Real estate, the residential sector in particular, has been making bleak headlines around the globe in 2008 and 2009. By early 2009, important trends were developing that will shape the real estate industry of the near future.

During most of the 2001–2007 period, easy availability of development loans and mortgages, low interest rates, eager investors and unbridled optimism caused massive new developments of homes, shopping centers and office buildings to sprout on a global basis. The effect was widespread. For example, large portions of the national economies of Dubai, Ireland and Spain were driven by real estate speculation and investment. By 2009, however, Dubai had been forced to turn to neighboring nations for backup central bank funds. Ireland’s real estate market spiraled downward. In Spain, where millions of workers had been added to construction and real estate positions in the previous decade, unemployment soared to 17.4% in the spring of 2009. Around the world, in nations such as Germany, Russia, India, China, Canada, America and Australia, housing prices crashed, developments were stalled or cancelled, real estate debts were in arrears and vast amounts were lost by mortgage investors.

Residential housing markets have been dismal. The hardest-hit sector may have been high rise condominiums, where new projects far exceeded potential demand by consumers. For February, 2009, the widely watched Case Shiller Index of home prices in the U.S. showed that prices in 20 of America’s largest metropolitan areas had declined an average of 30.7% from their 2006 peak. Home prices in the Phoenix, Arizona area were down by 50.8%. In Miami, where tens of thousands of new high rise condominiums had broken ground in recent years, the drop was 45.1%. In Las Vegas, also home to vast numbers of new condominiums, the drop was 48.4% from peak prices.

Home values in India were hit hard as well, with major declines in the values of properties in Delhi, Mumbai, Gurgaon, Chennai and elsewhere. Despite aggressive marketing by developers and offers such as a free car with the purchase of a new home, consumers were reluctant to buy homes as they doubted the security of their jobs and lost faith in property values. It became difficult to obtain financing for properties of any type, whether residential or commercial.

In total, the real estate and construction sectors, including the many professions and fields associated with them, make up one of the larger components of the global economy.

For 2008, the U.S. Bureau of Labor estimates that 7.2 million Americans worked in construction (down from 7.6 million in 2007) and 1.5 million worked in the real estate industry (about even with 2007).

About $1.07 trillion in new construction was put in place during 2008, according to the U.S. Bureau of the Census, down from the 2006 peak of $1.16 trillion. This indicates that the construction field accounted for about 7.46% of all economic output in the U.S. in 2008. There was more than $14.6 trillion in outstanding mortgage debt in America at year-end 2008, including $11.0 trillion in home mortgages. However, billions of dollars of that amount are unrecoverable as mortgage holders were writing-off massive amounts of mortgage assets in 2008.

Sales of existing homes continued to be weak in 2008, at 4.91 million for the year. This figure is according to the National Association of Realtors, including single family homes and condos/co-ops, and it is down dramatically from 6.48 million in 2006. Sales of new single-family homes plummeted to about 485,000 in 2008 (according to the U.S. Bureau of the Census), down from 1.05 million in 2006.

Clearly, homebuilders are suffering. For example, Pulte Homes, Inc., one of the world’s largest builders of new homes, saw its revenues soar from $8.8 billion in 2003 to $14.5 billion at its peak in 2005. Sales dropped a bit in 2006 as the market started cooling off, to $14.0 billion, but in 2007-2008 the bottom fell out. Pulte’s revenues dropped to $9.1 billion in 2007, with a net loss of $2.2 billion. Revenues dropped even further in 2008 to $6.1 billion, with a net loss recorded for the year of $1.4 billion.

Pulte’s average sales price was about $337,000 in 2007, but homes in its nearly 690 communities often were priced at less than $200,000. Many of Pulte’s customers had been people of modest financial means (and less than perfect credit) who had taken advantage of the fact that getting a mortgage was nearly as easy as ordering a Big Mac at McDonald’s. This was the “subprime” market at work.

On the opposite end of the spectrum, luxury home builder Toll Brothers saw sales rocket from $2.7 billion in 2003 to $6.1 billion at its peak in 2006. By 2007, sales fell to $4.6 billion. Here too, buyers of these expensive homes (averaging about $688,000 during the boom) found it incredibly easy to get a mortgage, often a mortgage that they couldn’t afford in the long run. For 2008, Toll Brothers’ revenues dropped further to $3.1 billion and the firm recorded a $297 million loss.

In the U.S., during a dismal 2008, only 569,900 single family building permits issued, according to the National Association of Home Builders (NAHB). This is a stunning decrease form the 1.62 million new homes started in America in 2005 during the boom. Residential construction continued to decline in early 2009. For the first quarter of 2009, NAHB estimates that new single-family building permits issued in the U.S. were off by 46% over the same period of 2008, to 149,300. Also, during the first quarter of 2009, multifamily building permits were off 52% to 81,600 units. As of April 2009, the Mortgage Bankers Association forecasts new single family housing starts to total only 338,000 for 2009, growing to 431,000 in 2010 and 750,000 in 2011.

Owners of retail centers and malls are suffering. General Growth Properties, Inc., America’s second largest mall operator, filed bankruptcy in early 2009. The company had been unable to refinance its massive mortgages as they came due. At $27.3 billion, this is the largest bankruptcy in U.S. real estate history.

Commercial construction spending has been at record levels. Private sector (non-governmental), non-residential construction put in place in the U.S. reached $298 billion in 2006, growing to $357 billion in 2007 and $410 billion in 2008, according to figures compiled by the U.S. Census Bureau. Despite the slowing economy, strong growth was seen in construction in the hotel/motel sector, higher education, health care and office facilities. In the U.S., commercial public sector (for government), non-residential construction was $255 billion in 2006, growing to $287 billion in 2007 and $307 billion in 2008.

Over the long term, there will be continuing demand from the health care sector for new or remodeled properties as the percentage of Americans over age 65 continues to grow, increasing demand for medical care.

There are several excellent sources for home sales and pricing data, including the Mortgage Bankers Association (MBA), the National Association of Realtors (NAR), the Census Bureau and others. Figures may vary depending on which source you access. For example, on the residential side, NAR figures show that a bit more than 2 million new single and multi-family homes were started in 2005 at the peak of the boom. That number dropped steadily through 2008. As of March 2009, the seasonally adjusted annual rate of all housing starts was 510,000, according to the NAR. The MBA forecasts that new single family housing starts will total 338,000 for 2009.

The median sales price for an existing home in 2006 was $221,900, according to the NAR, slipping to $219,000 in 2007 and $198,100 in 2008. The seasonally adjusted median price for an existing home was $175,200 in March 2009. As of April 2009, the MBA forecasts that the median price for existing homes sold in 2009 will be $182,600.

The median sales price for new homes in 2006 was $246,500, according to the NAR. The organization’s figures showed that the number was nearly unchanged in 2007 at $247,200. The U.S. Bureau of the Census shows that number slipping to $230,600 in 2008.

It is easy to imagine that problems can occur when housing prices rise at a rate much higher than the increase in average household income, which was the situation in all of the hottest housing markets during the recent boom. Many home purchasers were stretching to buy their homes. Some took on far too much debt. Many buyers used “interest only” loans to reduce the amount of their monthly payments. Others used risky adjustable-rate mortgages (ARMs) to reduce their initial payments. In particular, subprime buyers with poor credit took out ARMs that had rapidly rising interest rates after initial years. Foreclosure rates skyrocketed.

Atypically, the housing market was strong during the economic slowdown of 2000-2003. Credit was easier to get than ever, and interest rates were low (in mid-2003, homebuyers were able to get 30-year mortgages at a very low 5%), helping home sales soar. A $2,400 monthly house payment afforded a buyer a home worth only $424,000 in 2000 (net of taxes and insurance, and factoring in a 20% down payment). In early 2005, that same payment bought a $525,000 home. Often, unsophisticated consumers are more concerned about their monthly payment amount than they are about the total price paid, even if that total price represents poor value. Even jumbo mortgages were available at low rates.

Apartment house operators were particularly hard-hit by the boom period in home ownership. Vacancy rates skyrocketed while renters took advantage of extremely low interest rates (and mortgage plans with low or no down payments) to buy a home.

As of early 2009, apartment house owners faced a difficult market. Many young people have lost their jobs or have been unable to find work upon graduation from college. Instead of renting apartments, they have been returning home to live with their parents. Other young consumers are unable to save up a large down payment, as required by today’s stricter loan standards.