US recession – what impact will it have on the housing market?

Global economic woes to keep interest rates high, economist says

US recession – what impact will it have on the housing market?

A potential recession this year will yield challenges for the real estate market, according to researchers at CBRE.

Market researchers provided their predictions during the recent CBRE US Real Estate Outlook for 2023, designed to provide actionable intelligence to help investors navigate the year ahead and uncover opportunity and uncertainty.

“2023 is likely to be a challenging year,” CBRE officials said as an introduction to the presentation. “How severe is the recession likely to be? Will inflation come down? When will interest rates peak? Which property sectors will be most resilient?”

A backdrop of uncertainty

Moderator Julie Whelan, head of occupier research for the Americas at CBRE, began the presentation with an outlook suffused with challenge: “Change, progress, opportunity. As we start these are three themes that offer cautious optimism against a backdrop of uncertainty. While the pace of change is accelerated and creating opportunities for the real estate industry, acting on that change can be difficult under the very economic conditions that we’re in,” she began.

Looming recession won’t be severe

Richard Barkham (pictured), global chief economist, head of global research and head of Americas research, provided a macroeconomic view that could keep interest rates higher for the foreseeable future.

“Along with many other forecasts, we see the United States entering a moderate recession in 2023, probably after Q1,” he said. “Domestically, despite some recent good news, the battle with inflation is not yet done. There is still excess demand in the labor market. We’re almost at the peak of the rate cycle, but I think there will be one or two more interest rate rises to take demand out of the economy and reduce the pressure on inflation.”

Global dynamics affect US economy

And yet, economic pressures are not limited to the US, he added: “The international economy is also weak,” he said. “Europe and the UK have inflation and rising interest rates as well, plus elevated energy and food costs due to the war in Ukraine. In Asia, China’s abrupt exit from zero COVID had both good and bad features. The economy of China, which had been heading down very rapidly we think will turn around as it opens up within three or four months. That is good for global demand, but I think it could make the fight against inflation harder in the second half of the year, meaning interest rates will have to stay a little bit longer than people think.”

While recession is forecast, it won’t be overly severe, he noted: “However, what we expect of recession, we don’t think it will be deep,” Barkham said. “We should not see too much entrenchment. Unemployment will rise from around 3.5% to 5%, but it won’t be excessive.”

Housing market to remain weak

He turned to the housing market: “In the housing market, we do see a hit to house prices, and we do see consumer sentiment remaining subdued and that will cause weakness in the consumer side of the economy,” he said. “And all of that will contribute to overall economic weakness in 2023. But there is some good news - inflation will start to fall over the course of the year. We’ve already seen the start of that. And with that we’ve seen long term interest rates coming down and by long term interest rates, I mean the 10-year Treasury.”

Barkham doesn’t see an end to the Fed’s interest rate tinkering anytime soon: “I don’t think the Fed will let up on its high interest rate policy,” he said. “The last thing it wants to do is ease up on the fight against inflation and see inflation spring back.”

Yet he also predicted some easing of financial conditions that will ease credit availability during the course of the year.

Inflation to remain as main wildcard

Asked what the biggest wildcard might be that alters his predictions, he invoked the specter of inflation even while mentioning the reopening of China and the war in Ukraine as possible wildcards: “The biggest wild card for me is inflation,” he said. “That’s what I’m following. It caught us by surprise on the upside through 2022 and there is a possibility that it will catch us on the downside. In other words it will drop quicker than we expect in 2023 and that could be an upside of a wildcard. But the operative word is wildcard, and we can’t bank on that.”