2019 Real Estate Predictions

This new year is expected to provide a more exciting rollercoaster ride than 2018. The primary economic drivers looking ahead will be the pace of interest rate increases from the Federal Reserve, market volatility, the ongoing trade war and market sentiment. Each of these factors could also have major influence on residential and commercial real estate in 2019. 

Let's unpack each of the four drivers of the economy to watch in the year to come:

1. THE PACE OF RATE CHANGES

The Federal Reserve has targeted three more rate increases in 2019 based on current economic conditions. The $1 million question is: Will this recent volatility force the Federal Reserve to push pause on the rate increases? CNBC recently completed a poll in which 46 percent of economists think the Federal Reserve will stop at two hikes, while 41 percent expect three hikes. Personally, I think the Fed will pull back to two next year, but a lot will depend on how the markets perform and if there is another major correction.

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2. TRADE WAR

The trade war with China and other countries looks to continue into 2019. Fears surrounding this issue are what led to the recent tech selloff. Trade conflicts should start to flow through the entire supply chain in 2019 if there is no resolution – and I don't foresee a fix in the immediate future. This could lead to a repricing of many companies and industries due to higher cost structures and ultimately prices for consumers. There is considerable uncertainty as to 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. 

3. MARKET VOLATILITY

Volatility is a symptom of lofty expectations, faster rate increases and the trade war. I would expect the volatility we've experienced recently 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.

4. MARKET SENTIMENT

2018 comes to a close, the market tone has changed. Earlier in the year there was speculation as to whether a recession was coming. This has now changed dramatically, with most economists predicting when it will happen. The tone shift makes market participants weary to make major moves as the threat of recession looms.

WHAT DOES THIS MEAN FOR REAL ESTATE?

1. Rates: With the Federal Reserve's current plan for hiking rates, I would suspect residential and commercial rates to increase through 2019 by half a percentage point to three-quarters of 1 percent, so a 30-year mortgage could be close to 6 percent later this year. This will further price many buyers out of the market as mortgage costs increase. Fortunately, this should be a short-term impact, as rates will moderate as the economy slows this year or next.

2. Prices: For new construction properties, build costs continue to increase substantially due to increased material costs – for instance, lumber is up 40 percent due to the trade war with Canada – and increased labor costs due to a shortage of available skilled workers. These factors (along with rates) put the building industry into a bit of a tailspin.

3. Consumer Confidence: This is the most important factor to watch. Currently, confidence is holding up, 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 could get is driven by consumer confidence which could be thrown off course by increased market volatility. This will be the year consumers and businesses begin to pull back, and all these factors could contribute to a challenging economic environment. Although most economists are predicting the next cycle to begin sometime in 2020, there is a slight chance the next cycle could begin toward the end of 2019. As things change, yet somehow stay the same, we recall the wise words of Mark Twain:

"History doesn't repeat itself but rhymes."

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