What does 2023 hold for the real estate industry? Big banks Predict Fed Pivot, Recession

by admin | January 24, 2023 | Real Estate

According to a recent survey, most economists at major US financial institutions expect a recession to hit in 2023. The Wall Street Journal surveyed 23 firms that deal directly with the Federal Reserve, and most of them anticipate that the US will enter a recession in 2023, with only two expecting a recession in 2024.

While many analysts surveyed are becoming more pessimistic about the economy, Credit Suisse, Goldman Sachs Group Inc., JPMorgan Chase & Co., UBS Asset Management, and HSBC believe the economy will defy the unfortunate trend as the price rise slows.

This article looks into the big banks’ predictions about a looming 2023 recession, a Fed pivot on the interest rate hikes, and how these could impact the real estate industry.

What the Big Banks Anticipate

These companies, also known as main dealers, have raised the alarm about several issues, including Americans’ expenditure of their pandemic savings, bond maturities, and the downturn in the property market, directly leading to banks being more stringent with their lending requirements.

The economists mostly agree that the Fed is mostly to blame, as it has been gradually increasing interest rates over the past few months in an effort to slow the economy and control inflation. Although inflation has slowed recently, it is still significantly greater than the Fed’s target.

Seven rate hikes by the Fed in 2022 brought the benchmark rate to a 15-year high of 4.25% – 4.50%, up from 0% to 0.25% the year before. In December, Fed officials clarified they were committed to a gradual rate hike that would bring the target range for interest rates in 2023 to between 5% and 5.5%.

Yields on US government bonds with maturities of three months to two years are greater than those of 10, 20, and 30 years. This phenomenon, known as an inverted yield curve, has preceded every recession since World War II.

In October 2022, the Fed’s estimate reports showed that Americans still have around $1.2 trillion in excessive savings, down significantly from a high of more than $2.3 trillion in 2021. Additionally, the personal savings rate fell to 2.4% in November from a high of 4.7% in January 2022 and 7.3% in 2021.

Most economists also expect higher rates to raise the unemployment rate from November’s 3.7% to above 5%. While this is still historically low, continued rate increases would result in the loss of millions of jobs. The economists cited the number of people filing for unemployment has remained relatively low.
They have also predicted that the slowing effects of higher interest rates will become more noticeable in 2023, even though the economy has held up reasonably well during the rate hikes of 2022. That said, this current US interest rate is the highest it has ever been since 2008.

If the economy contracts, most economists believe it will be a mild recession. By late 2023, they anticipate a recovery in the economy and the stock markets, partly due to the Fed’s shift toward a monetary policy of rate decreases. Many economists expect high returns from bonds and modest gains from stocks in 2023.

How the Looming Recession Could Impact the Real Estate Industry

Although it may seem counterintuitive, the property market may thrive during economic downturns. Here is how the impending recession might affect the market:

Rising Mortgage Costs

Following a year of increases, mortgage rates continued their upward trend in the final week of 2022, ending the housing bubble that the 2021 pandemic had spurred. According to Freddie Mac, the average rate for a 30-year fixed mortgage has increased to 6.48% as of January 5, 2022, compared to 3.22% from the same time in 2021.

Increasing mortgage rates would make it harder for some would-be buyers to get mortgage financing. However, the Federal Reserve is likely to decrease rates to stimulate the economy in the event of a recession, so consumers can expect any challenges brought on by the increase in rates to be transitory.

Decline in Existing Home Sales and Less Affordability

According to the National Association of Realtors (NAR), existing home sales plummeted 7.7% in November 2022 compared to the previous month and dropped 35.4% from November 2021. NAR also reports that this current fall had been ongoing for 10 months, the longest streak since 1999.

The trend may continue with the forecasted economic slowdown coupled with affordability concerns. Moreover, the fact that many mortgage holders still have rates below market rates will contribute to a decrease in home sales in 2023.

Experts also anticipate that refinancing mortgages will continue to be infeasible for most current mortgage holders, restraining mortgage origination activity.

Historical increases in interest rates have led to less affordability. Although home prices slowed and fell in some areas, they are still significantly higher than before the pandemic, making it difficult for many families to afford homes.

The low supply of homes in the market to fulfill buyer demand is one of the main reasons home prices are currently high. Although most economists agree home prices will drop, there’s no consensus on whether home prices will continue to slow down or plummet in 2023.

The recent decline in mortgage rates notwithstanding, a section of the experts believe home values may plummet if buyer demand decreases in 2023 due to the recession and rising interest rates.

Some economists expect home prices to fall considerably further in 2023 due to rising mortgage rates. Most firms predict that the prices could fall by as much as 20%.

However, some analysts say a sharp drop is unlikely, so investors can keep their hopes up. That’s because home prices rose sharply during the pandemic housing boom, and a 20% decline would return the industry to February 2021 levels. They don’t expect the slowdown to throw many borrowers into negative equity.

Final Word

Most of the major financial institutions predict a recession will likely occur in 2023. Recessions are a normal part of the economic cycle and may impact the housing market, possibly slowing home sales. However, investors should treat these predictions cautiously as the economy continually shifts.

Investing in real estate is no longer a secret kept for the nation’s ultra-wealthy! People like you are participating in the action and taking advantage of the numerous benefits of real estate investment. 

While the commercial real estate sector is going through a transition, we’re keeping our eyes on what’s important: solid fundamentals. When you’re allocating your hard-earned funds, think long-term and keep it all in perspective.

When you are ready to reap the rewards of real estate investing let’s talk.

By Gurpreet Singh Padda, MD, MBA

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