Hugh Kelly on the Shaky State of the Real Estate Industry


Economist Hugh Kelly has a full plate these days. With the industry in the state that it is, Kelly and his take on things are in more demand than ever. As a principal at Hugh Kelly Real Estate Economics, he patiently grinds the issues down to grains of sand, then sifts them and sorts them out (he’ll do just that here!).

He spent over two decades as the Chief Economist with Landauer Real Estate Counselors, where he oversaw the marketing study team for the financing of The World Trade Center and the General Motors Building.

As a clinical associate professor at New York University’s Schack Institute of Real Estate (B.A., C.R.E.), he studies the subject of economics from both sides now, from both macro and micro, including Urban. He teaches graduate classes and has published over 200 articles in industry journals.

Here, he voices his concerns over the shaky state of the real estate industry, from a clear-eyed economic and financial focus. He also addresses how technology is changing (and not changing) the business, how fast is not always good, and how academic abstractions can serve as distractions – and do us all in.

What is the state of Urban Economics, given the current climate?

As a discipline, I think it is very lively at this point. There seems to be a division between those cities that are successfully revitalizing their cores and their core functions, and those cities which continue to spread outward, where sprawl and downtowns are in very dire shape.

Downtowns are becoming just a little place on the map where there is a lot of spread-out activity, in Atlanta, Dallas, and Los Angeles, for instance.

New York, Boston, Washington, Chicago and San Francisco are exceptions, but why is that? That, I think, is the most important question in urban economics today.

What are you seeing in the housing market that you’re finding alarming?

On the housing side, ‘conflicted’ and ‘struggling’ are probably two terms that I’ve used.
‘Conflicted’ in this sense: if you say there is a reduced decline in the value of housing around the country, you would probably be pessimistic. But on the other side, if you look at The National Association of Realtor’s Affordability Index, you see that houses are really quite affordable at this point.

So I think for the industry, this is something that needs to be sorted out. You get very mixed signals. What the affordability data tells me is that houses should be moving at the price levels as they exist today. People’s incomes can clearly sustain the purchase of a house under conventional mortgage circumstances. And yet, one out of four houses that are mortgaged in the country is under water. That constipation in the marketplace I think is an unsustainable circumstance.

What do you think it will take for skies to clear again?

I think what you’re looking at is the need for another year or so of measurable economic growth, in terms of the big measure of Gross Domestic Product and, most importantly, job growth.

The problem is that there is a symbiotic relationship between two things: can you have any real job growth if you have people mired in their own houses and unable to move to where the jobs are being created? So it’s a tough call.

Are you seeing any immediate light at the end of the tunnel regarding the state of the housing market?

It’s struggling but it’s not surrendering. People are really trying to work through their housing problems. As I talk particularly to residential brokers in and around the metropolitan [New York City] area, they don’t lack for things to do during the day. They are trying to arrange short sales. They’ve got lots of open houses and listings to work with.

The problem is getting the closing. It takes a very, very long time. It’s complicated. And particularly when you have several layers of existing mortgage on the house, when you have a first mortgage and a second mortgage, the process just takes incredibly long. So I think what you’re seeing is just a real struggle to fit all the pieces of the jigsaw puzzle together.

But as far as residential real estate is concerned, the people who are active in that area have not thrown up their hands and given up. They are just having to work incredibly hard for very meager results.

What other red flags are you seeing in the real estate industry?

The red flags to me are bad things that are happening on the governmental side. I don’t want to bash government. But I think if we focus on how we spend the least amount of money out of the government, we’re going to prolong the agony. That’s particularly true for residential real estate if we have more rounds of layoffs of state and local employees, because these are homeowners. These are folks who are trying to meet their mortgage. They’re trying to work as middle-class and lower-middle-class households. And to have large rounds of public sector layoffs is going to be a real problem for residential real estate.

This market is very, very sensitive to any bad news. And it doesn’t have to be local bad news. Think of what happened in terms of housing sales when Greece and Ireland’s banking system fell out of bed. All of the sudden, it was the flight away from credit again, and debt became harder to secure on the housing market. It’s a very fragile thing.

What is your reaction to Foreclosuregate?

I think the banks are going to have to bear some pain. The banks have enormous self-inflicted wounds in what they’ve done, not only in loans that they originated themselves, but in this opportunistic and ill-considered acquisition of companies like Countrywide. They bought a world of pain. That’s a bad debt.

There is this idea that the way to move through this market is to foreclose aggressively and quickly – there is a full spectrum of people who think that is the thing to do – to cauterize the problem and get it over with. That’s too broad, too deep. I think the kinds of mortgage restructuring programs that Chase was talking about so openly 12-18 months ago is more the way to go.

If you have people who are able to meet reasonable principle and interest payments, you should restructure those loans in a way that the present reality and pricing are placed. Write off the losses because of your bad banking practices, and start fresh.

How do you see things on the commercial side?

Commercial is where I have spent far more of my time, both in terms of my instruction at NYU and in my consulting practices. The commercial markets are way ahead in the recovery. The top eight to ten cities in the country have all strengthened as far as offices, apartments and even industrial.

I would say an equal number of markets – ten or twelve markets across the country – like Detroit, Atlanta, Las Vegas, and a couple of Florida markets like West Palm and Tampa in particular, have left us with a highly localized, long-term set of problems. But I think on the whole, my outlook for commercial real estate is that it will be strengthening much in the way that it strengthened in the 1993 and 1995 period.

What predictions do you have for commercial in the next year or so?

There is capital out there. It’s disciplined capital, and it’s returning in measured volume to real estate investments.

I was speaking with a banker yesterday, who says that his bank’s volume on the commercial side shows two things: they’re willing to lend and they are looking for customers. Also, they lost more deals to competitors than they actually made, which means that they are not the only bank out there. They are staying very conservative and very solid so that those loans – those loans now made at a sort of market trough – ought to be very [solid]. The quality of products coming now is not of the weak underwriting standards that they saw [in the recent past].

So you’re feeling good about bank loan activity?

There is very, very good academic research going back to the Seventies that shows that loans that are made at the bottom of the market cycle are better-performing loans than those made in more normal and certainly in boom times. Foreclosure rates are lower. Recapture and losses are higher for loans made where we’re at now. The lender can cherry pick the borrowers.

How do you think the economy will behave in the next year?

More broadly, the stage is set for an economic expansion that will lead to more job creation. CEOs who are looking to improve the stock value of their companies will therefore need to go the other way in order to generate more profit: increase market share. And the best way to expand your business is to hire people.

How is continuing education more vital than ever in today’s climate?

It reminds me of the book that was very popular several years ago, called Seven Habits of Highly Effective People. One of the seven habits is sharpening your saw, always keeping your skills current and always learning something new. Very successful people always do that. They’re always learning. They have a curiosity about things, and always want to get better. I think that’s always good advice. Invest in yourself.

How is technology affecting the business?

It’s kind of a mixed blessing, as far as I’m concerned. It’s put a lot of great tools in the hands of a lot of amateurs, or even shysters. I’m reminded that when I started in commercial real estate in the late Seventies, the guy who hired me said that ‘You’re going to do just fine, but remember the two kinds of people you are going to meet in real estate: dreamers and liars.’ That was so true! I can’t tell you how much of my consulting career involved trying to separate out those two for a client.

There are a lot of great tools in technology and I’m a big believer in technology. I use the resource tools of the internet all the time. But because they are available to me, they are available to everybody, and not everybody is either competent or ethical.

More generally, I would say one of the things we need to worry about in terms of technology is that speed compromised judgment. People think that if they do something fast, then fast equals smart. That’s not true. You need to be able to sift through things and often the best thing to do is to sit and wait. Technology does not help you do that. It gives you pressure to rush to judgment.

A long-timer broker in New York told me decades ago, ‘Sometimes the best deals are the ones you don’t make.’ And yet technology does not award inaction.

The other thing about technology is that hype often compromises strategy. For companies that have a business plan and a strategy, when the drumbeat of news begins to push against that strategy, that often [makes them abandon their business plan and strategy]. They’ve got to instead follow the market. The music was still playing, so we had to dance. That’s wrong.

I found that banks that did poorly were those who tried to be market responsive. Banks in the long term that did well – that is to say that they didn’t undergo FDIC takeover and didn’t occur mass losses on their balance sheets — were the ones who said, ‘Our standards are our standards. Our strategies are our strategies.’

Computers are great, but in the real estate business, boots on the ground are better. Technology is not the total answer, but it’s part of the tool kit. But the tool kit requires good craftsmanship to get good product.

Are there any other things that you’re feeling regarding the current state of the industry?

These come under the headline ‘Abstraction is the Enemy.’ That’s true in education and it’s true in public policy. In education, thinking that pure math provides all the answers; letting your model run things and trying to change real estate education to pure math and pure finances is always an exercise in abstraction. You get into risky territory.

Fundamentals always win.

In terms of public policy, and this is a real problem in Washington, when ideology becomes more important than problem-solving, we’re all in trouble.

About Author

Ron Sklar is a free-lance writer based in New York City. He writes for a number of blogs, websites, and magazines and has interviewed some of the top names in business and the arts.


  1. “I think the banks are going to have to bear some pain.” At least he wants to hold the banks somewhat accountable for their actions.

    “Write off the losses because of your bad banking practices, and start fresh.” I don’t see this one happening as long as it’s more profitable to foreclose on the home and sell it again.

  2. Does anyone have any theories as to why those particular cities (NYC, Boston, Chicago, DC, SF, etc) are the exceptions? In the case of NYC and SF you have some obvious geographical constraints that can go a ways toward an explanation . . . . but it’s got to be more than that, right?

    • I can’t speak for the other city’s but, their are a few reason why Boston( born, raised and currently live) was so resilient during the down turn.
      – we have one of the highest density of colleges ( and 3rd most educated population)
      – of those colleges we have some of the highest performing ( Harvard, MIT, Tuffs, Curry, Bentley etc…)
      – top medical factuality in the nation (Mass General, Brigham and womens, McLean etc…)
      – we have a huge infuse of tech and Biotech company’s (Biogen, Amgen, Genzyme etc…)
      -And lets not for get we have the Redsox, Patriots and the Bruins. Having the best sports teams in the nations really helps our moral….

      All of which performed the best during the recession and will grow after.

      • Im in the DC area, we have federal government jobs, a ton of contractor jobs, as well as a ton of businesses that cater to the market these created. This means there are a of dual income couples that have been here 20 plus years, and not the same market volatility in jobs you may see in other markets. I assume the NYC, Boston, Houston, Austin, etc have the same traits

        However, My home town of Las Vegas, is a complete service based industry, and has a lot more fluctuations in jobs when it comes to the national economy.

  3. Great article and good insight on the many aspects of the market. I concur with what Mr. Kelly says regarding the housing market struggling but not surrendering. The housing sector is definitely lagging the rest of the economy and acting as a big drag.

    I’d like to see more debt reduction programs out there and more cooperative banks.

    Thanks for the article, Ron!

  4. One point missing from the articles is that the average US citizen is overleveraged. According to the Federal Reserve each taxpayer has a personal debt of $135K and has average credit card debt of just under $10K. Most people who want to buy a home cannot becuase they simply cannot afford to take on more debt. A huge difference between quality of loans in the 1970’s were that high interest rates were resulting the most-qualified borrower’s because they afford the mortgage payment. Today, the interests rates are low and home affordability are historic lows, but the average homeowner is burdened by too much debt and cannot afford to service the mortgage. Therefore, I disagree that loan quality is high, because many of the loans underwritten these days are are back by the FHA/VA. I fear it will be many years before we cycle through all this turbulance.

  5. Pingback: Weekly Roundup: Existing-home sales rebound «

  6. Headlines don’t always reflect the story, and this headline is misleading. Hugh Kelly has a fairly positive outlook for the country getting out of the swamps and bogs we’ve created in real estate. He has an especially positive outlook for a continuing stabilization in commercial real estate.

    I’d call him an optimist.

  7. Nice article and some good points on the commercial side. I am a commercial real estate agent in the Chicago suburbs and have also found that the capital is definitely out there and has been out there for most of 2010, but less were willing to spend that capital in the first half of 2010. Presently & since June 2010, I personally have seen commercial property for rent being seized up more quickly than in the 2nd half of 2009 & 1st half of 2010. I do believe that commercial is way ahead of residential and that we have already bottomed out & should be able to start increasing rates near end of 1st quarter of 2011 and into 2012. Of course, majority of landlords have already greatly adjusted their rates & will be starting to increase those lowered rates…is what I believe. So, I agree, this year for commercial is promising for 2011.

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