Local Market Monitor, a National REIA preferred vendor, recently released their monthly National Economic Outlook where they share their thoughts on developments taking place in the U.S. economy.
National Economic Outlook
By Ingo WinzerDecember, 2021
While the economy continues to recover, the more important news for real estate markets is the large and wide-spread rise in home prices. Over the past year, the average home price increased 16 percent; in many markets 30 percent. This surge is unprecedented and will end badly, as bubbles always do.
However this surge in prices got started – and I admit it caught me by surprise – once a bubble gets going it takes on a life of it’s own. This time, fortunately, it’s not being driven by sub-prime mortgages so the fall-out will be less severe than the last time, but homeowners, lenders and investors now find themselves in a risky situation because in most markets home prices will again come down – or at best will stagnate for years.
Homeowners, especially those who refinance a mortgage to take out cash, will find themselves with more debt than equity in their home. Lenders will see higher default rates on their mortgages and home-equity loans. And investors will find that the money they put into a rental property doesn’t produce adequate returns.
It’s easy for me to foresee these things, not so easy for anyone to prevent them happening. Lenders are in the business of lending, investors make no money if they don’t invest, and homeowners want a house now, not at some vague time in the future.
The best advice is for lenders to resell those new loans as soon as possible, for investors to concentrate on apartments, and for homeowners to not spend all the cash from their refi.
The home price bubble could easily continue for another year and the money it generates from new construction, financial activities, and consumers spending their home equity will further fuel the economic recovery, which is already doing quite well. Compared to pre-pandemic levels, jobs in November were down just 0.6 percent.
Jobs were up 4.5 percent in construction, 3 percent in retail, 1 percent in finance and – most importantly – 2.7 percent in business services. The rest of the economy seems frozen, with jobs down 1.3 percent in manufacturing, down 2.2 percent in healthcare, down 4.3 percent at restaurants, and down 3.8 percent in government.
With these parts of the economy still un-recovered, the pandemic continuing (and even possibly re-surging), and a home price bubble hanging over our heads, 2022 will be a challenging time for real estate markets.
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