There is a distinction in examining renter trends that often gets overlooked. One of the smartest guys in this business is a research guru at a large owner, who bristles at the idea that there are "shadow markets." In conversations about rental markets, and rightly so, I believe, the point is made that in most metropolitan areas, there have always been renters in a wide variety of housing types and that no one is hiding in the shadows, even though that term has gained great popularity.

A leading expert in monitoring markets nationally, Greg Willett, MPF wunderkind and the sultan of statistics, observed recently that these shadow markets are showing up now in lots of places, as full competition to professionally managed apartment units. In the past, Greg would have told you it wasn't much of a factor, but now perhaps they're making great inroads as rental alternatives. The current pricing of these alternatives is a drag on professionally priced rents and the individual owners are beginning to make their presence felt. While they may not be good at delivering service, the greatly reduced rates more than compensate for the lack of amenities and sometime location challenges.

Historically, individually owned rental units rarely raise rents and operate in a somewhat irrational way. It is unlikely, based on behavioral finance studies, that these owners will change over time by very much. As the available inventory of these alternatives has skyrocketed, professionally managed ownership has to get better at luring that elusive renter.

The levels of traffic in most properties is reportedly down, sufficiently lower that the weakness isn't just attributable to seasonality, but to real softness in demand. The watch word for the present is management, but for those of us around in the developer fee fueled 1980s, it's certainly a contrast to prior periods. In most markets nationally, the long wait for Gen Y to come riding into town to rent vacant luxury units has proven to be painful. With little economic vibrancy, and lots of layoffs,  miscalculated employment growth and the instability in the industrial base, now is actually a better time to be a renter than an apartment owner.

While this trend is expected to be relatively short lived, the fact remains that treating residents well, and getting renewals down systematically is one of the keys to future net operating income. Expect major owners to report weakness and challenged earnings until the Fed policy response to the housing debacle begins to take hold. In the meantime, hopefully the Apartment Whisperer will be able to work hard to coax people out of the shadow inventory and into professionally managed buildings. As they said, "you got to treat them real nice and then they'll come to you."

"There's something happening here
What it is ain't exactly clear"
© Buffalo Springfield

The recent employment situation report from the Bureau of Labor Statistics released today show a decline in payroll employment of over 530,000 jobs in November, the ugliest report since 1974. Major revisions to earlier releases including September and October suggest that in the past three months combined, the U.S. has lost 1.256 million jobs. The unemployment rate increased to a staggering 6.7%. According to some analysis of the Mortgage Bankers Association data, about 10% of all U.S. households are in default in one way or another on their mortgages. With home sales at their lowest levels and car sales almost non-existent, the economy is clearly in the midst of a recession. Even oil prices have declined from the shocks of over $140 per barrel to a more understandable $41.65 per barrel. While that might drive OPEC nuts, it is good news for tightly strapped American consumers. It might even help the auto makers a bit, but not enough to get a bailout.

Is all of this the good news?

I'm not a fan of economic disruption and failing Fed policies but something amazing happens once everyone starts to recognize the calamity that is our current economy. We're now finally far enough into the NBER definition of a recession, for almost a year now, that reality has taken hold and now the necessary adjustments in the workforce, the economy and the industrial base can take effect. For the longest time, we've been staring down the barrel of an impending slowdown, snug in the belief that somehow we were going to avoid taking a hit. The shared common view that we were going to have a shallow recession has given way to the expectation that we're looking at a long, defined trough. I share that view.

My forecast for you is complicated by the lack of public policy from the new administration, so piecing this together as best I can, let's examine a couple of key points. First, with respect to unemployment, the true unemployment rate is actually 19.3%, not 6.7% and the reason is that the way the Household Survey works doesn't provide an accurate view of the total workforce. This much larger number is simply indicative of the greater number of people who want jobs that can't get them, and counted among these are future renters, recently minted MBA graduates and many Gen Y members not in the workforce yet. Additionally, the vast number of unemployed lost positions due to mergers, function dissolution and industry disruption. Let's keep these numbers in mind for a moment and go on to services employment.

Construction, retail, financial, professional and business, leisure and hospitality services lost 417,000 jobs. Of these, I estimate that approximately
340,000 are normal, not seasonal or temporary positions. Out of the total, perhaps half of them are current or prospective renters, based on ages, income and probable seniority, so if we count about 170,000 lost as renters, we can begin to see why absorption and site traffic is down so much, way above what would be expected for this time of year.

Where does that leave us?

We're looking at home prices continuing to decline for another year, probably bottoming out in September or October of 2009. We're looking at unstable consumer confidence as the new administration takes over and tries to work out coherent policies. We're expecting that the bulk of the recession based stresses will take approximately 3 to 5 years to be worked out, with the more positive indicators appearing in early 2010 (probably around the week of March 21st) and lastly, we're expecting to see foreclosures, house price failures and slow employment to accelerate for about 4-6 months before it gets better. Work outs take time, and as the employment base is re-engineered for the future, U.S. global competitiveness will increase and jobs will come back.

Certainly the press coverage of the housing crisis, the auto manufacturing debacle and mortgage madness (the Treasury Department wants to see 4.5% mortgages for new purchasers) isn't helping.

Did anyone notice that Bob Nardelli, CEO of Chrysler, was formerly with Home Depot? Hammers, aisle 2, Hemis, aisle 3?

Based on my viewing commentary on Fox News recently:

"Paranoia strikes deep
Into your life it will creep
It starts when you're always afraid
You step out of line, the man come and take you away"
©Buffalo Springfield

Are we bailing on the automakers? Any astute observer of the auto industry will tell you that there is pretty direct correlation between auto sales and housing starts. It's likely that the home equity mortgage withdrawal from the wealth effect is part of the cause, but more importantly the auto industry has created millions of jobs and helped to create the middle class. Taking a moment to look at the history of the industy, since the 1950s, the unions have held an iron grip on labor negotiations, forcing the big 5, now the big 2 (you gotta wonder about Chrysler) to pay ever rising costs in salary, benefits and union dues. In what is the essence of intermediation, the foreign car makers figured out how to build better, more reliable cars and that was the beginning of the end of business as usual for the U.S. car business. There is a long history of how Japan, after World War 2 and W. Edwards Deming helped to transform the island nation into a world manufacturing power and now the U.S. auto industry is struggling to catch up.

Should taxpayers be responsible for giving the excesses of the industry a pass in order to keep jobs and economies in the midwest from further decline?

I think the Congress ought to hold the industry accountable for past failings and make them demonstrate what they're doing to stay competitive. It should mean, selling corporate jets, closing plants, reducing the number of low selling brands, dramatically restructuring the benefits going to retirees and autoworkers and facing down the unions. I don't think bankcruptcy for all of them is out of the question either. A major fiscally responsible re-organization is about the only strategy that will save them long term. The use of tax dollars to help an inefficient industry, especially one that cannot effectively compete against better built cars from Japan, is not in the best interests of the American people. There isn't as much of a distinction anymore when you look at the content either. The components that make up cars are sourced all over the world, and over 70% of the cars are all built with the same parts. The difference is the assembly and tooling.

In the end. U.S. auto manufacturing is an important and meaningful part of the U.S. economy and a critical strategic resource what cannot be allowed to disappear. The Congress needs to put any stimulus package involving automakers on a par with the strictest regimen for future survivability, with meaningful benchmarks and a long term option in shares for the taxpayer, so the credit lines are fully secured.

International trade has blurred the lines between what is an American car and a foreign car, terms not typically used much these days. In a global economy, with foreign cars assembled in U.S. plants in Ohio and Kentucky, we don't want to send the wrong message to the other nations, that direct foreign investment isn't welcome here, and that's the hard part of the balance Congress faces. We can only hope that the car companies will ultimately learn their lesson and bring out best in class, energy efficient vehicles consumers want to buy.