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 After reading most financial reports put out by think tanks over the past few years they tended to temper bad news with some good news. This report did not do that. It was pretty bleak. The predominate theme was that leverage is gone from real estate for a while, cash is king.

If you are selling to buyers that have cash you should do okay. And I am not talking all cash deals, it is more so good credit and 20 percent down. We are returning to our roots for a while.

But there are some folks that will be hurt according to the 2009 Emerging Trends in Real Estate report by the Urban Land Institute and Price Waterhouse Cooper. Those who made large land investments in the past decade are taking it on the chin:

Devastation visits land developers, who lose all equity on their building lots and may be personally liable on gobs of leverage—some borrowed upwards of 95 percent. Now “people who bought land as values dropped are sorry they did”—prices continue to fall. Homebuyers and sellers won’t have a meeting of the minds until distressed assets move through the system.

 The report also was bearish on the outer ring suburbs. But the price of oil has fallen 50 percent since this report was started, it is below $70 a gallon today, so I would take this one with a grain of salt. If the recession keeps oil prices low as it should the issue should not be as extreme.

Outer-ring suburbs and exurban areas will register greater losses as market demand shifts toward infill neighborhoods. McMansion subdivisions in the sticks take a double whammy—rising heating/cooling bills for these expansive homes work against sellers already struggling to overcome resistance to car commuting expenses.

Deal volume will be an issue for real estate agents, but I would think the long term agents will be okay for the most part. The part timers and those thinking that real estate sales were easy money have mostly left the market now. The true professionals will be putting together deals that will be more challenging.

2008 deal volumes are 20 percent of those of 2007, and 2009 may not be much better. “It’s a terrible time for transaction people” after “some incredible years.” Interviewees agree that sellers will blink first—“they need to get reality.” Underwater owners will almost certainly cave toward buyer expectations, hoping enough dollars come off the sidelines to buffer pricing in bidding for distressed assets. Unlike in recent years, cash buyers will have the advantage—leveraged buyers and financial engineers “are gone.”

The focus on tighter lending and better underwriting will be good for the real estate industry in the long term. It will be painful transitioning from a market that is based on anyone can buy a home to those few can buy a home will be hard. But once it is done, we can move forward with a much more stable market.  

Surviving homebuilders will refocus on infill concepts—denser communities with mixed uses and town center elements. Chastened lenders, prodded by regulators, realize they need to reinforce underwriting standards and scrutinize buyers’ credit at the expense of loan volumes. The country figures out again that too much of a good thing—low-cost leverage—can be disastrous.

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