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How to Do Real Estate Market Analysis in 2023?

February 2, 2023 by Marco Santarelli

Real Estate Market Analysis

Real Estate Market Analysis

Real estate market analysis involves evaluating the current market conditions and trends in a particular geographic area to determine the demand and supply of properties, as well as the overall economic conditions that may impact the real estate market.

You can gain a better understanding of market conditions and make informed investment decisions by conducting a comprehensive real estate market analysis. Because market conditions can change over time, it is critical to update your analysis on a regular basis.

Many investors frequently make the often damaging (or fatal) mistake of buying a property with little to no consideration of the neighborhood and market the property is in. This can be one of the greatest mistakes an investor can make because if you buy in the wrong neighborhood or market, you’ll be stuck with the problems that come with it because of its location. Your only option may be to sell the property at a loss.

I’ve literally seen dozens of investors buy nice rental properties that would impress most people, but they happened to be in distressed neighborhoods with blighted properties, and in depressed markets with high unemployment and a decreasing population. It is more important to be concerned about the overall market health and its future prospects than it is to get lost in the potential cash flow and other “numbers” on the property.

They’re all important of course, but purchasing based solely on the property without considering the bigger picture of the market and neighborhood is like trying to sail a ship against strong headwinds. If you don’t start with the right market and neighborhood, over time you will experience more tenant turnover, shorter lease terms, increased late payments/defaults, and decreased or negative appreciation.

How to Do Real Estate Market Analysis in 2023?

Here are the steps to conduct a real estate market analysis:

LOCAL ECONOMICS

There are several local economic factors you’ll want to consider before choosing a market to invest in. Evaluate factors like unemployment rates, population growth, and economic indicators to determine the overall health of the local economy. This will help you understand how the local economy is affecting the real estate market.

Employment Trends

Employment is one of the most important economic factors related to the current and future health of a market. Simply put, people who have jobs have the income to afford to pay their rent. Those that don’t will be able to afford to pay their bills, and may be forced to move to find new employment which often involves moving to another city. The Bureau of Labor Statistics (BLS) and the local chamber of commerce are good places to start for local employment data and trends.

Net Migration

Study the demographic trends in the area, including population growth, age distribution, and household income. Understanding the demographics of the area can give you a better understanding of the demand for certain types of properties. Are more people moving into the market or moving out? This has a major impact on the market as demand for housing increases and decreases based on the total population in a given market.

Take for example the Dallas, Texas market:

Texas has joined California as the only other state in the nation with a population of more than 30 million, according to new data from the U.S. Census Bureau. Texas' population has grown by 470,708 people since July 2021, the most in the country. Texas consistently ranks first in the bureau's annual population updates.

Net domestic migration accounted for roughly half of that growth (the number of people moving to Texas from other states), with the other half split almost evenly between net international migration and natural increase (the difference between births and deaths).

According to The Texas Demographic Center, 10 counties in Texas are projected to have 1 million residents by 2060. Harris County, home to Houston, will remain the most populous county by far, followed by Dallas, Bexar, Tarrant, Travis, and Collin counties, all of which already have more than 1 million residents. Denton County’s population is projected to hit 1 million in 2027, followed by Fort Bend County in 2035, Hidalgo County in 2041, and Williamson County in 2058.

This increased population growth creates demand for more local housing which helps push property values and rental rates up, in addition to an ongoing need for good residential housing stock. Be sure to put yourself on the right side of the trend.

Industry Diversification

A market with a diversified range of industries offers less market volatility in harder economic times or recessions. A market driven largely by one or two industries tends to be affected harder than more diversified markets and takes longer to recover afterward. Although many investors do well in “one trick pony” markets, it’s best to mitigate your market risk by focusing on markets with a broader employment base.

HOUSING MARKET

It’s good to know the condition of the housing market you’re looking to invest in. Evaluate local zoning laws. Research the local zoning laws to understand any restrictions or regulations that may impact the housing market. For example, zoning laws may limit the type of properties that can be built in certain areas.

Look at current market trends, including any changes in property values and sales volume, to get a sense of how the market is changing. Based on the information gathered, draw conclusions about the overall health of the market, the demand for different types of properties, and any potential risks or opportunities in the market.

Market Conditions

Are you in a buyer’s market or a seller’s market?

A buyer's market is what you get when there's more supply than demand. There are more people looking to sell houses than there are people looking to buy houses. In a buyer's market, sellers may have to accept a lower price than they want to sell their property and may have to resort to providing incentives. This is the ideal situation for buyers because they can get a better deal.

A seller's market is just the opposite. The demand is larger than the supply. People have more money to spend on real estate, so sellers will often see several buyers competing to buy their property, which drives up the price. This means that buyers will have to spend more to get what they want. This is the ideal situation for sellers because they often get a better price on their properties.

Median Price Trends

The median price (the midpoint between high and low) is often a very good proxy for indicating real-time market activity. As the median price changes, this can indicate key market movements.

A rise in median price means that sellers are responding to more sales in their local area which means that the local market might be “strengthening” or getting “hotter” – favoring sellers, so they will ask more for their home. A fall in the median price might indicate the opposite – few homes selling at the current price levels which causes homes on the market to drop their price and for new homes on the market to price more aggressively.

A rise in median price could also mean that homes in the lower part of the market are selling and leaving the market. This means that the remaining homes on the market are at a higher price point, which causes the aggregated median price to rise.

Market Inventory Trends

Inventory is simply real estate lingo for “the number of homes for sale.” This stat shows you how much supply is available in the market you are researching. Inventory levels can ebb and flow frequently due to seasonal effects. There’s usually more inventory on the market in the springtime as the natural rate of real estate activity picks up during this time of year.

Alternately, there’s generally less inventory in the fall or winter as real estate activity slows. Evaluate the current supply of properties, including the number of new construction projects, the amount of available inventory, and the amount of time it takes for properties to sell. This will give you an understanding of the overall level of competition in the market.

Average Days on Market (DOM)

Simply put, the Days-on-Market tells you how long the active properties currently for sale, in aggregate, have been on the market (a.k.a. “time on market”). In other words, of the active listings currently available for sale, how long have they been for sale?

This factor is the average number of days it takes to sell a house in the relevant price range. For example, a market in which a house sells for $150,000 in three weeks is quite different from a market in which the same house sells in six months. The latter is known as a soft market.

In a soft market, sellers can drop prices, give concessions, or wait longer for their houses to sell. The vast majority of homes are owner-occupied, so there’s generally no negative impact on sellers who can’t sell their houses because they can continue to live in them unless sellers are in dire need to move because of a foreclosure, job transfer, or another firm deadline, they’re likely to hold out to get their prices.

Study interest rates:

Review the current interest rates and their historical trends. Higher interest rates can impact the demand for properties and affect the overall market conditions.

TIP:  If you’re working with a good and reputable company to help you find or provide you with investment-grade properties then they should be able to advise you on the various markets and neighborhoods as well as provide you with detailed market information such as local economic data and housing trends.

Filed Under: Economy, Growth Markets, Housing Market, Real Estate Investing Tagged With: Real Estate Market Analysis

How To Invest in Real Estate During a Recession?

January 25, 2023 by Marco Santarelli

What is a Recession in Real Estate?

It can be scary to invest in anything during a recession. We all carry visions of the great depression and bread lines and people selling apples. The idea of putting your money into anything other than your mattress can be frightening for some. However, real estate should never be looked upon as an ordinary investment. Real estate is one of the few investments that we actually use and need. Everyone needs a place to live and call home. And real estate has systematically and quantifiably proven to have risen in value over the decades.

During an economic downturn, real estate markets typically see a slump in both value and volume of transactions, which is known as a recession. This may arise because of a general economic downturn or because of particular circumstances like an excess of available housing units, a shift in interest rate expectations, or a decrease in demand for real estate.

Many people may find it difficult to make their mortgage payments during a recession, which can result in an increase in foreclosures and a decrease in property prices. A decrease in construction activity and the associated loss of construction and real estate industry jobs may result from this. Recessions in the real estate market can also cause a decline in the value of commercial buildings because tenants may find it difficult to keep paying the rent.

Property values may plummet and commercial real estate may become less in demand as a result. It's also worth noting that a recession in the real estate market can be caused by a variety of factors such as an oversupply of housing, changes in interest rates, or a fall in demand for property. Because there are so many more properties on the market than there are buyers, in other words, supply outstrips demand, the price for property in most areas can fall considerably during a recession.

Do This When Investing in Real Estate During a Recession

Investing in real estate during a recession can be challenging, but there are also opportunities to be found. Here are some strategies for investing in real estate during a recession. Look for distressed properties to buy cheap. Foreclosures, short sales, and other distressed properties can be found at a significant discount during a recession. Look for these properties and consider renovating and reselling them or renting them out.

Do not feel intimidated by a real estate agent who tells you that you are going to “insult” someone if you offer a low price for their property. The real estate agent wants you to spend as much as possible because their fiduciary responsibility is with the seller, and they get a commission based on the sales price. Use your head and take a look at the market.

When you invest in real estate during a recession, consider the following:

Why Are They Selling?

If you're purchasing from a builder/developer then why they are selling becomes less important. But if purchasing directly from the owner in a private sale, you can find out by simply asking the seller or your agent. If the property is in a state of disrepair, chances are that there are financial problems. Don't be afraid to offer a significant amount less. If the owner is buying another home and needs to close on the first one soon, again don't be afraid to offer less than their asking price.

How Long Has The Property Been On The Market?

A few years ago, a home that was on the market for several months was either priced too high or there was something significantly wrong with the property. Today, properties stay on the market for 90 days or more in many parts of the country due to the prevailing market conditions. Avoid making a lowball offer on a property that is fresh on the market unless you know it is going into foreclosure or just about to become foreclosed upon. However, feel free to make low offers on properties that have been on the market for a month or more. Those that have been on the market for over a year are owned by people who are willing to ride out the storm and will most likely not be sold for a low price.

Is The Property In Foreclosure?

If the property is bank owned, you should be prepared to offer a lot less than the asking price. Don't allow a real estate agent to sway you when it comes to making an offer. If they say, “I do not want to present such a low offer,” tell them that you are prepared to find someone else who will. There are many real estate agents looking for a sale, especially in today's market. If the property is in foreclosure, offer at least 20 percent below the lender's asking price.

Invest in Multi-Family & Commercial Properties

Multi-family properties, such as apartment buildings, can be a good investment during a recession. They can provide a steady stream of rental income and are often more stable than single-family homes. Commercial properties, such as office buildings and retail spaces, may also be a good investment during a recession. These properties can provide a steady stream of rental income, and as businesses may struggle, it can also lead to lower rental rates and better negotiation terms.

Look for Undervalued Markets

Some markets may be more affected by a recession than others. Look for markets that have been hit hard by the recession and may be undervalued as a result. Real estate markets can take time to recover from a recession. Be patient and don't be discouraged if you don't see immediate returns on your investment. Consult with a real estate professional or a financial advisor before making any investment decisions. They can help you evaluate the risks and potential returns of different real estate investments.

Contrary to what you may have heard, the recession is the best time to buy a property. Always do your homework and don't be afraid to invest in real estate during a recession. It's important to remember that investing in real estate during a recession is not without its risks. It is important to do your research and understand the market you are investing in and have a long-term perspective. It's also important to have a good financial plan and a diversified portfolio.

Filed Under: Economy, Foreclosures, General Real Estate, Housing Market, Real Estate Investing Tagged With: Investing in Real Estate During a Recession, Investment Properties, Investment Property, Real Estate Investing, Real Estate Investment, Recession in Real Estate

Is the Housing Crisis Over in America?

January 25, 2023 by Marco Santarelli

Is the Housing Crisis Over in America?

The housing crisis is not over in the U.S. There is a shortage, or housing underproduction, in all corners of the country. The major coastal cities are known for their exorbitant real estate prices, which are driven by zoning restrictions and a scarcity of available housing. According to a new study, these issues are increasingly plaguing once-affordable towns and cities across the United States.

According to an analysis by the housing policy group Up For Growth, more than half of the nation's metropolitan regions had a housing shortage in 2019, a significant increase from one-third of cities in 2012. The country is short 3.8 million homes to meet its housing needs, which is double the number from 2012.

In recent years, rising raw material costs have exacerbated builders' woes, particularly during the pandemic, when lumber prices increased by more than 150%. But, given the large cohort of Millennials entering the housing market, one of the most significant reasons for this shortfall has been the severe underbuilding of entry-level homes, where the majority of the demand exists. Given the significance of this factor, we go into more detail about the entry-level labor shortage below.

According to an analysis published by Freddie Mac, long-term single-family home development declines have caused the housing shortage. Starter homes have decreased much further, exacerbating that trend. Between 1976 and 1979, 418,000 entry-level single-family homes were built annually, accounting for 34% of all new homes built. Mortgage rates rose from 8.9% to 12.7% in the 1980s.

As mortgage rates rose, housing became less affordable, decreasing demand and supply. In the 1980s, the entry-level housing supply dropped by nearly 100,000 units to 314,000 per year. The entry-level percentage of new single-family homes remained at 33%, similar to the late 1970s, showing that entry-level supply fell by the same amount as the entire new construction market.

According to another report published on the housing shortage by Fannie Mae, every city in the country has a housing supply problem, but each city's housing supply problem is quite unique. The research conducted by the firm found out that while the US has a nationwide affordable housing deficit, each state and city's approach to solving it is different, and the tools and techniques utilized to build needed new housing supply must be adjusted.

Tools to increase housing supply are accessible, although less so. Many towns oppose hard choices and reforms to increase housing for low- and moderate-income homeowners and renters. However, without those choices, the economic and social benefits of adequate housing supply will be wasted and the issues caused by its scarcity will deepen.

The housing supply shortage has well-known causes. After the Great Recession, housing development plummeted. The last decade saw the fewest new residences created since the 1960s. 3.8 million housing units were needed in 2019. The pandemic-induced materials and labor scarcity worsened the tendency, as shown by the 2021 rent and home price increases.

Rising mortgage interest rates have already dampened housing demand, particularly for new homes, and an economic recession could reduce demand further. Prices and rentals may stabilize or fall in some markets. The supply crisis will persist, hurting low- and moderate-income families. Fannie Mae ensures affordable housing for low- and moderate-income families by providing mortgage funding.

From 2019 through 2021, Fannie Mae sponsored almost 575,000 affordable units, according to their analysis. Their loans on newly built single-family houses bought by moderate-to-low-income households, funding to preserve affordable multifamily rental housing, and investments in low-income housing tax credits make up the majority of that amount.

If the housing supply is there, we can finance more. Nope. Families everywhere will continue to suffer with high housing costs until communities take concrete action to construct and preserve affordable housing stock where and how it is needed most. Fannie Mae economists Kim Betancourt, Stephen Gardner, and Mark Palim have issued a study report.

The authors compared the housing supply of the 75 largest U.S. urban markets to the housing needs of their residents. The housing supply problem is national, but solving it is local. Most housing-cost-burdened households are not just in coastal metros with high housing expenses. Fresno, Charlotte, and Las Vegas have high housing-cost-burdened household rates. Even smaller cities like El Paso and McAllen, TX, lack affordable housing.

Housing shortages necessitate localized solutions. According to the research paper, affordable multifamily rental units in Dallas and Atlanta could boost housing affordability. Some markets need new single-family houses, while others need to preserve multifamily housing. This analysis, based on 2019 data (the last pre-pandemic year with accessible housing cost burden data), shows that supply and affordability issues have worsened.

Even if home price growth has slowed and inflation and rising interest rates have reduced demand, working people have suffered from the rise in rents and housing prices since 2019. The supply dilemma can only be solved by building more housing and preserving affordable housing. While the economic drivers of housing costs—materials and labor inflation, supply chain disruptions, etc.—may take years to fix, states and municipalities may work with investors, builders, and lenders to make more homes available.

In several of the most cost-burdened states, zoning reform to encourage higher density and multifamily housing near transit and job hubs are working. Another option is to reduce or streamline regulatory barriers that hinder new development, particularly for manufactured houses and smaller starter homes that have all but gone in many large metro areas and made it hard for millions to buy their first home.

Federal low-income housing tax credits have been one of the most successful capital-generating mechanisms for affordable housing production and maintenance for over three decades and should be expanded and reinforced. Helping first-time homeowners and low-income renters could encourage the construction of additional affordable housing in areas of high demand.

Fannie Mae and the thousands of mortgage lenders and investors they work with daily are ready to finance affordable homes. The US has a world-class housing finance system. It's time to equal the housing supply.

Will the Housing Crisis Worsen in 2023?

Many homeowners are still haunted by the 2008 housing market crash when property values plummeted and foreclosures increased dramatically. According to a new LendingTree survey, 41% of Americans now fear a housing crash in the next year, owing to the memory of a sudden disaster at a time when the real estate market was riding high. But NAR Chief Economist Lawrence Yun draws the distinctions between today’s real estate market and that of more than a decade ago.

“It’s a valid question,” Lawrence Yun, chief economist for the National Association of REALTORS®, said Tuesday at NAR’s Real Estate Forecast Summit. “People are remembering the crushing and painful foreclosure crisis. So, it has become a key question: Will home prices crash after the strong run-up in prices across the country over recent years?”

  1. The labor market remains strong.

  2. Less risky loans.

  3. Underbuilding and inventory shortages.

  4. Delinquency lows.

  5. Ultra-low foreclosure rates.

At the virtual conference, where leading housing economists offered their 2023 forecast for the real estate market, Yun offered assurance that current dynamics are nothing like during the Great Recession. He pointed to several key indicators of how this market differs.

Homes in foreclosure reached a rate of 4.6% during the last housing crash as homeowners who saw their property values plunge walked away from their loans. Today, the percentage of homes in foreclosure is 0.6%—also at historical lows, Yun said. He predicted foreclosures to remain at historical lows in 2023.

housing crisis or crash coming
Source: REALTOR® Magazine

Danushka Nanayakkara-Skillington, assistant vice president of forecasting and analysis at the National Association of Home Builders, said she expects housing starts to drop by double digits in 2023. Then, “as the economy improves in 2024, the housing market will gradually come out of this slump that is expected from the next year,” she added.

Builder confidence has fallen over the last 11 months as mortgage rates rose and buyer traffic slowed dramatically. Fifty-nine percent of builders have reported using incentives, like mortgage rate buydowns and price cuts, to try to win buyers back, Nanayakkara-Skillington said. Labor shortages combined with lot shortages, higher material costs, and lending issues for builders are all compounding factors preventing more construction.

And while lumber prices have eased from record highs, construction costs remain 14% higher due to shortages in other supplies, like gypsum and steel. “All of these issues will keep homebuilding down,” Nanayakkara-Skillington said. “We don’t see these issues being resolved in the near future either.”


Sources:

  • https://www.freddiemac.com/research/insight/20210507-housing-supply
  • https://www.cbsnews.com/news/real-estate-housing-shortage-crisis/
  • https://www.fanniemae.com/research-and-insights/perspectives/us-housing-shortage
  • https://www.nar.realtor/magazine/real-estate-news/2023-real-estate-forecast-market-to-regain-normalcy

Filed Under: Economy, Housing Market Tagged With: Foreclosure Forecast, Housing Crisis, Housing Crisis in America, Property Foreclosure, Real Estate Foreclosures, Real Estate Investing

Real Estate Housing Recession: How To Make it Work For You?

January 23, 2023 by Marco Santarelli

Real Estate Housing Recession

We are currently experiencing a looming real estate recession in this country. Property prices in some areas have started falling in some housing markets, especially those which experience a boom during two years of the pandemic. In late 2022, the Consumer Price Index showed that inflation had slowed for the second month in a row, which was certainly welcome news.

Nonetheless, we expect the Federal Reserve to continue to closely monitor wage growth metrics, which have historically been more difficult to predict, in order to determine how long it should maintain its restrictive stance. With a recession expected to begin in the first quarter of 2023, one plausible scenario is for the Federal Reserve to reduce the federal funds rate in mid-to-late 2023. However, given the Fed's recent statements, we believe there is a significant upside risk to the Fed keeping interest rates higher for longer.

“The wild ride known as the U.S. housing market slowed dramatically in the fall of 2022, as mortgage rates surged and home prices remained high,” said Molly Boesel, principal economist at CoreLogic. “Home sales started off strong in early 2022 but took a nosedive later in the year. On the plus side, generous amounts of home equity will protect many borrowers from experiencing the type of foreclosure activity seen during the Great Recession.”

Home Price Growth Declined Significantly Between Spring and Fall

According to data from CoreLogic’s monthly Home Price Index, U.S. year-over-year home price growth reached 20.1% in April 2022, the highest level recorded in more than two decades. However, appreciation has tapered off every month since, falling to 8.6% in November. Sun Belt states led the nation for annual home price gains for most of the year, most notably Florida, which posted the highest gain in the country from February to November.

This trend partially reflects Americans migrating from more expensive areas in the West to more affordable areas of the country, though price growth in southern states has followed the national trend and slowed in recent months. The year’s spike in interest rates is the primary factor in moderating home price growth, with Freddie Mac data putting 30-year fixed-rate mortgages at 3.22% in early January 2022 compared with a yearly high of 7.08% in mid-November.

Despite the slowdown, a major downturn is unlikely due to a shortage of available homes for sale, strong mortgage underwriting standards, and an unemployment rate that has returned to pre-pandemic levels. The strong home price growth in 2022 led to robust home equity gains across the country for nearly two-thirds of American homeowners with a mortgage.

CoreLogic’s quarterly Home Equity Report shows that in the first quarter of 2022, borrowers gained a collective $3.8 trillion in home equity since the first quarter of 2021, a 32.2% increase. During that period, US homeowners with a mortgage gained an average of $64,000. But since home price growth is the primary driver of equity growth, increases slowed as prices cooled. In the third quarter of 2022, homeowners gained a total of $2.2 trillion in equity than during the same quarter in 2021, an increase of 15.8% and averaging $34,300 per borrower.

What Does Real Estate Housing Recession This Mean for You?

There are several ways to make a real estate recession work in your favor:

  1. Look for properties that are priced below market value due to the recession.
  2. Look for motivated sellers who may be more willing to negotiate during a recession.
  3. Invest in rental properties that can generate cash flow during the recession.
  4. Look for properties in areas that are not as affected by the recession.
  5. Consider flipping properties, as a recession can create opportunities for buying low and selling high.

Opportunity! With housing prices dropping and interest rates still near historical lows, this is the perfect time to find good real estate deals and buy cheap.

Your goal should be to find investment opportunities in markets that offer the greatest long-term growth and stability. These are markets that show growth in employment and population.

Target properties that you intend to hold for a short or long period of time. You will gain equity through appreciation as the markets correct and grow over time.

Be sure to only invest in properties that provide a positive cash flow in order to cover all of your operating expenses. This is very important in order to be able to hold the property long enough to benefit from the appreciation that comes over time with real estate.

On the flip side, this is not the perfect time to sell. If you own real estate, it probably makes the most sense to hold onto your investment until the market rebounds. As always, it will. In the meantime, take advantage of the market by either refinancing your own properties for better terms or buying more property that you can rent with a positive cash flow.

During a real estate recession, property values and sales may decline. However, there are ways to potentially make the most out of a recession. One strategy is to look for discounted properties that can be bought at a lower price and potentially sold for a profit later on. Another strategy is to invest in rental properties, as rental demand may remain steady or even increase during a recession.

Additionally, it is a good time to negotiate a better price with a seller as they may be more willing to accept a lower offer during a recession. It is also important to do your due diligence and thoroughly research any potential investments before making a decision.

Filed Under: Economy, Foreclosures, Housing Market, Real Estate Investing Tagged With: Foreclosure Forecast, Housing Recession, Property Foreclosure, Real Estate Foreclosures, Real Estate Investing, Real Estate Recession

Economic Forecast 2022-2023: Forecast for Next 5 Years

December 22, 2022 by Marco Santarelli

Economists are increasingly confident that the economy will grind to a standstill and begin declining shortly. The Financial Times and the Initiative on Global Markets, a University of Chicago economic policy and market research center, surveyed 49 U.S. macroeconomics specialists at the beginning of June 2022. And the recession will likely happen next year.

National Bureau of Economic Research (NBER) defines a recession as a severe fall in economic activity spanning two fiscal quarters. First-quarter GDP decreased by 1.5%. In late September, the B.E.A. will reveal second-quarter numbers. Nearly 70% of economists questioned anticipate the NBER will make this decision in 2023, with 38% predicting a recession in the first two quarters and 30% in the second.

Only one of the economists forecasts a recession this year, while 30% say it won't happen until 2024. Since the Russian invasion of Ukraine at the end of February, food, and gas costs have risen the most, causing inflation. More than half of the economists polled expected that the same forces—geopolitical worries arising from the Ukraine war and increased energy costs—would endure for the rest of 2022 and into 2023, putting pressure on inflation in the United States to rise further.

The study did not differentiate between a severe or moderate recession in 2023, but experts identified numerous variables that might minimize tighter monetary policy's negative economic repercussions. A quarter of experts believe that increased consumer spending through inflation will reduce losses and improve the possibilities of a mild economic decline.

The U.S. housing market, which has been red-hot for months and will likely remain so next year, might prevent a devastating recession. Over half of the experts polled believe that the active housing market would keep the US economy out of a terrible recession, joining the likes of mortgage corporation Fannie Mae, which has previously forecast that a hot housing market will soften the impact during a recession. The recent economic and housing forecast shows that the recession may begin in Q1 2023.

The Conference Board predicts modest economic growth this year and a brief recession in late 2022 and early 2023. This outlook is linked to inflation and the rising hawkishness of the Federal Reserve. They predict Real GDP growth of 1.7% in 2022 and 0.5% in 2023. They don't believe the US economy is in a recession but they're lowering their Q2 2022 growth forecast from 1.9% to 0.8%.

This reduction follows Q1 2022 GDP growth of -1.6% and weaker May and June economic data. Given recent changes in private inventories and trade flows, Q2 2022 might see negative growth for a second straight quarter. Given the strength of the US job market and domestic demand, they don't believe this would be a recession (especially for services). They don't see any signs of a recession.

Economic growth will slow in 2022, and a small recession is likely. High inflation and monetary tightness cause it. Eastern European conflict and other geopolitical events have boosted energy and food costs. China's COVID-19 lockdowns have affected supply lines. They estimate year-over-year inflation to peak in Q2 2022 after recent improvements on these issues. Inflation will be above 2% until 2023.

High inflation numbers make US monetary policy aggressive. The Fed has signaled that it intends to raise interest rates markedly over the coming months and that the Fed Funds rate will likely end 2022 in “restrictive” territory (above 3 percent) before continuing to rise potentially to 3.75-4.00 percent in 2023. Higher interest rates will slow spending, corporate investment, and the labor market.

OECD Economic Forecast 2022 [September]

The OECD Economic Outlook is the OECD’s twice-yearly analysis of the major global economic trends and prospects for the next two years. Prepared by the OECD Economics Department, the Outlook puts forward a consistent set of projections for output, employment, government spending, prices, and current balances based on a review of each member country and of the induced effect of each of them on international developments. The Interim Report September is an update on the assessment in the June 2022 issue of the OECD Economic Outlook.

The following is an overview of the global economic outlook for 2022 and 2023 against the backdrop of the Ukraine conflict.

  • The global economy has been hit by Russia’s invasion of Ukraine.
  • Global economic growth stalled in the second quarter of 2022, and indicators in many economies now point to an extended period of subdued growth.
  • The war has pushed up energy and food prices substantially, aggravating inflationary pressures at a time when the cost of living was already rising rapidly around the world.
  • Global growth is projected to slow from 3% in 2022 to 2¼ percent in 2023, well below the pace foreseen prior to the war.
  • In 2023, real global incomes could be around USD 2.8 trillion lower than expected a year ago (a shortfall of just over 2% of GDP in PPP terms).
  • Annual GDP growth is projected to slow sharply to ½ percent in the United States in 2023, and ¼ percent in the euro area, with risks of output declines in several European economies during the winter months.
  • Growth in China is projected to drop to 3.2% this year, amidst COVID-19 shutdowns and property market weakness, but policy support could help growth recover in 2023.
  • Inflation has become broad-based in many economies.
  • Tighter monetary policy and easing supply bottlenecks should moderate inflation pressures next year, but elevated energy prices and higher labor costs are likely to slow the pace of decline.
  • Headline inflation is projected to ease from 8.2% in 2022 to 6½ percent in 2023 in the G20 economies, and decline from 6.2% in the G20 advanced economies this year to 4% in 2023.
  • Significant uncertainty surrounds the projections.
  • More severe fuel shortages, especially for gas, could reduce growth in Europe by a further 1¼ percentage points in 2023, with global growth lowered by ½ percentage points, and raise European inflation by over 1½ percentage points.
  • Further interest rate increases are needed in most major economies to anchor inflation expectations and ensure that inflation pressures are reduced durably.
  • Fiscal support is needed to help cushion the impact of high energy costs on households and companies.
  • However, this should be temporary, concentrated on the most vulnerable, preserve incentives to reduce energy consumption, and be withdrawn as energy price pressures wane.
  • Short-term fiscal actions to cushion living standards should take into account the need to avoid further persistent stimulus at a time of high inflation and ensure fiscal sustainability.
  • Governments need to ensure that the goals of energy security and climate change mitigation are aligned.
  • Efforts to ensure near-term energy security and affordability through fiscal support, supply diversification, and lower energy consumption should be accompanied by stronger policy measures to enhance investment in clean technologies and energy efficiency.
  • The fallout from the war remains a threat to global food security, particularly if combined with further extreme weather events resulting from climate change.
  • International cooperation is needed to keep agricultural markets open, address emergency needs and strengthen supply.

Economic Forecast For 2022 & 2023: Recession May Begin Next Year

According to Fannie Mae's Economic and Strategic Research Group, real GDP will rise 0.1 percent in 2022 and fall 0.4 percent in 2023. In July, projections for full-year 2022 and 2023 real GDP growth were reduced owing to weaker consumer spending and a negative revision to corporate inventory investment statistics, amid record inflation and increasing interest rates. The ESR Group predicts that real GDP will grow by 0.1 percent in 2022 and decline by 0.4 percent in 2023, compared to the previously expected 1.2 percent increase and 0.1 percent decrease.

Important Points

  • The ESR Group expects inflation, as measured by the Consumer Price Index, to have moderated to 5.7% on a year-over-year basis, down from the June reading of 9.1%.
  • Due to inflation, Fannie Mae is seeing homes listed for sale increasingly reducing prices, and both construction and home sales are receding.

Due to the forceful monetary policy response required of the Federal Reserve to bring inflation down from its present decade-high levels, the ESR Group now anticipates a recession to begin in the first quarter of 2023, sooner than originally anticipated. The ESR Group predicts inflation, as measured by the Consumer Price Index, to have eased to 5.7 percent year on year by the fourth quarter of 2022, down from 9.1 percent in June, and then to 1.6 percent by the end of 2023, somewhat below the Fed's 2 percent objective.

Negative GDP growth in Q2 would mean two consecutive quarters of decline, which defines a recession. While a convenient rule of thumb, it is not the technical definition per the National Bureau of Economic Research (NBER), the official arbiter of business cycle timing. They do not believe a broad economic recession began in the first half of this year based on a holistic examination of economic data. The Omicron wave of COVID-19 and supply chain interruptions caused Q1 data anomalies not representative of the general economic trend.

Real Gross Domestic Income (GDI) grew 1.8% annualized in Q1 vs GDP's 1.6% drop. Business fixed investment, which decreases during a recession, surged by 10% annualized in Q1, signaling ongoing expansion. Historically, when a recession begins, the unemployment rate rises. In Q1, payroll employment growth was substantial, gaining over 500,000 jobs each month. In Q2, the unemployment rate stayed at a cycle low of 3.6%, and most non-GDP economic activity indicators are not yet pointing to a decline. Q3 GDP growth should be moderate.

Housing Sales Forecast Reduced Due to Weaker Economic Outlook

The ESR Group also revised its forecast for total home-sales growth in 2022 to a decline of 15.6%, compared to its June prediction of 13.5%. However, the group revised upward its home-price appreciation forecast to 16% year-over-year growth in 2022 from the previously projected 10.8%. They continue to expect a significant slowing in home price increase in the future due to the lag effects of rising mortgage rates and a deteriorating economy impacting buyer demand.

Both existing and new home sales came in for the month of May in line with ESR Group's expectations. The former declined 3.4% to 5.41 million units annually and 8.6% year-over-year. New house sales rose 10.7% in May after falling 12.0% in April. New house sales down 3.1% year-over-year. Despite current sales being near projections, they've lowered their 2022 and 2023 sales outlook.

This is motivated by a revised macroeconomic prognosis and an expected early recession. The group now expects 4.57 million yearly existing house sales in 2022, down from 4.83 million. Their prediction for existing sales in 2023 is 4.55 million units, down from 4.67 million. New home sales are expected to fall below 600,000 by the end of the year on a quarterly annualized basis and then remain at similar levels in 2023.

home sales outlook 2023
Source: Fannie Mae

House Price Growth to Decelerate

The group expects house price growth to slow, although it was strong in the second quarter. Fannie Mae's Home Price Index shows house prices grew 19.4% year-over-year in Q2, down from Q1's 20.5%. They've increased their home price growth predictions for 2022 due to this strength, although they expect quarterly price growth to slow from 6% in Q2 to 1.5% by Q4 2022.

Home price changes tend to lag changes in home sales as prices tend to be “sticky”. Sellers are reluctant to lower their asking price, while buyers base their expectations on previous transactions. Price rise is moderating, though. Redfin reports that 7.1% of listings see price drops per week, up from 2% in March. Recently, asking prices have dropped. Realtor.com reports that active listings are up 28% from a year ago as of July 9. While this remains a tight market, the direction is clearly loosening.

house price growth outlook
Source: Fannie Mae

Mortgage Originations Outlook

Several variables changed their mortgage origination forecast. A modestly higher mortgage rate forecast along with a weaker GDP outlook led to a lower volume of expected loans originated, both for purchase money and refinance mortgages. However, the upward revision to their house price forecast increases the expected dollar size per loan originated.

Total mortgage originations are predicted to be $2.53 trillion in 2022, a $71 billion decrease from last month's prediction. Purchase volumes were reduced by $30 billion to $1.78 trillion and by $41 billion to $756 billion. In 2023, overall originations are expected to decline to $2.22 trillion, a $19 billion increase from last month's prediction due to higher buy originations. This is because higher home prices outweigh the down revision to home sales.

Economists' Outlook of a Recession

The NBER defines a recession as a widespread, multi-month drop in economic activity. The committee believes that severe circumstances exhibited by one criterion may somewhat counterbalance weaker indicators from another. For example, in the case of the February 2020 peak in economic activity, they concluded that the drop in activity had been so great and so widely diffused throughout the economy that the downturn should be classified as a recession even if it proved to be quite brief.

In April 2020, two months after the top, the committee decided on the trough.  A recession-free time is an expansion. Most recessions are temporary; growth is usual. However, it may take a while for the economy to reach its earlier high. The NBER timeline does not specify when the economy began a recession or growth.

The start month of a recession, according to the NBER's norm, is the month after the peak, and the last month is the month of the trough. Because the most recent dip occurred in April 2020, the recession ended in April 2020, and the ensuing expansion began in May 2020. Imagine a March high and a September bottom. The recession lasts six months, from April to September. If the peak occurred in June of the next year, the expansion would run for nine months, from October to June.


Sources

  • https://www.conference-board.org/research/us-forecast
  • https://www.igmchicago.org/wp-content/uploads/2022/06/RESULTS-2022-06-06-Survey-05.pdf
  • https://fortune.com/2022/06/13/recession-economists-survey-2023-inflation-interest-rates/
  • https://www.fanniemae.com/research-and-insights/forecast/economic-growth-stagnating-face-high-inflation
  • https://www.noradarealestate.com/blog/housing-market-predictions/
  • https://www.nber.org/business-cycle-dating-procedure-frequently-asked-questions
  • https://www.bea.gov/news/2022/gross-domestic-product-second-estimate-and-corporate-profits-preliminary-first-quarter
  • https://www.oecd-ilibrary.org/economics/oecd-economic-outlook/volume-2022/issue-1_ae8c39ec-en

Filed Under: Economy, Housing Market Tagged With: Economic Forecast, Economic Forecast For Next 5 years, Economic Growth, Economy, Recession

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