Residential Magazine

Forces of Nature

These underlying currents could shape the housing market in the months to come

By Melody Wright

At the end of 2022, there was no shortage of forecasts about how the U.S. housing market would fare this year. These prognostications featured wide-ranging disparities and little consensus, most notably regarding home prices.

Predictions tend to obscure underlying dynamics and how these dynamics may be impacted by market conditions and external events, investor and market analyst Michael A. Gayed argues. In other words, it’s much more effective to understand the various possible paths so that probability can be adjusted based on changing conditions.

“Small mom-and-pop investors reeling from the so-called ‘Airbnbust’ could race to list properties in oversaturated markets such as Dallas, Austin and Nashville.”

If mortgage originators have learned anything over the past several years, it’s that conditions can change quickly. Most likely, no one will get it 100% right with their predictions for this year. But a focus on current macroeconomic conditions, along with potential headwinds and tailwinds, enables effective charting of the potential paths ahead.

Banking stability

Market watchers spent a lot of time last year obsessing over the Federal Reserve’s actions and a potential pivot, but does this really drill down enough to understand what is actually impacting interest rates? Even as the Fed raised the federal funds rate again in December, mortgage rates began to soften.

What gives? The Fed’s role is expectation management and reaction rather than actual policy decisions, according to Jeff Snider, a global monetary system expert. In other words, the Fed is often looking in the rearview mirror while the bond markets determine the true course of mortgage rates based on liquidity and where the economy is in the business cycle.

Your time would be better spent understanding where the economy is at in the business cycle and what could impact it. Simply put, is this a period of expansion (growth) or of contraction (recession)? Easier said than done, you might say, with the currently conflicting signals. True, but inflection points will materialize if you are paying attention.

To understand the U.S. bond market, which is often the safe haven for the rest of the world, paying attention to the economic health of other countries is critical. Fears of global recession and policy mistakes could actually drive down the 10-year Treasury yield much lower and faster than currently anticipated, while a recent change in Japan’s yield-curve policy could have the opposite effect.

Slowing economy

Then there is deflation. Yes, deflation, not inflation. Notwithstanding an exogenous shock, deflation is coming, based on global manufacturing and shipping reports.

For example, U.S. manufacturing contracted this past December at the fastest pace since May 2020. Remember what was happening at that time? Most of the world was paralyzed with either lockdowns or infections at the start of the COVID-19 pandemic.

Despite China reopening its border after easing pandemic-era restrictions, energy is trading much lower than in the aftermath of the initial shockwaves of the Russia-Ukraine conflict. This is likely a result of plummeting demand as inventories in the U.S. and Europe are currently stable.

As of this past November, U.S. wage growth (based on average hourly earnings) remained relatively modest at 5.1% year over year. Based on recent layoffs and business closures, pay increases will likely cool even further unless a major labor negotiation or disruption occurs.

Potential recession

Consumer spending makes up approximately 70% of U.S. gross domestic product. By many accounts, consumers are spent. In January, Macy’s warned that lulls during nonpeak holiday weeks were deeper than anticipated.

At the same time, TransUnion reported that credit card debt reached a record-setting $866 billion in third-quarter 2022, a 19% year-over-year increase. And not only did credit card debt increase significantly, it got even more expensive to service. This trend will only continue if the Fed maintains its current path of “higher for longer.”

If higher-paying jobs do not materialize to service this increased debt, then a recession could be deep as consumers break under exploding interest expenses. Consequently, the unemployment rate will be critical when watching for signs of recession — and it can be tricky. For instance, the December nonfarm payroll report showed that most job additions involved part-time rather than full-time workers.

So, be on the lookout for ways in which consumers could be encouraged to spend in 2023 to understand how deep a recession is likely to be. Wage growth that outpaces inflation, an increase in full-time employment, government stimulus efforts, or palatable prices for travel and leisure activities are some of the potential drivers that could entice consumer spending in 2023, thereby curtailing a deep recession in the U.S.

Increasing inventory

Yes, this could be the year when you see start to see housing inventory reach the market at a record pace. This could happen in regions that went construction crazy for both single-family and multifamily homes. Demand increased as investors large and small jumped on the passive rental-income bandwagon and gobbled up homes.

Depending on the persistence and severity of macroeconomic factors, distressed institutional investors faced with margin calls may start selling some of these homes as rents decrease and borrowing costs increase. Small mom-and-pop investors reeling from the so-called “Airbnbust” could race to list properties in oversaturated markets such as Dallas, Austin and Nashville.

If this happens, homes for sale could pop up in markets that have been starved for inventory. An explosion in inventory could make for some disorderly price decreases, creating contagion across the country. Based on census estimates from 2020, there are approximately 16 million nonprimary homes, many of which are second homes. As baby boomers retire at a pace of 10,000 per day, they will be looking to protect their retirement. They may finally cash in that second home and place their money on safer bets due to the well-forecasted rocky conditions ahead.

Finally, to understand the path housing could take in 2023 and beyond, it is imperative to understand the nation’s aging demographics. Did you know that after the year 2000, population growth has slowed significantly in the U.S., with the growth rate from 2020 to 2021 representing the lowest numeric increase since 1900? Population growth is declining more sharply since the Great Recession due to tightened immigration policies and lower birth rates.

With an average household size of 2.6 people, no changes to immigration policies and only 3.6 million babies being born each year, there may be a time coming soon when U.S. housing stock is overbuilt. And if there are too many homes in a declining or aging demographic situation, values could decline.

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To win in 2023, market participants will need to be able to access as much in-depth research as possible in order to pivot faster. Potential exists for rapid changes. Global financial stress, labor turmoil, deflation, and declines in home prices and rents are likely to drive the path housing takes.

If inflation continues to moderate at an accelerated rate, and investors pile into safe assets due to liquidity issues and recessionary risks, this year has the remote potential to be a much busier year than many anticipate. Investors may exit the mortgage market while stable earners reemerge amid home price and interest rate declines. In other words, don’t let the macroeconomic factors surprise you in 2023 as they did to so many in 2022. ●


  • Melody Wright

    Melody Wright is senior vice president of product strategy and business development at Inflooens, a mortgage technology company. A 24-year industry veteran, Wright worked in the first part of her career on operational effectiveness at multiple large nonbank servicers. Wright currently focuses on mortgage fintech and macroeconomics, working hand in hand with clients to design and implement integrative solutions in mortgage origination and servicing that will be successful amid the ever-evolving economic landscape. 

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