Keeping Pace with Market Trends
Now that “normalcy” has returned to the Carolinas real estate market after the Great Recession, the region is poised for accelerating growth for years, says CEO Pat Riley of Allen Tate Co., despite issues of new home affordability and a likely brief, cyclical recession in 2019. Construction labor is slowly coming back, materials are off-the-chart expensive, and land is back at pre-recession prices per acre. So new homes are now 15 to 18 percent more expensive.
A+ Difference: People, Vision Stength
Allen Tate Keeps Pace with Market Trends
Now that “normalcy” has returned to the Carolinas real estate market after the Great Recession, the region is poised for accelerating growth for years, despite issues of new home affordability and a likely brief, cyclical recession in 2019.
According to Pat Riley, president and CEO of the Allen Tate Companies and a former chairman of the Charlotte Chamber, the Interstate 85 corridor between Raleigh and Greenville, S.C., continues to attract a high number of corporate transferees, from young workers to retirees, who are looking for housing.
Charlotte is a Beacon
“Charlanta, the I-85 corridor, right now is the fourth most productive region in the United States and the 11th most productive region in the world,” Riley touts. “The 11th in the world, the fourth in the United States, the same gross output as the entire country of South Korea.”
“We don’t compete against the Triangle, the Triangle doesn’t compete against Charlotte, and we don’t compete against the Upstate. We don’t have what the Triangle has, the Triangle doesn’t have what we have, and we don’t have what the Upstate has, but together, we are a compelling story to the world.”
Raleigh leads the top cities for STEM (Science, Technology, Engineering and Mathematics) graduates. On the I-85 corridor, Chapel Hill-Durham is the only area below the U.S. rate in employment growth. The Charlotte region leads in employment growth, with the arts, theater, sports, food and entertaining and institutes of higher learning, which makes it attractive for young people looking for work and a place to establish themselves.
“Young folks are not buying until they’re sure about employment,” Riley says, adding that delaying marriage is an added factor. “They will come to the Carolinas and tend bar until they find a job. We’re just like Austin, we’re just like Nashville.
“They would rather come to the Charlotte region as a single person than stay in the Triangle. They might go back to Cary when they’re ready to settle down, but the reality is we are beacon for young people right here where you and I sit.”
The region is also second only to Florida in attracting older workers and retirees.
“We know about corporate moves, but there’s another move that nobody is keeping stats on and that’s the number of folks coming here to follow grandkids and kids, and coming here for second careers and to retire. Florida is the golden egg—it still leads the country—but the reality is we are the best alternative because of our cost of living and proximity to the mountains and beaches, quality medical facilities and big city amenities.”
Recession Bigger Than In-migration
Riley remarks that the population increases had made him overly optimistic about Charlotte’s resistance to recession in 2008.
“I had thought that we would not be participating in this recession,” he recalls, “that we were not ready to participate because of in-migration. Folks were coming here, 30,000 a year, right through the recession. But I was so wrong. This was much bigger than in-migration.”
Since World War II, Riley says, such bubbles in the housing market had been limited largely to the West Coast.
“All of a sudden, the roaring 2000s happened and we became part of what happens in California every 10 years,” Riley observes. “We used to snicker, ‘There they go again.’ San Francisco is up, then the bubble breaks and then it goes back down. And we, especially on the East Coast, said, ‘We’ll never participate in that.’ Well, the whole country participated in that phenomenon this time around.”
Allen Tate Co. had $4.1 billion in sales in 2004, and $5.71 billion with 24,500 closings in 2006. The housing market was on fire.
The rapid rise in housing values, encouraged partly by government efforts to increase home ownership, allowed folks to own a home that should not have. It also led many people to borrow against their home equity at unprecedented levels.
“What happened is homes went up so fast that our friends in the banking industry said, ‘You know what? What do we care if we lend people’s equity back to them? What do we care? If a home is going up 5, 10, 15, 20 percent a year, what do we care? What’s our risk?’” Riley explains. “So what we had for the first time in history, we borrowed the equity in our homes for this, that and everything.”
“That was solace for our old age. We gave that away. It was in some cases what we needed for a rainy day; we gave that away. So it was a double-edged sword because for the majority of Americans, their wealth is in their homes. It’s forced savings. That mortgage payment? So much goes to principal, and we’re not, as Americans, good savers. That’s why the mortgage was our safety net.”
Changes in lending practices, a downturn in the stock market that made real estate a more attractive investment; and record-low interest rates fueled the perfect storm. In those heady days, among other things, Allen Tate sold 331 condominiums in five weeks in a single Charlotte development.
“This was the perfect storm,” Riley comments. “The stock market went from 19,000 down to 8.5, 9, and what did we all do? We ran. We ran from the equities and where did we run? We ran into real estate. If we were wealthy, we were down in Naples, buying two condos instead of one. International money was coming into the four corners of America because they saw appreciation of housing and said, ‘Where can we have safe money in America?’”
The recession dramatically slowed home sales except in cases of necessity, such as death, divorce, relocation, or foreclosure, who would sell even when their homes were devalued.
“We were dancing for survival,” Riley recalls. “The only people who moved had to move.” Our company once had 51 offices—building wherever Harris-Teeter or Target identified a desirable demographic.”
We’ve consolidated to 37 offices in 2009, but since added four locations, for a total of 41 locations today across the company’s footprint in North and South Carolina.
Post-recession and Pent-up Demand
The post-recession economy is dealing with pent-up demands on several fronts, including the older Silent Generation that delayed moves to downsized housing because their longtime, paid-for homes’ values were depressed in recent years.
“They needed to move to assisted living or independent care,” Riley explains. “But they didn’t sell their homes, and we—as their kids—advised them not to because the homes were at the lowest values they’d ever been, so they didn’t make those moves.
“So that generation now is really active, and we as their kids should be pushing them to get to where they need to be. You can see from the facilities being built up and down our roads and highways that we are fertile ground for this type of housing.”
On the other end of the spectrum, the Millennials have delayed marriage and childbearing into their 30s, partly because of a bleak job market, high student loan debt, and the experiences of their parents’ divorces and job losses.
Millennials now make up 36 percent of the buying market, but they have been late to the dance. Historically, this age group would now be in their second or third home, not buying their first. Their delayed buying set up a nine-year gap, including the recession, before the typical pattern of a starter home followed by move-ups even began.
But the younger cohorts of this generation, in their early 20s, are making a different decision—buying a home as soon as possible.
“They’re not waiting,” Riley remarks. “They might not be in a long-term relationship; but as a single person, they’re buying. They want to get on this ownership bandwagon as soon as possible to take advantage of the appreciation that’s out there, as well as low interest rates.”
Providing affordable housing for that market is especially challenging because of increased expenses within the industry, in addition to tighter lending requirements. Labor, materials and land are all at or near record costs. And the appraisal lag of needed comps has been a drag.
“The headwind for young adults for home ownership is as strong as it’s ever been,” Riley points out. “For the first time in history, labor for new homes is at an all-time high. We lost a lot of our construction labor, a lot of it, and it’s slowly coming back, and materials are off-the-chart expensive, and land is back at pre-recession prices per acre. So new homes are now 15 to 18 percent more expensive than the same house down the street.”
Buyers have often paid premium prices because they wanted builders to provide modern features such as open floor plans, hardwood floors, outdoor living space, and connectivity, but many are now experiencing sticker shock at the price gap with older homes.
“When prices went down double-digit, what do you expect when the market gets better?” Riley asks. “They go up double-digit. The only persons that got hurt in the recession were the people who bought in 2007 or 2008 at the peak and had to sell in 2008 or 2009. The rest of us are back, and probably ahead unless we haven’t maintained those homes.
“Everybody’s predicting a 5 percent appreciation rate again this year. This is higher than we anticipated because historically since World War II, it’s been about 3.5 percent. So we’re still ahead of history, and that’s caused by lack of supply.
“We’ve got to get back up to that 1.5 million new home starts in America. We’re jogging; we’re not sprinting. We can’t get the land developed quickly enough. We can’t get through the permit process quick enough, and we can’t get the labor that we need, so it’s going to lag a little bit from demand.
“Let’s be really candid. Part of the inventory shortage is because the Baby Boomers are downsizing much, much later than earlier generations. While this will boost the condo market in the future, it’s a huge cause of lack of inventory.
“We’re starting our six-year, eight-year, 10-year trek,” Riley says. “We Boomers are much later than generations before us in downsizing, because we’re healthier and we’re living longer. We’re still out there playing and exercising and thinking that we’re in our 30s. We’re not ready to downsize yet. We are just starting our downsize trek. That’s why the inventory gap will diminish over time. We are just slow to the draw.”
Recovery With Reservation
However, many Boomers are remodeling to enjoy the upgrades now that will be necessary when it becomes time to sell, comments Riley.
“The condo market is typically the first one into a recession and the last one out. Lenders don’t like to lend on a condo project unless 40 percent of a building is owner-occupied. A lot of these towers that are built for conversion will convert in the next couple of years because there is a thirst for a home in the mountains or at the beach and a home here that I can lock and go visit my grandkids in whatever city they are, or to my getaway home. The future of condos is strong if they get built.”
With more than 80 percent of homeowners holding mortgages at very low interest rates, the decision to buy another house might become complicated if interests rates rise as expected.
“Never before in history have so many Americans been sitting in a home with mortgage rates of less than 4 percent. We have never had that. I don’t even know how it’s going to play out,” Riley muses.
“I hear the back-and-forth, ’Honey, we have a mortgage at 3-5/8 percent. Should we really buy this house at 7 percent?’
‘Seven is a point lower than the historic average since 1950 of 8 percent. Seven is great and we can still deduct the interest.’
‘But do we really need this extra bedroom? How big do we need this extra fireplace outside?’
“There’s going to be some discussions when you’re leaving rates under 4 percent. It’s going to be interesting how this plays out,” Riley says, more than a little curious.
Riley says that experts expect a cyclical recession in 2019 (similar to 1990 and 2000) as the government may have to raise interest rates to curb another inflation cycle. But it will last only about 18 months and not be in any way similar to the 4.5-year recession that started in 2008.
“What they’re figuring now is that by 2019, we are going to be in an inflation cycle again, and the only way America knows how to slow it down is to raise interest rates, slow down housing,” he explains. “Housing always goes in first. We always go in first—we’re the first one out, but we’re the first one in when it comes to a recession, and everything else follows.”
Last year, the firm had $5.16 billion in sales on 21,595 closings, the third best in its history. Riley expects another increase of 5 to 6 percent this year.
The improvement in real estate sales is occurring even though new housing starts are still far behind pre-recession levels.
“We used to do a million and a half new homes a year in America,” Riley says. “This year, we’re probably going to do 750,000. We’re millions of new homes behind in America. We are thousands short in our region.”
Riley summarizes the company’s performance: Allen Tate achieved near-record sales in 2015 with far fewer new home purchase opportunities and in a tightened lending environment. In the past two years, only one-fourth of buyers were putting down 3 percent or less—nearly twice that many were making such small down payments in 2009.
“This is doing it the right way, but this is also showing you how healthy the market is where you and I choose to live, work, and play,” Riley comments. “It’s a beautiful thing.”
Allen Tate Co., Inc.
6700 Fairview Road
Charlotte, N.C. 28210
Principal: Patrick C. Riley,
President and CEO
Recognition: Largest real estate company in the Carolinas; ranked #6 among the country’s largest independently owned, non-franchised brokers, and #13 among all brokers, based on closed transactions sides for 2015 (REAL Trends 500)
Business: Residential real estate and real estate-related services.