Will US Real Estate Crisis Lead to "Lost Decade"?


Eric Sussman of UCLA-Anderson is both a practitioner and professor in the field of real estate investment. Last week, we discussed the causes of the 2008 real estate crisis and its impact on job prospects for MBAs. We continue our conversation.

BNET: Financial markets have for the most part stabilized, but how soon can the real estate sector become healthy again?

Sussman: If you look historically at the last real estate recession when the government essentially forced the hands of the banks and S&Ls to get their crappy assets of their balance sheets. You can argue that was a pretty good thing. And the private sector ended up making a ton of money on those high margin transactions. What's happened now is...well, nothing. They've announced all these acronym programs and there is really no traction or impact. The concern is that we can become like Japan [during the 1990s] where bad assets just sat on the bank's balance sheets for years. Banks don't lend and you could just enter a decade of malaise. Japan has not recovered from its "Lost Decade" and may never recover.

BNET: So many people are "in" the real estate industry, given the fact that their major investment is their home. What are some misconceptions regular people have about this industry?

Sussman: I think Americans have been fooled by the "American Dream" myth-that they will all have a big house with the big yard and a white picket fence. But if you think globally-whether it's the European Union or Asia or the rest of the Americas-that's unique. Most people live in high-density housing, not a 3500 square foot home with a swimming pool. The American Dream turned into a nightmare with the real estate crisis because it doesn't make sense. There's some interesting data about the size of the average American home in the last decade. It's grown substantially. The modest 1500-2000 square foot home has evolved into the 3500 square foot home.

The second misconception is that it is better to own than to rent and that building up equity is this wonderful thing. Well, building up equity comes at a cost-obviously acquiring the home and taking on the leverage that involves. There's a big opportunity cost associated with money people commit to their home purchases. It's an illiquid asset the return on which is unclear.

BNET: Has the real estate crisis impacted either of these behaviors? Could a different tax structure or more consumer education change peoples' attitudes?

Sussman: There's no question that the events of the last couple of years will have an impact on those misconceptions. But, memories are short. We're bound to repeat history; it's part of the human condition.