Q. Lots of people associate the American dream with owning a home. Is that still an element of that American dream?
A. I think that the American Dream of owning a home has changed somewhat, at least in the millennial generation. There’s no question that they don’t think of the American Dream of owning a house in the same way my generation or my parents’ generation did. They’re not as keen on owning a three bedroom home in the suburbs, they’ve never even thought about what that American dream entails.
What is the current state of real estate? Where are we in the recovery as far as housing is concerned?
It always comes down to basic economics - supply and demand - so you have to break it up into those two pieces. On the supply side, if you think about single-family homes in, let’s say, Los Angeles County, supply is basically fixed. We don’t have a lot of land, we’re sort of land trapped. So in terms of new supply of homes today in the market, it’s not single-family, detached housing. Condominiums—yes there is new condominium construction in certain areas like downtown Los Angeles, but not a lot. If anything, the supply that is coming on the market right now is high-end rentals.
It’s really been a demand story. If you look back on the last few years since the financial crisis, there were a few things that lead to the recovery. Number one is institutional home acquisition, which has been a short-term and unusual phenomenon. Large financial institutions like Blackstone bought tens of thousands of homes throughout the country, including in Southern California, sight unseen in many cases. Foreclosure properties they bought with their institutional capital, with the plan of leasing them. And they’ve done that to a great extent, but that’s done. They’re not buying any more homes like they have. If you look at 2008, 2009, and 2010, people really weren’t buying because they really didn’t feel confident [about] where prices were going to go. Uncertainty is never good for a single-family homeownership demand.
Consumer confidence is one of the key drivers of that. So we’ve had a lot of people sort of waiting. And when people saw, “Hey the stock market has recovered and things don’t look like we’re going to have a double-dip recession,” people sort of clamored in in the last couple of years and bought, bought, bought. And I think that sort of pent-up demand has been satisfied. Interest rates, of course, fell remarkably. Over the last few years the Federal Reserve has increased money supply and compelled the markets, and that has sort of played out. Interest rates are still low, but they’re not going any lower. So you got a sort of benefit from that, which we’ve already seen. Those are three really big reasons why on the demand side we’re sort of closer to the peak than a trough.
Is it fair that big institutional investors, like Blackstone, can purchase homes and securitize the rental income?
It’s one of the prices we pay, no pun intended, from living in a capitalist society. If you look at who benefited from the financial crisis, and maybe there’s some irony in this, a lot of financial institutions benefited. And if you look specifically at Blackstone, and I’m certainly not picking on them, but they were one of the most involved companies in single-family home buying - they took advantage. They saw an opportunity. Warren Buffett has said, and it’s great advice, “When people are fearful be greedy, and when people are greedy be fearful,” and I think investment firms saw that people were very fearful, they had capital, people were panicking, and they took advantage of that opportunity and bought these homes. But now that they’ve turned around and leased those homes and resold some of them, you might argue that what they did was actually a good thing, because the fact of the matter is they have restored the prices in the housing market and instilled confidence. Maybe a lot of individuals bought who would not have otherwise had bought, if they didn’t see the housing market recover. I think you can make a compelling argument that their actions were positive.
What advice do you have for millennials who want to enter into real estate as a way to build wealth?
That’s a great question. I think that like any investment, the earlier you begin investing the better. It’s not easy. Availability of capital on the debt side is there, there’s a lot of money available on the debt side, but prices are expensive and, let’s face it, for the millennials coming out of school with a fair amount of student debt, it’s an issue in terms of when they are able to acquire a home or an investment property. You just have to save as much as you can and start there. Without savings, you have no opportunity to invest anyway.
The second thing is: look for opportunities. There are always opportunities—I just took my MBA students on a bus tour throughout the city and, when you think of a great dynamic city like Los Angeles that’s always changing, down-and-out areas improve. I told my students that if I had told people that I was buying property in Silverlake and Echo Park areas maybe 10 or 15 years ago they would’ve told you I was absolutely crazy, given the gang issues, etc. Now people will ask, “How’d you do it in an area that’s so expensive?” So we look at areas that are maybe not places we would consider buying, in areas that are challenging economically. But those areas will change—it’s going to happen. Some areas faster than others, but there’s opportunity. And I think millennials, if they have vision, they have youth, they have time. So if you have that vision, and sort of see when things are changing, I think you can take advantage of those opportunities.
Over the long term, is it better to invest in real estate or the stock market?
I’ve been through the market crash of ‘87 and other financial crises, and I do believe that if you buy in good, strong, primary markets like Los Angeles, San Francisco, New York, you can mistime the markets. But if you hold long enough, you’ll make money. And history has proven that time and again. Now that is not necessarily true with some of the secondary and tertiary [real estate] markets. But I just feel very confident that in primary markets, where supply is really fixed, people want to live there. Foreign capital goes there too, and we’ve seen a lot of it [recently] throughout those cities. Real Estate can be a really great place to be.
Dr. Eric Sussman
Eric Sussman is a lecturer in accounting and real estate at the UCLA Anderson Graduate School of Management. Businessweek recognized him as one of the Top Ten Most Popular Business School Professors in the country. Dr. Sussman is also President of Amber Capital, Inc., Manager of Fountain Management, LLC and Clear Capital, LLC, and Managing Partner of Sequoia Real Estate Partners and the Pacific Value Opportunities Funds, which have acquired, rehabilitated, developed, and managed over two million square feet of residential and commercial real estate in the past 20 years. He received his MBA from Stanford, with honors, in 1993, after graduating Summa Cum Laude from UCLA in 1987.