From surging home prices and inventory shortages to elevated inflation adding to the mix, no one could’ve predicted how the housing market or U.S. economy would rebound from the pandemic.
As those changes continue to impact the real estate and economic markets, experts offered their insight into the future during the Urban Land Institute’s (ULI) 2022 Spring Real Estate Economic Forecast virtual webinar on May 4.
“I think uncertainty is probably the biggest thing that has changed in the last six months,” said Suzanne Mulvee, SVP, research and strategy at GID.
Mulvee moderated the event, which unpacked the results of ULI’s economic report. The biannual report surveyed dozens of real estate economists and analysts to develop a three-year prediction on 27 leading economic and real estate indicators.
Speakers at the session included Mary Ludgin, senior managing director and director of global investment research at Heitman; Lee Menifee, managing director, head of Americas Investment Research at PGIM Real Estate; and Sabrina Unger, managing director, head of research and strategy at American Realty Advisors.
Economists expect the solid economic expansion that started last year to continue over the next three years, albeit slower.
The forecasts showed a consensus that real GDP growth would settle at 3.3% this year before moderating to 2.3% and 2.1% growth in 2023 and 2024, respectively.
The state of employment growth is also poised for continued growth over the next few years after 2021 mounted a significant recovery of 6.74 million jobs from the loss at the height of the pandemic—almost 9.3 million.
Full recovery and growth are expected in 2022 with an additional 4.10 million jobs, while the growth will continue to moderate to 1.87 million and 1.15 million jobs in the following two years.
The unemployment rate is expected to sit at 3.5% this year and next year before inching to 3.6% in 2024.
Despite a robust expansion of the economic environment since the outset of the pandemic, elevated inflation and the uncertainty that it has produced have also presented one of the most significant changes across all markets.
While the consumer price index (CPI) inflation hit a 40-year-high of 8.5% in March, ULI forecasts that 2022 will average 6% before dropping to 3% and 2.5% in 2023 and 2024, respectively.
Menifee suggested that the most “dramatic changes” in inflation are primarily connected to foreign circumstances.
“The war in Ukraine is the obvious one and the pressure that has put particular pressure on energy prices,” he said, adding that disruptions in China with a zero COVID policy have also contributed.
“That leaves some other places in a precarious position, which comes in the backdrop of increased inflation expectations,” Menifee added. “We’re also navigating a very tricky environment where fiscal policy will be much less supportive of growth.”
The effects of inflation were also discussed during ULI’s “Learning in Real Time: Experts Share Their Forecasts for Real Estate in ’21, ’22, ’23,” panel featured in the organization’s spring meeting.
Moderated by Paige Mueller, managing principal of Eigen10 Advisors, the event featured paniests Mulvee, Tom Errath, managing director for Harrison Street Real Estate and Taylor Mammen, CEO of RCLCO Fund Advisors as panelists.
“I think a lot of us felt in the fall that maybe this would start to subside,” Mueller said. “We certainly knew there were lots of things that were tied to supply chains and COVID, and the expectation was that the economy would start to return to normal.
“But inflation has become much broader than that, and we’re seeing that now start to be integrated into wage growth, and the concern is that that becomes a more long-term expectation,” she added.
Mammen wasn’t convinced that higher inflation would stick around over the long term, but he indicated that short- and medium-term inflation was likely.
“The real spikes in inflation that we’ve seen since the middle of 2021 have been largely event-driven,” Mammen said, citing the covid-related outbreaks and geopolitical conflicts.
“We can cross our fingers and hope there aren’t any more events like that, but we all know now that you can’t necessarily predict the future,” Mamman added. “But I do think barring other events, the long-term trends support lower inflation or potentially deflation, but it all depends on what happens in the world to a great degree.”
Where is real estate heading?
As the Fed looks to reel in inflation, Mulvee stated that supply chain and logistics challenges plaguing the construction and real estate markets overall are likely to persist.
According to Unger, the efforts by the Fed to raise interest rates will have two direct influences. The first—and probably most obvious—will be its impact on consumers, while the second would be the effect on the housing market.
“Ultra-low rates have made it very attractive for buying,” she said. “We know the U.S. is chronically under-housed, which has created this intense home price appreciation backdrop stretching affordability.”
Menifee attributed that to several factors, including more than a decade of underbuilding.
“That cumulative impact is where we are now and particularly in a lot of places where we normally think of as very easy to build,” he said.
Over the last decade, single-family housing starts experienced consistent annual growth from 2012 to 2021, but it has stayed under the 20-year average—only 2020 and 2021 saw starts surpass the average.
Housing start increases are expected to continue this year and next year to 1.20 million in 2022 and 1.25 million in 2023. However, economists predict that the housing starts will drop slightly in 2024 to 1.1 million, which is still above the 20-year average.
A significant change in the past year has been the surge in home prices and the rise of mortgage rates out of historic lows. According to Muvee, both metrics have led to a 60% increase in mortgage payments for consumers.
Price appreciation is expected to remain solid but in 2022, with 10.0% price growth. Forecasts indicated that the pace of appreciation will slow in 2023 and 2024 to 5.0% and 4.4%, respectively.
While the mortgage rates weren’t covered in ULI’s forecast, they have been on the rise over the past year, climbing from historic lows in late 2020 to surpassing 5% in recent months.
Mulvee predicted that the runup of both metrics could make the undersupply of housing even more acute.
“I think that people thinking about selling their home and maybe trading up to a new home are less likely to do it because they are locked into a mortgage rate somewhere in the 3% range versus the spot market, which is 5.4%,” Mulvee said. “That takes inventory out of the market, and it makes the scarcity even more robust.”