Third Quarter 2022 Market Report | Christie's International Real Estate Summit Colorado

Elliot F. Eisenberg, Ph.D.

ECONOMIC OVERVIEW

Nationally

By: Elliot F. Eisenberg, Ph.D.

Despite negative GDP growth in the first half of 2022, the U.S. economy remains relatively solid, even as it has been battered by a series of one-offs and bad news. However, factors that drove growth since the start of the pandemic are unquestionably beginning to slow, with individual incomes generally flat, savings rates declining, and most of the pandemic-triggered stimulus has ended. Early forecasts place 22Q3 GDP at 2% growth as net exports improve. All indications are that 22Q3 and 22Q4 should show growth below trend but positive, and that may be enough to offset the bad first half year so that for all of 2022 we may ultimately have positive GDP growth.

Importantly, the consensus is that by 23Q2 the U.S. will most likely be in a recession as the impacts from rate hikes become increasingly felt throughout the economy. With inflation as public enemy number one, the Fed is likely to continue to raise the fed funds rate through the remaining two meetings this year and probably into next year as well. Currently, the impacts of higher interest rates are mostly seen in the housing market, and increasingly, manufacturing. We have not yet seen similar impacts in the traditionally interest-ratesensitive auto market since the ongoing chip shortage continues to keep the supply of autos well below demand. Over time, increased interest rates will broadly impact other parts of the economy, importantly business investment and commercial construction. This situation is not unique to the U.S., as central banks throughout the world are similarly raising interest rates to reduce the demand that far exceeds the available supply, causing inflation almost everywhere. As we look to 2023, all indications are that this will be a garden-variety recession, not particularly deep and lasting around a year.

Since the beginning of the year, the stock market has been down roughly 20% and teetering in and out of the bear market territory for months. The impact of rate hikes on the stock market is not a bug of current monetary policy but rather a feature, as the intent of rate hikes is to cool the economy down by reducing household spending. If history is a guide, the stock market will probably fall somewhat further, as we are likely to see lower corporate earnings in 2023 and higher interest rates push down price-to-earnings ratios.

While headline inflation numbers appear to have peaked and are likely to come down, core inflation looks to be more persistent and will ease more slowly. Declines in headline inflation are being led by improved supply chains and the resultant reduction in goods inflation, as well as declines in food and energy prices. However, core inflation, which is made up in large measure of services and rents, is coming down much more slowly, and other highly technical measures of inflation are flat or increasing, making it unlikely that inflation will dissipate soon, or at least soon enough to dissuade the Fed from further rate hikes.

Overall, despite rising rates, the economy remains in surprisingly good health, and it is thus highly unlikely that the Fed will quickly pivot to looser monetary policy. The most important variable to watch is inflation since it needs to fall meaningfully and steadily before the Fed becomes less hawkish.

Nationally

MARKET OVERVIEW

The Fed’s interest rate increases are having the intended impact as home price appreciation slows mean ingfully across the country, and in some markets, prices are starting to decline. Year-over-year price appre ciation that was as high as 15-20% as recently as six months ago is now down to single digits. Interestingly, because mortgage rates were so low for so long and so many houses were sold or refinanced since Covid, data show that as of July 31, 2022, 90% of first mortgages have an interest rate below 5%, and more than 66% have a rate below 4%. With rising interest rates, this rate “lock-in” is preventing a big bump in new list ings from materializing, keeping supply low, and thus propping up home prices. This lack of new listings is effectively reducing supply while simultaneously keeping demand down as well, by constricting the normal “move-up” market. On top of that, the shift from the pandemic to endemic nature of Covid and the associ ated return-to-office policies are dramatically slowing the second home market. Combined, this makes this housing market much different than those of the past.

As we look to the pending recession, there is little chance that this will be a replay of the Housing Bust of 2008. Demographics are still very strong, homeowners have a staggering amount of home equity built up, and there is still an underlying shortage of millions of housing units needed to meet demand. Overall, this remains a seller’s market, though one with more opportunities for potential buyers.

“...90% of first mortgages have an interest rate below 5%, and more than 66% have a rate below 4%. With rising interest rates, this rate “lock-in” is preventing a big bump in new listings from materializing, keeping supply low, and thus propping up home prices.”