Housing was not the only thing that took down the markets, butit is one of the main things inhibiting a good recovery. It will beyears until the housing market sorts out. That is continued goodnews for multifamily. For openers, all of the politicians got onthe ridiculous band wagon that everyone should own their own homeand fulfill the “American dream”. First of all, not everyone hasthat dream. Second the equilibrium ownership in the US is probablysomewhere around 63%-65% in the current economic environment.Third, there is a whole segment of the population who will not carefor a home any better if they own or rent. They are justirresponsible slobs, or they will never have the income to properlymaintain it. The whole concept that everyone should own a home ispolitical rhetoric and not reality.

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The result is we have millions too many houses right now whichneed to wait until the population growth to population movementcatches up. Take Arizona, or Las Vegas or the Inland Empire.Because there is endless land builders foolishly figured there wasendless demand and endless mortgages. Nothing is endless other thanrisk. Land in lousy locations got bought and developed. Commutesgot longer for many. Prices went well beyond any intrinsic value.Home builders made excessive profits well beyond anything they evermade before or ever will again. Lending went out of control. BarneyFrank covered up for the illegal acts of Franklin Raines at Fanny.Barney also rejected John Snow’s warning in 2002 that Fanny was outof control. Bottom line is we are not going back there.

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Now we have investors buying up foreclosed houses and makingbasic repairs and flipping them or renting them. That is nice whereit can be down, but it is not going to solve the lack of demand fornew construction. It actually means new building of houses in manyareas is a ways off until demand catches up by population growth,which is slow. We are not having a post war baby boom ever again.Yes more people are again moving to Phoenix, but that is a longerterm trend. If you buy good land now you still have a long hold inmany areas. Las Vegas has other issues related to the casino andhotel industry which Obama killed. While occupancies are up, rateis not and those casino hotels will suffer for years to come. Theevent planners are just not going to risk the reputation issue fora long time. CA has huge issues and business is not going to beexpanding there, so housing demand will be slower to recover thanin the past.

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That leaves multi as the place to be in residential. Renting isthe right answer for probably 35% or more of the population. So aspopulation grows, residential demand grows, and as the economystruggles with high unemployment for another 5 years, renting isthe solution for millions. Mortgage credit guidelines are reallytough and will remain that way for many years. In fact they are sotough that many people who can afford a house cannot get a loanunder current guidelines so are forced to rent. If you havemillions in the bank, but do not declare a lot of current incomeyou do not get a loan. That will all change, but not forawhile.

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The real risk to multi is that too many developers see theopportunity and as always happens in real estate, everyone wants tobuild the same thing at the same time and every developer has thebest site in town, regardless of where in town it is located.Lenders are looking for loans to make, so of course they makemultifamily construction loans. What else would they do. In somemarkets we will eventually have too much multi and the cycle startsagain.

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The macro issue is without a robust residential constructionmarket, the general economy will continue to suffer. That segmentgenerates millions of jobs and property and sales taxes. Fromconstruction workers, to materials manufacturing and sales, tofurniture stores, carpet stores, hardware stores, title work, andon and on. It is probably the biggest generator in the past ofmultiplier effect on the economy, and that is not happening againfor a long time. Home prices will continue to decline a-n manymarkets for awhile and the psychological damage to potential homebuyers and lenders will last for a very long time. The long termimpact on retirement nest eggs tied up in home values, and all thatflows from that, is going to be felt for a generation, just as thebaby boomers are hitting the key age. You need to consider all ofthis when doing strategic planning for your business and investing.This is a generational macro change, and you need to understand theramifications.

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Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.