory and Prices

"If you look at the resale market only," says Miller, putting new construction aside, "we’re going to continue to see modest appreciation in prices. I think with very limited inventory—which is at record lows now—we’re going to see upward pricing pressure, but not runaway pricing."

While he admits that "it's hard to call it," Miller suspects inventory will also rise--albeit slowly.

"I think inventory will be low, but I don't think it can go any lower," he says. As price appreciation prompts some owners to cash out, "We're going to see inventory climb in a slow, gradual way, though it'll still be nowhere near where we need it to be."

Even with inventory low, tight credit and rising interest rates will likely keep prices from racing upward.

Miller notes that New York City is a bit of an anomaly as compared to the rest of the country in this regard.

"Around the country you’re seeing higher rates of price appreciation than in New York, but that’s because in those places there’s a heavier concentration of distressed sales. We don’t have as many foreclosures," he says.

·        Rents aren't going down anytime soon, but look for more concessions & negotiability in the first quarter of this year

"The vacancy rate in Manhattan has slowly but surely gone up in the last seven or eight months, so I think you’re going to see some more value, especially in the beginning of this year, with more landlords offering concessions, and maybe a little negotiability for pricing," says Gary Malin, president of Citi Habitats.

Looking ahead, Malin says,"I don’t necessarily see anything throughtout the year in terms of a major jump. I'd say the market will remain stable and the better deals will happen at the beginning of the year."

Miller agrees that rents will stay high, though not necessarily sky-high. 

"The economy is improving, jobs are better, and rental market responds much more quickly to changes in the economy than the sales market," says Miller.

That said, he doesn't predict a surge in rents. "I see it as a plateau, where we’ll remain at a high level. I see rents bouncing along at high plateau," he says.

The price gap between Manhattan and outlier boroughs will continue to shrink, he predicts.

Miller notes that in November 2008, the median spread between rents in Manhattan and Brooklyn was $1,125; now, he says, its $300, noting that part of the reason for the surge in rental prices in Brooklyn is that most new luxury developments in the borough are rentals.

"Brooklyn's gone through an amazing renaissance," says Malin.

·        New Construction (especially for the one percent) is Hot, but lacking all around

Demand for new condos will continue to outpace supply.

“The 2014 pipeline shows only about 1,200 homes coming on to the market south of Harlem—a number that usually ranges between 5,000 and 7,000 on average years," says Adrienne Albert, founder of The Marketing Directors, a new development marketing firm. 

“There is a huge need for smaller homes, especially in Manhattan,” she says. “The mid-market is going to be underserved because land value is so high.”

Miller agrees, noting that during the last new development boom, in 2006, buildings were targeted at the middle to upper end of the market, rather than just ultra-uxury.

“All the new development entering the market is targeted toward the top 10 percent because of land prices,” he says, noting that the lowest entry sales price is around $3 million for luxury development. “There’s no chronic shortage in the upper end like there is in the lower end—the other 90 percent."

He adds: "I suspect we'll see a fairly rapid uptick in new development, but I don’t think it’ll hit 2006 numbers." 

On the rental side of new construction, developers are seeing that "there’s a desire for high-end rentals," says Citi Habitats' Malin. "There’s a lot being designed and developed, a lot that won’t be on the market for 2015 and 2016 and beyond."

·        Market pressure mounts for co-ops to behave more like condos, even as some condos start acting like co-ops

With co-ops keeping a tight reign on who can buy in, many buyers can’t—or don’t want to—pass muster. Brian Meier of Douglas Elliman suggests that co-ops start to rethink their scrutiny of applicants in order to stay competitive.

“There is a difference between diligent financial analysis of buyers and antiquated rules,” he notes in his year-end report on the market. “This will come under greater scrutiny for co-ops, and some boards will have their own internal pressure to rethink rules and practices or face the reality of their own decreasing values.” 

Meanwhile, more condos will become a little bit more like co-ops, particularly with regard to who is allowed to reside in apartments.

“We’re getting more calls from condo boards about out-of-state corporations buying apartments and using them as employee crash pads,” says real estate attorney Robert Braverman of  Braverman  Greenspun. “A good number of condo boards are going to modify their documents to have increased restriction on permitted occupants."

·        Tax Exemption Changes May be on the Horizon for Co-op and Condo Owners

Whether you own a co-op or a condo,  you’ll be subject to changes in the city’s STAR program, which offers certain tax exemptions for owner-occupied, primary residences, according to real estate attorney Dean Roberts of Norris McLaughlin & Marcus.

“It used to be a very straight-forward proposition for everyone and now it’s a complex one. People should be very aware of their STAR issue—the city is making everyone register,” Roberts says. And don’t assume that because your neighbor has it, you will too.

“People in co-ops living side by side, one gets a STAR and the other one doesn’t for somewhat arbitrary reasons,” he warns, calling it a sign that “regulatory things in the city that will get only more complicated.”

·        The Neighborhoods: Fringe is still fashionable

Manhattan and Brooklyn, the top trending boroughs in 2013, will continue their march in 2014, going deeper into neighborhoods formerly considered too fringe to be fashionable, like Brooklyn's Bushwick, which proved that seemingly no neighborhood is too gritty or grim for a makeover.

·        Amenities: Smaller Apartments, Bigger Socialization Spaces

Whether you rent or own, hanging out is in, and that’s reflected in the way new rental and condo buildings welcome residents—from ramped up community rooms to residential lounges doubling as coffee bars.

“Today the trend is to find a way for people to connect — and not just on the Internet," says Albert. " There is a trend toward quiet, inactive, socialization where you can hang out and get out of your apartment.” The convention: the smaller the apartment, the more elaborate the socialization space.

"From a rental perspective when you’re building a new building, if you don’t build those amenities into the building it’s hard to get the pricing you want," says Malin. "They've become standard. If you don’t do it, you’ll stand out, in a bad way"--particularly for large-scale buildings.

"Anything that makes the building a destination adds value," he says.

Dave Maundrell of Apartments and Lofts says he sees formal entryways giving way to integrated lobbies where people can gather café-style or in communal work station ala Starbucks. 

And that goes for outdoor space, too. 

“Buildings are starting to get in depth with their roof decks,” says Maundrell.  “You’ll see more elaborate landscaping, barbeques, game set-ups like shuffleboard, bocci, and swimming pools.” 

·        Mortage Rates Head Up....and Home Equity Loans Stage a Comeback

Interest rates will creep up next year, with rates for 30-year-fixed predicted to approach 5.4%  in the fourth quarter, says Robbie Gendels, a senior loan officer in the New York City office of National Cooperative Bank.

Even though the rates are still historically low, many people refinanced into lower-priced loans over the past couple of years, so refinancing activity will be slow.   Apartment owners who need to pull out money for a renovation or other reasons will increasingly seek out home equity lines of credit instead of refinancing into a higher-interest rate mortgage.

The coming year will see tighter restrictions on borrowing, as banks lower the allowable debt-to-income ratio, says Julie Teitel of GuardHill Financial Corp.

“We used to be able to get up to 50 or even 54 percent [debt-to-income ratio]  with some banks, but starting this year, [the] ratios won’t be able to exceed 43 percent,” she says.

What does that mean for buyers? Either putting up a bigger down payment or buying a lower-priced home.

Complicating the process further: Buyers will now have to obtain and pay for appraisals up front before the bank can issue even a commitment letter, says Teitel,  adding cost and time to the purchase process. However, lenders will do away with pre-pay penalties.

·        Ups and Downs in Foreclosures

New foreclosures in 2013 trended up throughout the five boroughs, with most recorded in the Bronx and Queens, according to real estate data website PropertyShark.com.  At 350 foreclosures in the third quarter of 2013, that’s a 54 percent increase from third quarter 2012.  But the good news, says PropertyShark senior data analyst Nancy Jorisch, is that it’s almost half of what was recorded three years ago, and not epidemic. 

“When you look at that and say 350 in the huge city of New York, it’s not as rampant as it is in other parts of the country,” she says. Further, she says, “there’s nothing that really indicates that foreclosures have impacted sale prices in neighborhoods.”

Jorisch noted another positive trend: properties selling at auction after foreclosure are  being bought by investors or individual buyers—not banks.

“We think that’s a show of strength. There’s no heavy pocket of foreclosure activity, but what’s encouraging is the investment back in the industry by individuals and investors,” Jorisch says.  Going forward, she says, "There's no reason to believe there will be a spike in foreclosures in 2014."

In 2013, the housing recovery was a welcome bright spot for the economy: prices were shooting up, fewer homeowners were underwater, and builder confidence was finally on the upswing. It’s looking like 2014 should be another good year for housing–mostly. Here are ten things housing experts expect to see in 2014 according to forbes.com:

 1. More homes will be available
Short supply drove rapid price increases at the beginning of 2013, but watch for that to change next year. Realtor.com notes that the inventory (homes available for purchase) shortage began to soften in February. New construction and rising prices should bring more homes, both new and old, on to the market in 2014, helping inventory return to traditional levels.

2. Mortgage rates will rise
Online real estate database Zillow predicts rates will hit 5% by the end of 2014–well up from the 4′s and 3′s of late, but still well within normal levels. New Fed Reserve chief Janet Yellen is expected to continue Ben Bernanke’spolicy of keeping mortgage rates low by buying blocks of mortgage-backed securities, but the Fed’s bond-buying taper could push rates higher. “While this will make homes more expensive to finance – the monthly payment on a $200,000 loan will rise by roughly $160 – it’s important to remember that mortgage rates in the 5 percent range are still very low,” says Erin Lantz, Zillow’s director of mortgages. Really. “Prior to the Federal Reserve’s 2008 decision to buy $85 billion in debt per month, the 36-year average was 9.2%, and never below 5.8%,” notes Glen Kelman, CEO of Redfin.

3. Mortgages will be easier to get 
“The silver lining to rising interest rates is that getting a loan will be easier,” says Lantz. “Rising rates means lenders’ refinance business will dwindle, forcing them to compete for buyers by potentially loosening their lending standards.”

4. Home prices will rise 3%
Redfin and Zillow are predicting that home prices will rise between 3% and 5% in 2014. For comparison’s sake, 2013 saw jumps of 5% nationally, with increases of more than 20% in some hot spots. “These gains, while beneficial in many ways, were also unsustainable and well above historic norms for healthy, balanced markets,” says Dr. Stan Humphries, Zillow’s chief economist. “This year, home value gains will slow down significantly because of higher mortgage rates, more expensive home prices, and more supply created by fewer underwater homeowners and more new construction.”

5. Fewer homeowners will be underwater
Rising prices helped 2.5 million homeowners with underwater mortgages regain positive equity status during the second quarter of 2013, according to Realtor.com. By Q3, a CoreLogic report found that about 6.4 million homes were still in negative equity at the end of Q3. Watch for that number to shrink in 2014.

. Affordability will decline
Despite the slower pace of price increases, home affordability will decline as mortgage rates rise. The real culprit is income levels, which aren’t keeping pace with the increases in housing costs. In 2013, the National Association of Realtors’ Home Affordability Index dropped to a five-year low. Experts predict the trend will continue in 2014.

7. Ownership will decline
In 2014, Zillow predicts, homeownership rates will fall below 65 percent for the first time since 1995. “The housing bubble was fueled by easy lending standards and irrational expectations of home value appreciation, but it put a historically high number of American households – seven out of ten – in a home, if only temporarily,” says Humphries. “That homeownership level proved unsustainable and during the housing recession and recovery the homeownership rate has floated back down to a more normal level, and we expect it to break 65% for the first time since the mid-1990s.” Watch also for adult children to move out of their parents’ homes, starting their own households and further decreasing the overall homeownership rate.

8. Americans will move
Rising prices, a reversal of underwater mortgages, and easier credit will free Americans up to move. But next time they’ll choose smaller homes in more affordable locations. Redfin is predicting that new lending regulations–which make it harder to borrow more–will send Americans to less expensive hubs like Portland, Denver, Austin, Richmond, Dallas, Houston, San Antonio, Atlanta, and Raleigh.

9. Foreclosures will fade
The once booming foreclosure market has slowed, with September 2013 the 36th straight month of year-over-year decreases in foreclosure activity, nearly 33% down from the end of 2012. The declines should continue with the overall housing recovery.

10. Home buying process less crazed
During the bust, investors bought as many as one out of every five homes in America, according to Redfin. The perfect storm of increased inventory, higher prices, and fewer foreclosures means that investors are stepping out of the buying market, giving way for regular folks. Add to that the loosening credit rules, and the housing buy market begins to look more normal. “All in all, more inventory, less competition from investors, and more mortgage credit should all make the buying process less frenzied than in 2013,” says Kolko of Trulia 

 In conclusion, if you are buying, selling or renting, the 2014 housing outlook is still a seller’s market but better for buying and renting than 2013.