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As 2022 draws to a close, real estate report predicts recession, housing shortfall in 2023

Housing affordability and the ongoing housing shortage have been a subject of intense scrutiny over the last few years – especially in major metro centers. Driving these conversations, there has been an unprecedented increase in rental and real estate costs across the United States. As 2022 draws to a close, the latest market report from New York-based commercial real estate firm Newmark does not paint an optimistic picture for cities in the coming year.

“Housing remains undersupplied, with a shortfall of 400,000 units in 2021 when single-family and multifamily completions are compared to new household starts,” said the report, “United States Multifamily Capital Markets Report.” The lack of housing stock, in turn, “resulted in an annual average effective rent growth of 13.5 percent.”

Meanwhile, rate hikes instituted by the Federal Reserve to combat rising inflation pushed the 30-year fixed-rate mortgage average to a 40-year high of 6.7 percent. This represents a 122.6 percent increase over last year’s rate, and further contributes “to the increased cost of single-family homes,” the report says. Correspondingly, as rates rose, “mortgage applications fell 65.3 percent year-over-year as of September.”

Next year, analysts predict that the cost of single-family housing will “remain prohibitive”. In high-growth cities, especially those on the West Coast, the report estimates that owning a home costs 35 percent more than renting. These barriers to home ownership are forcing more Americans to rent. Rentals are expected to grow from 4.4 percent to 9.5 percent.

“While inflation has started to recede, consumer sentiment has yet to recover,” the report continues. With uncertainty looming, it is expected that most renters will continue to rent, “rather than risk buying.”

Looking further out, the report predicts that older, “old” commercial buildings will be converted to multifamily properties. This is in line with the general consensus across sectors on the fate of large office space as remote work continues to solidify as an economic norm.

It also highlights a trend. While residential real estate costs have risen since 2020, the same cannot be said for commercial real estate. Year on year, the valuation of office and retail space has fallen markedly over the past seven years.

Beyond real estate, the research provides data that sheds light on the economic conditions next year may bring. First, that the economy is not yet in recession – but experts expect one to happen next year.

Unemployment, which soared during the start of the pandemic, has returned to post-2020 rates. Meanwhile, job opportunities have steadily climbed to near historic highs.

Labor is tight in cities across the United States, and one benefit of that is wage growth.

Average wage growth hit the highest recorded rate on record this year. Of all workers, “lower income workers, service workers and those without a college degree are seeing the greatest wage growth.” Yet prices are rising faster than wages can keep up, the report says.

Next year, the Federal Reserve is expected to continue raising rates, and while they should peak sometime next year, the report predicts they will remain at or above 3 percent for the foreseeable future.

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