Matthew Ferrara, Philosopher

Real Estate’s New Normal

These five trends are sure signs that your grandfather’s real estate market is gone forever.

Throughout the housing recession, a favorite phrase of brokers, bankers and buyers was: “When the market gets back to normal…” So it must be a bit of a surprise to everyone to see that, as the arrows on charts finally start pointing upwards, the market doesn’t look hardly anything like it did five, ten or even twenty years ago.

As the television commercials used to say: This is not your father’s Oldsmobile. This is the new generation.


Well, that was what they used to say before Oldsmobile closed down forever, having waited just a little too long to become a leader in the future of their industry. So what about real estate brokers? Well, here are some “new normals” that brokers should have built into their future strategies as well:

1. Cash Sales. Over 50% of all homes sold in 2012 and 2013 were financed without a mortgage, according to Goldman Sachs and reported by the Wall Street Journal. This is more than twice the (20%) rate of all-cash purchases before the housing crash. This dramatic change in the purchase process has major implications for brokers: It will require agents to prepare their mortgage-financing buyers to make spot-on, super-sensible offers on desirable homes, or risk losing to same-priced-but-all-cash offers. It will require brokers to abandon their “marketing” strategy that has traditionally focused on how “affordable” it is to buy due to the “current interest rate” – something that will be meaningless to more than half the marketplace. As for brokers who derive a significant portion of revenue from an in-house mortgage company, profitability will increasingly depend upon the ultra-thin-margin real estate commission.

2. Debt Concerns. On the other end of the spectrum are the can’t-afford-anything consumers. Namely, high-debt consumers whose wage growth has stagnated during the longest recovery in American history. Their ability to secure lending from financial institutions has become harder than getting into an Ivy League school. Credit standards, banking regulations and risk-aversion by lenders looking at a pool of high-debt, low-income customers will slow financed-purchases for the foreseeable future. Yet even those college graduates who collectively comprise over $1 trillion in tuition debt need a place to live, and the market has responded. One solution is the rise of the multi-generational home. Larger single-family or two- and three-unit multifamily units that have become important property types in many cities. Builders have responded by adding more multi-family units to developments, and older generation American have turned to remodeling large existing homes to accommodate stuck-at-home kids. As Boomers delay downsizing and twenty-somethings put off first-time buying, the housing industry’s business model will change: everything fro marketing to value proposition to commission rates will need to catch up.

3. Rental Generation. Despite media attention about the rising costs of rents across America, the market reality is that renting is more popular than ever. Gen Y prefers smaller, urban living, for a much longer period than their parents did, for lots of reasons (no kids, low marriage rates, higher debt). They neither desire or can afford to purchase a Boomer-era home in suburbia. Meanwhile, Baby Boomers are choosing to rent for lots of reasons: healthier, mobile Boomers don’t want to be tied down in retirement. Wary of getting stuck should the market freeze again, they’re selling and putting the cash under the mattress as a safeguard against rising health care costs. After retirement, they don’t want to maintain a property either, preferring to pay a landlord for that convenience. When companies like Blackstone and Deutsche Bank start creating a bond backed by home rental payments, big bets are being made on the rental composition of the housing marketplace.

4. Prices are stabilizing. Actually, they are flattening out, and none too soon. In some markets like Florida, Arizona and southern California, investors have already pulled back, having driven up prices and absorbed all the bargains, while they locked out cash-strapped buyers for the last year. And the so-called inventory shortage will be dealt a double-blow soon, as a flurry of summer new-construction comes online and regulators fix (or banks adapt to) laws that have artificially kept inventory off the market (such as Nevada’s foreclosure-crushing A.B. 300). Either way, inventory is heading back into the market, which will push down prices. Sellers who just bobbed above water might decide to simply stay pat; and brokers who were counting on rising prices to refill their depleted revenues will get a chance to see re-test their lean-operations strategies.

5. Foreigners Are Going Home. The summer of rising prices had many underwater owners and brokers excited, but its effects on foreigners was just the opposite. According to the National Association of REALTORS, foreign investment in the United States housing market fell 17% as early as March of 2013. As foreign economies stalled over the summer, and currency costs rose, the flow of foreign money contracted, especially on higher end properties. As investors mopped up the low-end of the market, foreigners saw fewer deals. Even real estate website search traffic dropped by 22% from Canadians, traditionally the largest source of foreign buyers, said Trulia. The National Association of REALTORS now estimates about 6% of sales in 2013 will be to international clients, a drop of nearly half in the last year.

Of course, markets are more complex than just five bullet points. And local markets contain dynamics that make some, one or none of these ideas perfectly relevant. Still, some of the trends affect everyone, such as demographics or debt-finance conditions. Probably there are some others we’ve missed – especially localized market factors – that will create different opportunities. Either way, chance continues to reshape the housing market, and brokers will need to adapt far better than simply releasing a “new model” of the olds-mobile.



  • Maybe, yes. Maybe, no.

    1. Cash sales are the darling of real estate investors. As investors start to exit the market, albeit slowly, due to rising home prices, cash sales will also begin to diminish and mortgage financed buyers will be back in the game…with higher home prices and higher mortgage rates (but still damn low).

    2. Debt concerns for sure but as underwriting standards begin to loosen very, very slowly the higher debt-to-income ratios with lower credit scores will become more common. Household formation is on the rise as the millenials see opportunity in low mortgage rates combined with rising home prices. Today is a deal. Tomorrow they’ll see some ROI. Good news for Chez Mom & Dad.

    3.Rental Generation may be de rigeur for center city hipsters but for those who are starting to think it’s baby time will want a house that they can grow into. See #2 about the rise in household formation.

    4. Prices will continue to rise slowly. We will never see the rocket, hockey stick price appreciation of Housing Bubble 1.0 of the early 2000s but it’s not out of the realm to expect 5% to 7% as inventory remains low. Continued low mortgage rates (even in the 4s – gasp) will still make homes very affordable and attractive for those with a long term view and long time horizon.

    5. From what I understand Brazillians are going gaga over Miami. There will be other localities that are still attractive to foreign investment. I don’t think the foreign cash was that big of a factor in the “old” real estate market. It’s nice when it’s around but it won’t kill the market if it’s not in as great abundance as before.

    Of course, markets are more complex than just five bullet points. And local markets contain dynamics that make some, one or none of these ideas perfectly relevant. Amen, Brother Matthew, Amen.