By Lazer Sternhell, Co-Founder & CEO — Cignature Realty
If one word could describe what it has been like in the 2022 real estate market, it might be “whiplash.” In mid-2020, Covid spurred a dramatic — and largely unforeseen — lowering of interest rates to near-zero, which precipitated an unprecedented property boom. Housing prices and rents both soared into 2022 when the Federal Reserve suddenly began raising rates in response to inflation — much of which was caused by rising rents.
Now, the year is ending with mortgage rates double what they were a year ago, the Housing Affordability Index at an all-time low, a liquidity crisis reported at shared workspace giant WeWork, and the equivalent of a bank run on at least one prestigious, non-traded real estate fund — Blackstone’s BREIT.
The question of where the real estate market goes from here is complicated. In a November 30 speech, Federal Reserve Chairman Jerome Powell noted the following:
“Unlike goods inflation, housing services inflation has continued to rise and now stands at 7.1 percent over the past 12 months. Housing inflation tends to lag other prices around inflation turning points…however, overall housing services inflation has continued to rise as existing leases turn over and jump in price to catch up with the higher level of rents for new leases. This is likely to continue well into next year.”
A popular subject of debate is whether the Fed will change course next year and actually begin to lower rates, giving the market a bounce. While it’s impossible to know what will happen in 2023, we can offer four qualified predictions:
1. 2023 will be all about affordability
The last few years have been marked by dramatic market distortions, from zero interest rates to hundreds of billions of dollars in direct government aid flowing to individuals and businesses alike. The end result has been a decline in real wages as inflation soared and more Americans dropped out of the workforce.
JP Morgan Chase CEO Jamie Dimon recently told CNBC that he expects the excess savings resulting from government aid and stimulus to be spent by mid-next year, in large part due to higher prices for nearly everything. Dimon thinks the result will be a recession and a lot of belt-tightening, and his sentiment has been echoed by Amazon.com founder Jeff Bezos, who recently (and, perhaps, ironically) advised Americans to hold off making major purchases.
2. Home prices will probably fall in the double-digits, but higher interest rates will keep renters in multifamily
In 2021, the benchmark CoreLogic Case-Shiller Index of home prices rose 19%. That number is expected to fall to 8% this year, with prices having declined month-to-month since June of 2022.
Normally, one might expect a flood of home buyers as prices fall, but with mortgage rates much higher than a year ago — and possibly headed even higher — it’s more likely that inventory will remain low as investors sit tight and renters stay put. However, a resetting of adjustable mortgage rates could throw the market a curveball, as was infamously the case in 2008.
3. Population growth and investment will skew to warmer states as well as those with no income tax
Forbes Magazine recently analyzed data from the United States Postal Service and United Van Lines, concluding that the top two moving destination states during the pandemic were Texas and Florida. What they have in common, aside from the weather, is a lack of state income taxes. Another tax-less state, Washington, came in at number six.
Given that only eight states in the entire country do not levy personal income taxes, this seems like more than a coincidence. In 2023, expect many families and investors to continue moving south.
4. Hybrid work becomes the norm
This year, few issues have proven more controversial or wrenching than the return to the office. Companies like Amazon, Apple, and Google repeatedly delayed the end of work-from-home, only to end up with a compromise.
While it’s possible that the four-day workweek may make its way across the Atlantic to the United States, it’s more likely that hybrid work is here to stay. This means that companies will need less office space, particularly in cities where they are already confronting issues of crime and higher taxes.
As The Wall Street Journal has reported, this spells a major loss for city governments, but also an opportunity for multifamily investors and developers, as office space may be converted into apartments and condominiums. As such, we can expect to see fewer office workers and more residents in urban areas next year, as well as lots of construction. With people switching addresses and careers at an unprecedented pace, the adage that claims “the only constant is change” will continue to hold true in 2023.