Market News November 15, 2021

11/15/2021 Housing and Economic Update from Matthew Gardner

This is the latest installment in the Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market. 

 


Hello there!  I’m Windermere Real Estate’s Chief Economist, Matthew Gardner, and welcome to the latest episode of Mondays with Matthew.

Before I get started, I wanted to let you know that this will be the final episode of Monday with Matthew for 2021 as I’m going to be taking Christmas off. So it’s time to offer you my forecasts for the U.S. economy and the country’s housing market in 2022.

Although many people – including myself – had hoped that COVID-19 would have become a somewhat distant memory by now, and that the economy would have recovered this was – sadly – not to be the case, and the pandemic’s influence on the economy is still being felt and all the datasets I track tell me that, although we are certainly healing, COVID continues to act as a drag on economic growth and I expect that to continue through the spring of next year – if not a little longer.

Economic Recovery & Growth

And it’s because of this that I – along with many other economists – have spent the last few months lowering our forecasts for economic growth – at least through the middle of 2022. So, let’s look at this a little closer.

 

A slide of two bar graphs. The bar graph on the left is titled "United States Real Gross Domestic Product," showing Q1 2020 through Q4 2022 on the x-axis and negative 40 percent to 40 percent on the y-axis. The low GDP was in Q2 2020 around negative 30 percent and the high was Q3 2020 at over 30 percent. The second graph is title "U.S. Rea; Gross Domestic Product History & Forecast," showing the years 2015 through 2022 on the x-axis and negative 4 percent through 6 percent on the y-axis. The lowest annual percentage change was negative 3.4 percent in 2020 and the highest was 4.9 percent in 2021.

 

Here is my forecast for economic growth through the end of next year and you will note that, even though I am cautious in regard to the economy as we move through the winter and into 2022, I am still expecting to see a fairly decent bounce back in the fourth quarter of this year following the very disappointing rate that we saw in Q-3.

And on an annualized basis, I believe that the economy will have expanded by just shy of 5% this year and come in a little below 4% in 2022.

Simply put, the impacts of COVID-19 are going to continue to act as a drag on virus sensitive consumer services next year and ongoing supply chain issues will also delay inventory restocking. Both of these impacts have a depressing effect, in more ways than one, on economic growth, but I don’t see any chance that we will fall back into a recession.

 

A bar graph titled "Non-Farm Payrolls: Average Monthly Change & Forecast," with Q4 2019 through Q4 2022 on the x-axis and figures in the thousands from negative 5,000 to 2,000 on the y-axis. The low was negative 4,333 on Q2 2020 and the high was 1,342 in Q3 2020.

 

Looking at the employment picture this chart shows my forecast for average monthly growth in jobs during a quarter and to give you some context, over the last decade or so the country has added an average of around 200,000 jobs per month during any one quarter and my forecast is for more robust employment growth as we move through 2022 and, if correct, I expect to see the country return to pre-COVID employment levels in the second half of the year.

 

A bar graph titled "U.S. Unemployment Rate & Forecast," showing January 2020 to Q4 2022 on the x-axis and percentage figures on the y-axis, from 2% to 16%. The high was close to 15 percent in April 2020 and the low was just over 3 percent in January and February 2020.

 

And with jobs continuing to return I’m looking for the unemployment rate to continue trending lower and breaking south of 4% during the final quarter of the year. With the expiration of enhanced unemployment benefits – in concert with wages rising significantly in many face-to-face industries such as leisure and hospitality – prospects for people currently unemployed are looking rather good. That said, there are still millions of unemployed Americans who are not looking for work even with wages rising, the labor force still down by 3 million from its pre-pandemic peak, and this is worrying as businesses continue to have a hard time finding employees which raises the expectation that inflation will remain higher for longer than I would have liked to see.

Measures of Inflation

And that leads nicely into my final economic forecast and that is my outlook for inflation. As we have discussed, supply chain issues and labor shortages have increased prices significantly and this top chart shows annual changes in all consumer prices which I expect to remain around 5% until next spring, before gradually dropping down to below 3% by the end of the year.

 

A slide titled "Measures of Inflation" with two line graphs. One is titled "Consumer Prices" and shows the percentage changes on the y-axis and the quarters from Q4 2018 to Q4 2022 on the x-axis. It shows an expected drop from Q4 2021 to Q4 2022. The "Core Consumer Prices" graphs showing the same measurements on each axis. It shows an expected increase in core consumer prices in Q1 2022 followed by an expected drop toward Q4 2022.

 

But the core inflation rate – which excludes the volatile food and energy sectors – won’t peak until early next year before it too starts to gradually pull back and, at these levels, the Federal Reserve will undoubtedly have started to raise interest rates to counteract inflationary pressures. This is not pretty, but I absolutely do not believe that we are in some sort of inflationary spiral, or that “stagflation” will raise its ugly head again.

 

A slide titled "Solid Growth This Year & Next" with a bar graph titled "U.S. Existing Home Sales w/ Forecast." It shows the existing home sales in millions every year from 2021 to 2022. 2021 and 2022 have the highest figures on the graph, at 6.02 and 5.98 million respectively.

 

U.S. Housing Market

Okay! Now it’s time to turn our attention to the U.S. housing market which was a beacon of hope during the pandemic period and, given the massive spike in demand that started last June, I’m looking for a little more than 6 million existing homes will have changed hands in 2021, but I don’t see this level increasing in 2022 – mainly due to ongoing supply limitations as well as rising affordability issues, and I’m therefore forecasting sales to pull back  – albeit very modestly – next year. That said, the country has never seen more than 6 million home selling in a single year since records were first kept so the number is still very impressive.

 

A slide titled " Sales Prices Slow in 2022," with a bar graph titled "U.S. Median Sale Price of Existing Homes & Forecast," which shows the annual percentage change of single-family and multifamily units for the years 2012 through 2022. The highest figure is 16.4 percent in 2021, whereas the lowest in both in 2018 and 2019 at 4.9 percent.

 

And with the market as tight as it has been so far this year, it shouldn’t be any surprise to see median sale prices skyrocketing and, even though we have 3 more months of sales data yet to be released, I still anticipate prices will have risen by almost 16 and a half % in 2021- a quite remarkable number. This pace of appreciation has never been seen before. In fact, the closest was back in 2005 – when the housing bubble was inflating rapidly – but even then, prices only rose by 12.2%.

But, as I mentioned in my sales forecast, this pace of growth is unsustainable and I am expecting to see some of the heat to come off the market next year but, a growth rate of 7.3% is certainly nothing to sniff at.

There are three major reasons why we will see the pace of growth slow. I have already mentioned my concerns regarding housing affordability, but mortgage rates and new supply will both influence the slowdown in sales and price growth in the resale arena.

 

A slide titled "Mortgage Rates Will Remain Favorable" with a bar graph titled "Average 30-Year Mortgage Rate History & Forecast." It shows a predicted increase mortgage rates from Q4 2021 at 3.13 percent to 3.78 percent in Q4 2022.

 

Although I do not prepare a forecast for housing affordability, this is my where I expect to see mortgage rates through the end of next year and I am looking for them to continue “stair-stepping” higher but still ending 2022 below 4% – very low by historic standards given that the long-term average for a conventional 30-year mortgage is somewhere around 7 1/2%.

Obviously, as rates notch higher that starts to compress price growth as it puts a lower ceiling on how much a buyer can afford to pay for a home.

 

A slide titled "New Home Starts Pick Up," with a bar graph titled "Single-Family Housing Starts w/ Forecast." The graph shows the housing starts in the thousands for the years 2012 through 2022. There is a gradual increase, from 535,000 in 2012 to an expected figure of over 1.2 million in 2022.

 

And slowing growth in existing home prices and sales will also be a function of additional supply and this chart shows my forecast for single-family starts this year and next. I expect more than a million homes to start construction in 2022 – continuing the trend that started in mid-2020 – but I am sure that some of you may be asking yourselves that if starts are already robust, how have existing home sales been able to increase so significantly if there has been solid supply coming from homebuilders – and that would be a great question.

And I would answer this by telling you that the way the Census gathers data on start is to count the number of home foundations that have been poured, but vertical construction has not necessarily started. And what we have been seeing is a lot of foundations but not so many homes actually being built – and we know this by looking at the number of homes that are for sale but have yet to be started. So, it’s important to look at a separate number that the Census Bureau also puts out which counts the number of units actually under construction, and that number has been growing significantly over the course of the last 18 months or so.

 

A slide titled "Growth Picks Up in 2022," with a bar graph titled "U.S. Single Family New Home Sales with Forecast." The graph shows the new home sales in thousands for the years 2012 through 2022. Sales were at a low of 368,000 in 2012, jumped to 835,000 in 2020, and are predicted to peak at 927,000 in 2022.

 

Builders have been hamstrung with rising labor and material costs which will lead new home sales this year to fall below the number seen in 2020; however, I do expect this to pick up significantly next year and my current forecast calls for 927,000 new homes to be sold in 2022.

So, there you have it, my economic and housing market forecast for 2022.

Of course, there are still a number of variables that could lead me to revise this forecast but, as an old economics professor of mine used to tell me, “Gardner, forecast well, but forecast often!”

If everything goes according to my plan, you should expect to see the housing market start to move towards some sort of balance next year, but I am afraid that it will still remain out of equilibrium until at least 2023.

And if you’re wondering, no, I don’t see a housing bubble forming and I’m also not at all concerned about homeowners currently in forbearance, but it would be silly to say that there aren’t any issues in the housing market that concern me because there are and the biggest of which is housing affordability and this will have a significant impact on the millennial generation who are continuing to get older, and they are all – well most – thinking about settling down and, possibly, having children, and I wonder how hard it will be for many of them to be able to afford to buy their first home because most really do want to become homeowners. Will builders figure out how to build to this massive pent-up demand? I guarantee you that whoever can solve this puzzle will do very, very well.

COVID-19 caused an unparalleled shock to the US economy and the rise of the delta variant has certainly impacted the speed of our recovery but, rest assured, this particular forecaster firmly believes that we will recover and that the economy will continue to grow.

Demand for ownership housing remains remarkably buoyant and, in fact, it is quite likely that demand may actually increase with the work from home paradigm that will start to gain momentum next year. It will be fascinating to watch how this impacts not just demand, but where these buyers will ultimately choose to live.

In closing, I very much hope that you have all enjoyed the videos that I have shared this year as much as I have enjoyed making them.

As always if you have any questions or comments about this topic, please do reach out to me but, in the meantime, stay safe out there and I look forward the visiting with you all again next year.

Bye now.