Real Estate Investment: Return on Investment and Cash Flow Calculation

Household formation is slowing, leaving less demand for home construction, Mallach said during a Brookings’ lecture series at the University of Nevada, Las Vegas.

Households increased by an average of 1.12 million a year from 2000 to 2005, but that average dropped to 631,000 a year from 2005 to 2009. Household formation won’t be more than 800,000 to 900,000 a year, he said.

“It’s going to be single people, senior citizens and immigrants, so there’s going to be less demand for high-end homes,” Mallach said.

Low levels of home construction both in the Las Vegas Valley and throughout the nation will be a huge “economic drag,” he said. Las Vegas has seen construction employment drop from 12 percent of the total work force to about 5 percent, which is close to the national average, he noted.

“Those jobs are not likely to come back,” Mallach said. “Hospitality jobs will come back, but not construction. You’ll either have continued high elevation of unemployment or significant out-migration. Those are the restraints on economic growth or recovery.”

The new economy challenges many assumptions held about the role of the housing market, Mallach said. It’s time to rethink policies on homeownership, rental housing, mortgage finance and low-income or subsidized housing, he said.

“I don’t know that there’s been any serious discussion on housing for decades,” he said. “Now that mortgage financing has collapsed, Frannie Mae and Freddie Mac, the entire country is in a state of befuddlement of what to do about it. I don’t have the answer.”

Some of the questions to consider: Should government policy encourage people to maximize their housing consumption? Should we take steps to encourage investment in multifamily housing? Can we finally do away with the mortgage interest tax deduction?

Mallach said the interest deduction is a “bad thing” and does not encourage homeownership.

“What it does is push the price of housing up,” he said. “For the lower-income owners who typically don’t get the deduction, they’re paying for those who do.”

Using the $5 billion a year in mortgage tax deductions to repair and rehabilitate existing homes would make a far bigger difference for people who need housing, he said.

Approximately $30 billion a year is spent on housing vouchers in the United States, yet it’s helping one out of four households at most by Department of Housing and Urban Development estimates, Mallach noted.

One reason for higher vacancy and decreasing rents in the Las Vegas Valley is the “exponential increase” in investment money coming into the market and buying foreclosed homes for rental purposes, he said. That’s destabilizing neighborhoods across the valley and the country.

“It’s not that we need more housing,” he said. “We need to shepherd what we have better. Over half of the houses built in the 1950s are still standing. Preserving existing houses is the way to go in an era of low production and low demand. It’ll go a long way toward stabilizing housing and preserving more neighborhood communities.”

“When you go on a binge, you lose track of what is right behavior. I think we’ve been forced back to recognition of what went wrong. What is scary is, ‘Are we capable of doing what’s right?’ ”

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.