State of the (Real Estate) Union

The national real estate picture has brightened much since the dark days of the financial crisis, and home prices are now back to near record high across the U.S., 10 years upon the prior peak. Nevertheless, the real estate market, and therefore the way we live, has evolved dramatically, and presents a picture few had foreseen a decade ago.

Post-recession America has been the scene of large lifestyle and demographic changes. As in many major cities around the globe, urbanization accelerated, and the metropolitan areas of the coasts and the South have taken in swaths of 'Millennials' (broadly, today's 18-to-34 years old), attracted by technology sector jobs and 24 hours, live/work/play environments. Just like the long-abandoned neighborhoods of the 'Bowery' of New York and of the 'Tenderloin' in San Francisco, as America's urban cores grew, they transformed into pedestrian-friendly, low-crime city centers. And fast growing cities such as Denver, Portland and Raleigh-Durham became widely desirable given their mix of attractive career opportunities and outdoorsy settings.

Simultaneously, the lack of both financing and supply of homes for first time homebuyers and Millennials has created a rental boom across the nation. The U.S. homeownership rate fell to a 48-year low this year, at 63.5 percent. It was over 69 percent in 2004. And whether cause or effect, living patterns have changed: for the first time, in 2014, more young adults are living with their parents than with a romantic partner (32.1 percent). That number was 20 percent in 1960, with 62 percent of young adults living with a romantic partner then.

While this rental, if not 'roommate', boom has benefited commercial real estate developers and investors, Americans have gradually changed their relationship to homeownership, which is becoming more of a luxury. The single-family market has been dominated by investors, oftentimes institutional ones, such as Blackstone and Colony Capital, large private equity firms which have scooped thousands of foreclosed and distressed homes nationwide during the down days of the market. Such purchasers have crowded out end-buyers.

While bank lending has loosened over the past few years, obtaining a mortgage is still out of reach for the many that have unsteady income, low credit or tarnished credit reports, or just not enough downpayment to purchase a home. And since bank lending has not 'normalized' yet, a shadow lending system for the aforementioned borrowers has emerged, most often at onerous rates, starting at 8 percent.

Even though rental and high-end condo prices have somewhat softened in large cities recently, there is a whole in the market at the starter home level: simply put, they have not been built. The combination of high land prices and a lack of 'bankable' prospective purchasers has pushed developers to focus on the luxury segment of the market, and deliver products unaffordable for many. And up until recently, much of the luxury or extra-luxury inventory found takers in international investors seeking to flee the instability of certain parts of the world (China and its economic slowdown, for instance) and looking for a shelter in the perceived safety of American real estate.

Furthermore, the scars of the subprime crisis and the housing bust have changed the image of real estate as a safe investment, leaving many without the appetite to purchase a home, either for fear of another downturn or for having lost a house to a foreclosure.

While the housing sector has been and remains a bright spot for the economy during the recovery of the past several years, the ongoing lack of inventory is nowhere close to having been remedied. The economy still needs to normalize in order for purchasing power to rise among potential homebuyers and apartment renters. If the very high end market experiences a further slowdown and even some distress, investors might seek to reposition certain properties to make them more attainable financially -and perhaps finally cater to the first-time homebuyer market. But that will take time.

Nevertheless, eight years after the demise of Lehman Brothers, the effects of the recession on the way Americans live is very palpable. How will our lifestyles and culture evolve? If the housing market settles, and as millions of urban Millennials look for more space to start forming families and households, could a repeat of the 1950s suburban boom could be in the cards?