Earlier in the year most economists and myself predicted a recession by now, but the cards have changed with most now predicting the opposite, a soft landing. What is a soft landing? Is a soft or hard landing better for real estate? Does it really matter which “landing” it is? Is real estate already in a “hard” landing?
What is a soft landing?
There is no official definition of a soft landing. The National Bureau of Economic Research (NBER), often considered by economists as the quasi-official arbiter of dating recessions, does not define hard or soft landings. Many economists consider a mild recession with a small increase in the unemployment rate as soft – what Fed Chair Jay Powell once described as a “softish” landing.
In essence, the federal reserve, under a soft landing scenario, is able to slow the economy without triggering any major bad outcomes like an asset price reset like the 2008 recession, or a huge stock market correction, or a collapse of any major industries.
The soft landing scenario is played out in the recent federal reserve meeting where rates where held steady with projections of one more rate hike and then rates fairly consistent through next year (https://s.wsj.net/public/resources/documents/projectionsl20230920.pdf )
Will the economy actually achieve a soft landing?
Although the market is factoring in an almost certain “soft landing”. The reality is drastically different. Achieving a soft landing is extremely unlikely. Since World War II, economists say, the U.S. has achieved only one durable soft landing, in 1995. “We steered the economy very expertly, but in addition, we were lucky. Nothing bad happened,” said Alan Blinder, an economist who was Fed vice chair from 1994-96. The probability of a soft landing is very small compared to the more likely outcome of some sort of a recession.
In today’s environment a soft landing will also be difficult as the theory of higher rates for longer will ultimately unintentionally break something else in the economy that will trigger a harder landing. Real estate is a prime example that could easily break under the higher interest rates. We are already seeing this play out in commercial real estate.
Real estate already experiencing a hard landing
Regardless of what metric you look at, real estate is already experiencing a hard landing. Closings volumes are down, interest rates are up, and if you ask anyone in real estate, it looks pretty bleak. The one positive is on the residential side prices are holding up in most markets.
According to a recent Well’s Fargo report: “Existing home sales inched down 0.7% in August as resales continue to be constrained by low inventory and rising borrowing costs. The 4.04 million-unit sales pace is the slowest since January and the second slowest pace since October 2010, when the housing market was still in recovery from the housing market crash.
August’s turnout continues the long slide in existing home sales, which have fallen 17 of the past 19 months, and are now down 15.3% over the year. Elevated mortgage rates continue to be a prohibitive force and thus will weigh on demand for the foreseeable future. The outlook for a persistently high financing cost environment was affirmed by the FOMC’s September meeting yesterday in which it communicated a higher for longer interest rate outlook with minimal cuts projected for 2024.”
On the flip side commercial prices are in a free fall in office, with multifamily and large big box retail up next for price resets. We are seeing huge amounts of distressed debt starting to surface in the office sector. Although we haven’t seen a large-scale commercial reset yet, there are rumblings of further stress in other sectors, especially multifamily.
Summary
I’m doubtful that the federal reserve can achieve a soft landing. As rates stay higher for longer, something is bound to break. The breaks I see are in banking, commercial real estate, and ultimately residential real estate. Regardless of the hard or soft landing for the economy, real estate is already deep into a hard landing with volumes historically low, rates remaining high, and price resets beginning in commercial real estate.
Unfortunately the real estate hard landing is only set to intensify as rates could head even higher and then stay high well into 2024. Under this scenario, there is no way that the hard landing in real estate does not spread to other sectors in 2024. Now would be a good time to buckle your seatbelt and get ready for some turbulence ahead.
Additional Reading/Resources:
- https://s.wsj.net/public/resources/documents/projectionsl20230920.pdf
- https://www.wsj.com/economy/central-banking/federal-reserve-powell-interest-rates-ba600bf0
- https://www.reuters.com/markets/us/us-existing-home-sales-drop-prices-up-year-earlier-2023-08-22/
- https://www.wellsfargo.com/cib/insights/economics/
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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, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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