In the latest edition of Fundamentally Speaking, Calvin Schnure, NAREIT’s senior vice president for research and economic analysis, explained that underlying fundamentals of the broader economy remain positive, despite market gyrations.
Schnure noted that growth in gross domestic product (GDP) made a robust improvement in the spring. At the same time, sustained consumer spending, particularly for auto sales, has been evident. “In sum, the underlying economy looks quite good,” Schnure said.
Some of the most encouraging news has been in the housing market, Schnure said, where sales of existing homes have risen to levels not seen since before the financial crisis.
“You can’t overemphasize how important housing is to the overall economy,” Schnure pointed out. The scope of the housing market recovery suggests that the economy could begin firing on all cylinders again, he added.
Schnure said he is not concerned that the recent improvement in housing prices could point to a bubble developing in the market. He explained that elements involved in the last housing bubble—the growth of subprime mortgages, weak underwriting standards and oversupply—are not present today.
“If anything, underwriting standards are on the strict side of normal, mortgage debt outstanding has not been growing at all and the household debt service burden is the lowest in 35 years,” Schnure said. This suggests that the recovery in prices reflects the underlying recovery in fundamentals in a market with little new supply, he noted.
Turning to the commercial real estate outlook, Schnure pointed out that the best thing for REITs and commercial real estate would be steady economic growth that adds jobs and consumer spending. Indeed, stronger economic fundamentals helped the commercial real estate market improve this spring, with rising occupancy and accompanying rent growth. The NAREIT T-Tracker showed that funds from operations (FFO) rose 16 percent in the second quarter. “Those are good solid results. Going forward the fundamentals remain in place,” Schnure said.