Real estate is at a turning point, which makes economic forecasts difficult to deliver with accuracy. That’s why the Chicago Association of Realtors’ 2020 Market Outlook, held yesterday at the Swissotel downtown, was especially interesting this year, with three economists offering their sometimes differing opinions about what’s to come.
Half empty or half full?
The event included forecasts from three economists — National Association of Realtors Chief Economist Lawrence Yun, realtor.com Senior Economist George Ratiu and CoStar Group Market Economist Brandon Svec — looking at what the real estate community can expect in the coming year. However, there was some disagreement in terms of what 2020 will bring.
Yun headed up the optimistic side of the economic outlook, predicting that existing-home sales will increase 4 percent in 2020, with new-home sales up 11 percent. Meanwhile, Ratiu’s predictions were significantly less sunny, with a projected 1.8 percent decline in existing-home sales nationally and a 0.9 percent dip in the Chicagoland area.
In terms of what it’ll cost to buy in this year, Yun expects median price growth to be around 3.6 percent in 2020, while Ratiu is thinking existing-home prices will go up a more modest 0.8 percent and will decrease 0.3 percent in Chicago’s Metropolitan Statistical Area.
During the panel discussion, moderator Rebecca Thomson of Coldwell Banker asked the two economists to address the disparities.
“We have a sizable packed-up demand for homeownership that has not been realized… Home sales are roughly the same as they were in 2000. We have far more people, far more jobs [than we did then]. Why are the home sales the same?” Yun said. “That’s where my optimism is coming from.”
Ratiu said his relative pessimism is due to the fact that, while many millennials may want to move into homeownership, he doesn’t see the pressures of price and inventory moving off their plates anytime soon, and he worries about all the troublesome economic news finally having an impact on consumer confidence. “Consumers are beginning to feel a little nervous. … We expect softer consumer spending and that includes housing,” he said. “We expect sales to actually decline on account of more weakness from affordability pressures.”
Here’s a roundup of the metrics on which the economists more or less agreed:
- GDP: Yun predicted gross domestic product to increase around 1.6 percent next year and Ratiu thought it might make it to 1.7 percent. Though the 2019 numbers aren’t fully in yet, Yun guessed when all was said and done that this past year would be around 2 percent.
- Interest rates: Yun expected rates to be around 3.8 percent next year, while Ratiu said he’s expecting them to “move up slightly” in 2020. All three economists said they did not expect the Federal Reserve to increase rates in the next year, due chiefly to the fact that it’s an election year and the group will want to avoid appearing to be partisan. “The only way to give the perception of neutrality is to do nothing,” Yun said.
- Multifamily: Around this time last year, economists were concerned about oversupply in the multifamily market but Svec noted that’s turned around. “The multifamily market is extremely healthy,” he said. He forecasted lower levels of construction (4,100 new deliveries this year as opposed to the 7,000 seen in 2019), flat rent growth (around 2.3 percent) and a falling vacancy rate (from 6.3 percent to around 5.9 percent). Still, Svec noted the sector faces headwinds in 2020, including proposals for rent control and increased affordable housing requirements, and the fact that many millennials are leaving the city as they start families. “Over the next five years, the biggest threat to multifamily is not the developer down the street, it’s the single-family home in the suburbs.”
- The state of the luxury market: Another item the economists agreed upon is the fact that prices for high-priced homes will continue to fall, and inventory will increase. Ratiu predicted that “in the short term, it is a little doom and gloom” for that sector. Yun noted that “it’s going to be a slow bleed in the upper-end market” in 2020.
Larger implications of inventory shortages
It will come as no surprise to anyone who’s been attentive to market pressures that economists expect tight inventory in lower-priced homes to continue to be a problem in 2020. But Yun worried aloud that low inventory could eventually translate to decreasing consumer confidence in the real estate market overall. He noted that while most Americans still think it’s a good time to buy, the percentage of survey respondents who say they believe strongly that it’s a good time to buy is on the decline. That’s because for every multiple-offer situation, there’s at least one buyer who walks away frustrated. But Yun also noted that, “Even the winner is wondering, ‘Did I overpay?’”
Another important side effect of low inventory is that Americans are missing out on economic opportunity, further bifurcating the market. “Homeowners have substantially more wealth than renters, but if homeownership levels are lower,” Yun noted, “wealth distribution becomes more uneven.”
New entry-level homes have been extremely slow to come online, though there is some hope that will change in the next decade. However, Yun mentioned that Sarah Ware, principal and managing broker of Ware Realty Group LLC in Pilsen, approached NAR with an interesting proposal to increase inventory without building anything new. At a recent NAR board of directors meeting, Ware noted that during the downturn, many institutional investors bought up foreclosed homes to rent out. While many of those companies were initially looking at unloading those properties after five to seven years, it’s now been more than a decade and they’re still largely on the books, thanks to good rental rates and appreciation. “If investors are unwilling to unload [those properties], is there a way to incentivize it?” Yun said, noting that a capital gains tax break might change the calculus for some of these investors. “It could help the market. … That is something that NAR is looking deeply into.”
Development hot spots to watch in 2020
Everyone wants to know where the next hot neighborhood in Chicago will be. Svec is betting 2020 will see continued development on the Near North Side, in Fulton Market and the West Loop, and in the South Loop. However, he identified one swath of Chicago as having the greatest potential. “There is probably no more undervalued land than what sits below McCormick Center,” he said. “From Hyde Park to McCormick Center is very ripe for development.”
One key element for those looking to get ahead of development trends in Chicago to keep in mind is proximity to Lake Michigan and the Chicago River, according to Svec. As humans, “we like to be by water,” he said. “If you look at development that is happening right now, 80 percent of it has a view of the water.”
Outside of the city, Svec is bullish on the area southwest of Chicago. Looking at recent data, “the only county that saw an increase in millennial population was Will County,” he said, noting that he’s seeing some interesting mixed-use development happening in the area.