Projected Real Estate Trends for September 2022
According to Realtor.com, September is the best time to buy a home in the U.S., specifically the week of September 25th to October 1st. It’s the beginning of the “off season” for real estate. More than six percent of homes for sale will have reduced prices for a savings of approximately $20,000 on the median home price of $450,000. Homes will be available 15 days longer than during the summer and demand for homes historically sinks 8.5% lower than the average week, allowing buyers time to make more informed comparisons and choices. Better prices, more inventory and less competition – what could be better? What could stand more improvement are the market conditions that impact housing demand, prices and availability.
There are numerous market conditions that cause housing in the U.S. and across the world to constantly change. Economicshelp.org and Investopedia.com suggest these factors are:
Economic growth. Demand for housing is directly related to the rise and fall in household incomes. When the economy is healthy, incomes rise and consumers are able to spend a greater part of their income on homes. When incomes fall, they’re less able to hold onto their homes and can’t afford to buy homes.
Unemployment. When unemployment rises, fewer people are able to afford a house. Fear of unemployment can be just as paralyzing. The exit or the entrance of a major employer within a community can be enough to steer local housing into a buyer’s market (few buyers, offers below asking price, falling prices, incentives extended to buyers) or a seller’s market (high home prices, multiple offers, bids over asking price, few to no seller concessions.)
Consumer confidence. Consumers must feel confident in their own finances and future prospects. If they believe housing is too expensive or risky, they’ll defer buying until they feel more stable.
Supply. A shortage of housing will cause prices to rise. An excess of housing will cause prices to fall. Housing can be impacted by other factors such as the price and availability of building materials, local zoning laws that encourage or limit growth, and the availability of skilled labor.
Mortgage availability. Lenders also must feel confident in order to loan money for mortgages. Before the Great Recession that began in 2007, lenders were flush with money to lend. Afterward, they tightened borrowing standards to the point that many homebuyers were unable to qualify for a mortgage. Among the steps banks take to control lending are raising credit score and down payment requirements, raising mortgage interest rates so only the most qualified homebuyers make the cut, and eliminating the availability of riskier loan products.
Interest rates. Low and high interest rates affect the monthly costs of housing with smaller or larger mortgage payments. As interest rates rise, a greater number of homebuyers are priced out of being able to afford a home when interest rates rise. When the market is sluggish with fewer homebuyers, interest rates can be lowered to make homebuying more affordable and attractive.
Demographics. These are data that describe the characteristics of a given population, including age, race, incomes, household compositions, marriage and divorce, education levels, migration patterns, births, deaths, immigration, and population growth, to name only a few areas. When baby boomers were born between 1945 and 1964, they became the largest demographic to date and created a housing boom in the 1960s, ‘70s, and ‘80s. As they began retiring around 2010, they became “empty nesters,” creating demand for smaller homes and over-55 community developments.
Government Policies/Subsidies. When housing sales nosedived during the Great Recession, the federal government attempted to stimulate homebuying with tax credits, tax deductions and subsidies. A first-time homebuyer’s tax credit was introduced in which was utilized by 2.3 million people who purchased homes between 2008 and 2010. Ironically, the federal government played a significant role in the housing crash of 2008 by loosening government-backed requirements and oversight for mortgage loans with the altruistic goal of helping low-income consumers to become homeowners.
The Law of Unintended Consequences
Commercial real estate was clobbered by the of the global pandemic that began in earnest in March 2020. During quarantining, people who worked in offices, restaurants, schools, etc. had to find alternative ways to stay in business. Office workers began working from home, restaurants pivoted to take-out only, and schools conducted classes online. To avoid crowds, many homebuyers moved to the suburbs to find larger homes where they could hunker down comfortably with family. Interest rates dropped to all-time lows and a housing boom ensued, driving prices to record levels. There weren’t enough homes to buy, because builders were still recovering from the Great Recession. Getting loans was difficult, and they were hampered by supply chain interruptions and lack of skilled labor once demand for new homes returned. Industry estimates say the U.S. is still short about five million homes.
So what can we expect in real estate trends here and across the globe? Global residential real estate markets are expected to grow more than nine percent between 2022 and 2027. The residential real estate market in emerging nations such as India, China, Brazil, Argentina, and South Africa is mostly being driven by urbanization. India, China and Nigeria are expected to account for 35% of the growth in the global urban population. Today, approximately 55% of the world’s population lives in cities. By 2050, more than 7 out of 10 people will live in urban environments.
Because of limited space and resources, these urban migrants are creating more density and are more likely to live in apartments, as in Sydney, Australia where 30% of homes are described as apartments.
In the U.S., steady job growth, a stock market at all-time highs, rising rents and expectations of higher mortgage rates helped create a frenzied housing market. But with interest rates doubling year-over-year and the stock market wobbling, homebuyers feel less secure. Goldman Sachs predicts a 22% drop in new home sales, a 17% drop in existing home sales and an 8.9% drop in housing GDP by the end of 2022. In 2023, Goldman Sachs forecasts even deeper declines to home sales, predicting another 8% drop. For existing home sales, researchers predict they’ll drop another 14%, and housing GDP will drop another 9.2%.
Those predictions could stimulate another round of foreign investment in U.S. residential real estate. The Federal Reserve says that Chinese investment in U.S. housing, widely considered to be a safe harbor, is estimated to be between $170 billion and $344 billion. Meanwhile some countries are imposing restrictions on foreign residential investors, including Canada, New Zealand, Australia, and Hong Kong.
The global residential market will be influenced by the global real estate market which includes investment and commercial properties. Asia Pacific was the largest region in the real estate market in 2021, while North America was the second largest region. The Asia Pacific region is home to some of the world’s most populous and rapidly growing cities. These cities include Beijing and Shanghai in China, Mumbai and Delhi in India, Tokyo and Seoul in Japan, and Sydney and Melbourne in Australia. Combined, these cities have a population of more than 1 billion people.
According to Goldman Sachs research, real estate is slowing down globally, due to a spike in mortgage rates in the U.K. Canada, New Zealand and the U.S. Borrowing rates are likely to rise further. Residential growth across developed countries is declining – down by half in the U.K. A 10 percentage-point slowdown in house sales growth tends to be followed by a two percentage point slowdown in house price growth in or around six months, researchers estimate. Prices are still rising in Germany and the U.K. but they’re declining across Australia, Canada, Sweden and New Zealand, down almost 8% from their peak during the pandemic.
Yet, the supply of housing is tight in many countries, including the U.S., Canada, the U.K. and New Zealand. While a tight housing market may be enough to avoid a slump, say researchers, the rapid decline in affordability and slowing home sales suggest that a housing downturn could be a real risk.
