Happy Holidays to you and your family. With 2019 coming to an end quickly it is time for my 2020 real estate market predictions. 2020 is shaping up to be considerably more exciting than 2019 economically speaking! The main economic drivers in 2020 will be consumer confidence, the election, market volatility, and mortgage rates. For the 2020 year, consumer confidence will have the largest economic impact.
Before getting into my 2020 real estate market predictions, it is important to note that two major headaches for the economy have partially resolved: the threat of huge tariffs, and Brexit. Both of these items have come to partial resolution with a phase on trade deal which will further limit huge tariffs and a new election in Britain that will allow Brexit to get done. These two items should help the general economy in 2020.
Although two major global worries have been resolved, there are still four primary factors that could substantially influence the economy in 2020.
- Consumer Confidence: Consumers currently are driving over 65% of all spending in the economy. How the consumer “feels” will drastically alter the direction of 2020. Currently Consumer confidence is at historic levels.
Here is what the conference board had to say on consumer confidence in their November report: “Consumer confidence declined for a fourth consecutive month, driven by a softening in consumers’ assessment of current business and employment conditions,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The decline in the Present Situation Index suggests that economic growth in the final quarter of 2019 will remain weak. However, consumers’ short-term expectations improved modestly, and growth in early 2020 is likely to remain at around 2 percent. Overall, confidence levels are still high and should support solid spending during this holiday season”
The consumer is starting to show some signs of cracking. Retail sales in November came in well below estimates. “While softer-than-expected retail sales in November may be blamed on the timing of the Thanksgiving holiday, in fact, the growth in retail sales has downshifted noticeably in recent months,” economists at NatWest Markets said. Is this the first sign of consumer confidence beginning to wane?
- The Election: Election years are difficult years economically as anxiety about future policies will force many to “wait out” the year until there is better direction. For example depending on who gets elected will impact the strategy on China, on taxes, healthcare, . that will alter any business decisions. I think consumers will also pull back from making any big economic moves due to uncertainty about future policies
- Market Volatility: Volatility is a symptom of lofty expectations, uncertainty on various fronts (from trade to Brexit implementation to regulations), and the length of the economic cycle. Recently volatility has gone through the roof in the stock market. I would expect this to continue into 2020 as the economy figures out when the next cycle will begin. One byproduct of volatility is business confidence. Market Volatility will force many companies to sit on the sidelines with major purchases until volatility calms down a bit
- Mortgage rates: In 2019, 30-year mortgage rates reached a bottom around August with rates at 3.375%, they have begun climbing again to close to 4% recently. The driver of this sharp increase in rates is that the “perception” of economic conditions has brightened. Essentially less people believe that a recession is imminent and therefore longer-term rates (10-year treasury) have increased their yields (rates). This is not being driven by the federal reserve, but the markets perception on the economy. 2020 will be interesting to see if this trend continues, if rates crest 4%, although historically this is an extremely low rate, the sudden rise will crimp real estate as buying power is constrained.
What does this all mean for real estate
- Rates: Mortgage rates are beginning to modestly rise again which will slow down purchase activity. Fortunately, this should be a short-term impact as rates will moderate as the economy slows late 20 or 21.
- 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. Prices have made building affordable housing increasingly difficult. This trend will continue into 2020 as the labor market remains constrained.
- 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 with 2019 ending up basically flat. I expect this trend to continue into 2020 and especially impact the higher end properties.
We all know real estate is market specific, but overall real estate throughout the country will continue to be soft into 2020. 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 election is the million-dollar question. Fortunately, I don’t see a “cliff drop” in 2020 like we saw in 08, if anything 2020 will likely bounce up and down/ muddle along until after the election. Don’t forget the important words of Mark Twain: “history doesn’t repeat itself but rhymes”. It will be interesting to see when the next rhyme starts.
Resources/additional reading:
- https://www.conference-board.org/data/consumerconfidence.cfm
- https://www.marketwatch.com/story/retail-sales-fall-short-of-forecast-in-the-early-stages-of-the-holiday-season-a-poor-omen-2019-12-13
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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 Bloomberg, BusinessWeek, The Colorado Real Estate Journal, 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).