With 2019 coming quickly it is time for my annual real estate predictions. 2019 is shaping up to be considerably more exciting than 2018! The main economic drivers in 2019 will be the pace of rate increases from the federal reserve, market volatility, the ongoing trade war, and market sentiment. Each of these factors could have large impacts on residential and commercial real estate in 2019. For real estate in the upcoming year, the pace of rate increases by the federal reserve and market volatility will have the largest impacts.
First let’s discuss each of the four drivers of the economy to watch in the upcoming year:
- Pace of Rate increases: The federal reserve has targeted three more rate increases for 2019 based on economic conditions. The million-dollar quest ion is will this recent volatility force the federal reserve to take a breather and pause the rate increases? CNBC recently completed a poll where 46% of economists thought the federal reserve would stop at two hikes while 41% expect three hikes (the remainder expected 1 or 4 hikes). Personally, I think as of today, the federal reserve will pull back to two hikes next year but allot will depend on how the markets perform and if there is another large correction like we recently experienced.
- Trade War: The trade war with China and other countries looks to continue in 2019. Currently trade fears is what led to the recent tech selloff. I don’t think we have experienced the full impact of trade issues yet. Trade conflicts should start to flow through the entire supply chain in 2019 if there is not resolution. I don’t think that the deeper issues that caused the trade issues will be resolved in 2019. This should lead to a “repricing” of many companies/industries due to higher cost structures and ultimately prices for consumers. There is considerable uncertainty whether consumers can absorb the full impact of the price increases. If consumers pull back due to prices there could be a shock to the economy.
- Market Volatility: Volatility is a symptom of lofty expectations, faster rate increases, and the trade war. Recently volatility has gone through the roof in the stock market. I would expect this to continue into 2019 as the economy figures out what will happen on rates and trade. One byproduct of volatility is consumer and business confidence. I would suspect both would take a hit in 2019 as the volatility continues.
- Market Sentiment: As 2018 comes to a close, the market “tone” has changed. Earlier in the year there was speculation on “if” there would be a recession. This has changed drastically to most major economists predicting “when” there will be a recession. This change in tone makes market participants weary to make large moves as the threat of a recession looms.
What does this all mean for real estate
- Rates: With the federal reserve’s current plan for hiking rates, I would suspect residential and commercial rates to increase through 2019 by 1/2% to 3/4% so a 30 year mortgage could be close to 6% sometime in 2019. This will further price many buyers out of the market as costs increase substantially for mortgages. Fortunately, this should be a short term impact as rates will moderate as the economy slows late 19 or 20.
- Prices: For new construction properties, build costs continue to increase substantially due to increased material costs (for example lumber is up 40% due to trade war with Canada) and increased labor costs due to the shortage of available skilled workers. These factors (along with rates) has put the building industry into a tailspin.
- Consumer confidence: This is the most important factor to watch. Currently confidence is holding up for now but is beginning to show signs of cracking. There has been a noticeable pull back in home purchase activity already in many markets. This pull back will be more widespread in 2019.
We all know real estate is market specific, but overall real estate throughout the country will soften considerably in 2019. Although rates will bite into buying power, the wild card of how “soft” the market will become is driven by consumer confidence which could be thrown off course by increased market volatility. To what extent consumers and businesses react to increased volatility and the trade war is the million-dollar question. 2019 will be the year consumers and businesses begin to pull back. How much will dictate how “soft” real estate becomes in 2019.
All these factors will contribute to a challenging year economically. Although most economists predict the next cycle to begin sometime in 2020, there is a chance the next cycle could begin towards the end of 2019 depending on the wildcards such as rates, trade, and volatility. Don’t forget the important words of Mark Twain: “history doesn’t repeat itself but rhymes”. Will 2019 begin the next rhyme? What do you think will occur next year in real estate? (Please post your comments below)
Resources/additional reading:
- https://www.cnbc.com/2018/11/20/jeremy-siegel-the-fed-could-substantially-ease-rate-hikes-in-2019.html
- https://www.forbes.com/sites/forbesrealestatecouncil/2018/09/12/worried-about-the-impact-of-trade-wars-keep-an-eye-on-the-three-rs/#13afd25d343e
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).