The Home Run Team's Fourth Quarter 2022 Economic Forecast

The Home Run Team's Fourth Quarter 2022 Economic Forecast

We expect the 4th Quarter to be largely driven by two elements: interest rate increases and the Holiday shopping season. These forces will work against each other throughout the 4th Quarter to give some signs of stability and even growth. In the big picture the sticky nature of rate hikes will win out over the transitory good news of Holiday sales. The result will be a 4th Quarter that sees cooling of the economy but camouflaged somewhat by retail and supply chain gains. As a result, we will not see adequate drops in inflation to avoid additional, significant rate hikes before the end of the year.

For home buyers, now is the time to lock a rate and find a home. Further delay will mean greater difficulty in buying and increased limitation of options, due to being able to finance smaller dollar amounts in a higher rate environment.

Sellers have already missed the runaway sellers’ market. Further delay will mean fewer qualified buyers and fewer buyers in the market overall. These conditions could last well into next year. Due to the on-going housing shortage, we expect prices to continue to increase once rates stabilize, but far more slowly. Unless the Federal Reserve makes significant headway against inflation, increases in housing value will not keep pace with inflation in the short to mid-term. The result is that sellers waiting to sell will not see significant increases but could also end up losing value in a real-dollar sense. Longer term, we expect housing increases to keep pace with inflation for several years after the current inflation crisis abates.

We expect rents to continue to rise commensurately with inflation and even more where so-called airline-pricing is in use. Renting will continue to be a financially inferior housing option, for anyone with the ability to buy.

It is important to note two things. Home ownership at any interest rate still builds equity and thereby wealth, whereas renting a residence is a full loss beyond the short-term use of the property. A constructive way to think of renting is that it is a 100% interest rate. Renters never gain equity and only lose wealth as a result of the transaction. Even in an environment where home appreciation does not keep pace with inflation, ownership is still a much better housing solution financially because the payment results in real property that will gain value over time.

Our expectation is that it is highly likely the Fed will raise rates by .75% in September with two additional hikes later this year of NO LESS THAN .5%. We base this on our analysis of the current inflation conditions, historical analysis of prior attempts to curb inflation, and the public statements of Chairman Powell and the Fed Governors. It seems clear to us that the September 75bps rate hike is all but certain and that a full percent is increasingly possible.

We expect to see mortgage rates rise to over 6% by the end of Q4, 2022 and possibly go as high as 7% in 2023. It is helpful to remember that 7% is roughly the 50-year average for mortgage rates. Once the initial shock wears off, we believe the housing market will recover from rates at this level, provided we do not enter into a severe recession.

We think there is moderate risk of a notable national recession by the 2nd Quarter of 2023. With the stickiness of inflation in the Q3 2022, and our expectation that the economy will appear stronger than it actually is in Q4 2022, we believe the Fed may be overly aggressive and overshoot interest rates and quantitative tightening, causing a recession.

Housing starts will slow despite the national shortage. In addition to seasonal slowing, there will be market-driven decline despite the national shortage. Profitability pressure and demand uncertainty tied to rates will be the main factors. Large builders in most of the nation will remain cautious until we know where and when the inflation-interest pendulum stops swinging.

Despite this fairly gloomy national outlook, the Norfolk-Virginia Beach housing market has many opportunities. Military moves will not be significantly impacted by these conditions. What will be available at different pay levels will change, but housing will remain in demand seasonally. Due to continuing inflation, home buyers, military and civilian, will continue to increase their net wealth more through buying real estate than holding cash in the short term. Cash suffers the full effect of inflation. Real estate will continue to generate modest equity gains to help offset the cost of inflation.

There may be an additional opportunity for local builders. It will depend on using forecasting to right-size builds for a future rate environment, to close the housing gap to some degree and make the market less attractive to national builders who might otherwise try to enter the market and displace local companies as building costs and rates stabilize. This is a complicated strategy better suited for a thorough discussion elsewhere.

Our greatest challenge in Q4 2022 and potentially for the next couple of years, will be the tendency to give in to the climate of fear and broad economic misinformation sweeping the country. We have significant, real economic headwinds to overcome, but panic over interest rates that are still fairly low, poor economic education, and the sensational and sometimes wrong information from media outlets, combine to make it increasingly difficult to confront the real problems and place them in context.

In summary, we expect the housing market to become more difficult for buyers before it becomes easier, but we do not believe that conditions will become overly difficult. Buying will remain the better choice for all those who are able to make it. Home sellers will suffer a short-term erosion of real wealth if they continue to hold but see a return to net gains once the current rate and inflation climate stabilizes. Waiting for short-term prices to go up before selling in this environment is likely a mistake, due to the net effect of inflation. The risk of a notable recession next year is considerable but could be greatly reduced or even eliminated if the Fed is able to significantly reduce inflation by year-end, without overcorrecting. The Norfolk-Virginia Beach market, due to the high concentration of military, will be relatively insulated from the worst of whatever the markets bring, and may even present opportunities to protect the local housing industry while reducing the local housing shortage. All of the opportunities we see depend on increasing the understanding that this market does not necessarily suffer in sympathy with harder times in other parts of the country, and the boldness to act on that understanding. Giving too much weight to the conditions elsewhere and allowing that weight, or negativity in the press, to stall our efforts will probably mean inflicting more of the broader nation’s pain on ourselves. This is a time to search out opportunities others will be unable to act upon, not to accept their fate as our own.

 

This forecast contains forward looking statements, the accuracy of which cannot be guaranteed, and no investment or financial decision should be based on these statements alone. Please consult your financial or realty professionals before making any financial or realty decision. This forecast is the intellectual property of The Home Run Team Ltd. and any sharing, re-posting or quoting of it must be properly attributed to The Home Run Team.


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