USA Real Estate: Price Falls Not Over Yet and Beware of Retail

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

August 2009

No doubt USA real estate prices, especially in some of the widely reported markets, have fallen quite a bit and there appear to be signs of the fall leveling off.

Despite this, we think it is premature to conclude that the fall has definitely stopped. Here are some of the reasons:

A)      Data source = the data comes mainly the MIT Center for Real Estate”¦s research website and includes the apartment sector*, the office sector, the industrial sector, and the retail sector. In addition, we have used the answer search engine to help find information on economics.


B)      The overall price trend is still going downward = indexing 1Q94 to 100, we have during the peak in 2007 an apartment index of around 300, ditto for office, 280 for industrial, and only 220 for retail. Yet in 1Q09, these indexes have dropped to 230 for both apartment and office, and around 180 for both industrial and retail. In terms of the rate of drop counting from the peak, the industrial sector performed the worst with 36%, followed by the apartment and office sectors at 23%, and then the retail sector at only 18%. 

C)     Using standard deviation, prices have only dropped to touch the upper standard deviation limit = using the data above, we have calculated the standard deviations of the prices for the 4 sectors listed and found that prices in general have only reached the upper standard deviation limit i.e. prices are still above their averages. Note that these do not definitely or automatically imply further drops, or for that matter, prices can only fluctuate between these upper and lower standard deviation levels. Yet, they do arise on occasions e.g. Hong Kong real estate prices from the mid90s to mid 2000s.


D)     Even if one shortens the data period to the last 10 years starting from 1999, the current price levels are still mostly above their averages = with the exception of the industrial sector which has reached its average (note: of these last 10 years, not that of the last 15 years counting from 1994). 

E)      We have also looked at the price change, demand change, and supply change and compared them = except for the retail sector, the price, demand, and supply trends tend to go together albeit not in perfectly matching footsteps.

F)      Comparing the 1Q09 to the 1Q99 price data = the apartment sector ratio is 1.47, office 1.51, retail 1.61, and industrial 1.38. Purely from a price volatility angle, the smaller the ratio, the less risky it may be, and thus on this score, the industrial sector tops and the retail sector takes bottom.


G)     The 1Q09 supply to demand data = briefly, a ratio of less than 1.00 implies the supply increase is smaller than the demand increase during the period from 1Q99 to 1Q09, and a ratio of more than 1.00 implies the reverse. While this ratio, whether less than or higher than 1.00, cannot conclusively imply under or over supply, it does throw a light on the aspect. As such, the apartment sector has a ratio of 1.25 (supply increase being 25% higher than demand increase), office 1.39, retail 1.90, and industrial 1.70. On this score, the retail sector may harbor the riskiest bet, followed closely by industrial and with apartment being the least risky.


H)     The USA GDP has roughly doubled from 1Q99 to 1Q09 = and with its population being comparatively steady, it means the GDP per capita has also roughly doubled during the period. While GDP does not necessarily dictate that asset prices should follow suit, it does reflect in part the increased liquidity which in turn tends to have significant influence on asset prices (more liquidity, especially when coupled with increased velocity, tends to lead to higher asset prices, real estate assets included). As such, 2007 price levels could be seen as being too high while current prices could be viewed as more probable. Nonetheless, the thing with GDP is that it can also change to tread up or down. In addition, there could also be a link between GDP and asset prices in that they may feed and spiral with one another i.e. higher GDP, higher asset prices, more consumption, higher still GDP, higher still asset prices, and so on and on”K(comments are welcomed from economists). The word ”„higher”¦ could also be substituted by ”„lower”¦. 

Does it mean the USA real estate market should remain hands-off? No.

First, it deserves some investment interest monitoring as decreased prices mean lowering risks and thus probably improved return to risk ratios.

Second, the above dwells on the overall market pictures, but investors do not buy everything in the real estate markets. This means if an investor comes across a ”„good”¦ deal, e.g. one priced below its long or short term potentials, its competing properties, and so on, along with good terms and conditions, by all means go for it.

Just make sure one still sets aside some cash for probable and better opportunities which may present themselves in times to come.

*Note: this refers to the apartment rental market sector and is different from though perhaps related to the home-owning residential sector.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.

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