BAM Key Details:

  • Lawrence Yun, Chief Economist at NAR, called the Fed’s latest rate hike “unnecessary,” stating inflation has already started to calm. 
  • Regarding the residential real estate market, Yun forecasts that mortgage rates will drop to around 6% by the end of 2023 and below 6% in 2024. He also expects home sales to increase in 2024 after bottoming out this year. 
  • Yun’s forecast for the commercial real estate market includes a decrease in valuations of commercial properties and a decline in total transactions. 

This week, the National Association of Realtors® (NAR) is hosting its 2023 REALTORS® Legislative Meetings. Lawrence Yun, NAR’s Chief Economist, took to the stage to discuss the current real estate market, and what he forecasts for the residential and commercial real estate markets. 

The Fed’s “Unnecessary” Rate Hike

While on stage, Lawrence Yun did not back away from sharing how he felt about the Fed’s most recent rate hike, stating it was unnecessary.

Aggressive rate hikes have hurt both regional banks and the housing market, Yun explained, and inflation is starting to calm, even while rent prices remain high. 

Inflation will not reignite – inflation will come down closer to 3% by the year’s end. Inflation has calmed down while rents are still accelerating.

Lawrence Yun

Chief Economist, National Association of Realtors®

Yun stated that rent growth will also begin to decrease because apartment construction has reached a 40- to 50-year high. And while this will help with consumer price inflation, it does not help with the issue of low housing inventory. 

Robert Dietz, Chief Economist for the National Association of Home Builders, was also part of the forum to discuss challenges builders are facing today—the biggest of which is to increase the amount of affordable housing inventory. But the Fed’s rate hikes have made it even more expensive to build new construction. 

It’s death by a thousand cuts. It’s impossible to build entry-level housing when you’ve got – before putting a shovel in the ground – $200,000 in regulatory costs.

Robert Dietz

Chief Economist, National Association of Home Builders

Lawrence Yun’s Residential Real Estate Forecast

The lack of inventory remains the biggest hurdle in the housing market, which is down 40% compared to 2019. Because of this, housing prices and competition among buyers have risen dramatically—a positive for those who already own a home. 

Home price increases are naturally good for homeowners. Everyone participates in wealth gains if you’re a homeowner.

Lawrence Yun

Chief Economist, National Association of Realtors®

As far as where the residential market is headed over the next year, Yun forecasts that mortgage rates will settle closer to 6.0% in 2023 and fall below 6.0% in 2024. He also expects to see the bottom for new and existing-home sales this year, before sales begin to rise in 2024. 

And in the meantime, the focus is on increasing inventory. 

We have to stop the bleeding before improvement takes place. We need to get more inventory, and the long-term solution is more home building.

Lawrence Yun

Chief Economist, National Association of Realtors®

Lawrence Yun’s Commercial Real Estate Forecast

During NAR’s Commercial Economic Issues and Trends Forum, Yun provided an overview of the U.S. commercial real estate market. Rate hikes have also created significant challenges for this industry, especially after lending policies were tightened by many small and regional banks.

The Federal Reserve’s aggressive rate hikes have damaged balance sheets for regional and local banks, an important source of commercial real estate loans.

Lawrence Yun

Chief Economist, National Association of Realtors®

Despite this, Yun highlighted some positive trends in the market. In the past 12 months, America’s apartment sector recorded 116,000 net positive absorptions and the industrial and retail sectors added 361 million square feet and 64 million square feet, respectively. 

On the other hand, office markets are experiencing a different trend, with a 29 million square feet reduction in net absorption last year. 

Yun predicts the national office market and apartment market will both see rises in vacancy rates—office vacancies due to falling demand and apartment vacancies due to increased supply. He noted, however, that local markets may see different results.

The performance of commercial real estate markets will vary across the country. Markets with strong job gains will naturally hold on much better, while those with weaker job conditions will struggle to raise net occupancy.

Lawrence Yun

Chief Economist, National Association of Realtors®

He also forecasted that commercial real estate transaction volume will decrease by 27% overall in 2023 and that valuations will continue to decline after falling 15% from early 2022.

The lack of capital, higher costs of financing and refinancing, and the weakening economy will contribute to a lower overall valuation of commercial real estate prices. Weaker prices will mean opportunities for those with deeper pockets to get deals done in the months and years ahead.

Lawrence Yun

Chief Economist, National Association of Realtors®

Takeaways for Real Estate Agents

Right now, and for the foreseeable future, the real estate market continues to be complex, both at the national and local levels.

Yun’s forecasts, and the data to go along with them, show that any dips in home prices are likely to reverse over the coming year. And with no huge supply of inventory in sight, local markets may continue to see multiple bids for affordable homes. 

The commercial real estate market has its own challenges, with a lack of demand for office space, combined with tighter lending policies and an increased supply of apartments, making many predict value decreases on the horizon. 

Stay on top of the data and trends for your local market, so that you can keep your clients informed and combat any misleading headlines.