A resurgent real estate sector has been one of the main factors behind the recovery the economy is currently experiencing. As such, there remains a great deal of focus on how this segment continues to perform in 2014 and beyond. Looking ahead, we can see some trends that are likely to emerge. First home prices are likely to continue to rise, but at a slower pace than in 2013. As a result of the continued rise in prices, more and more homeowners who were unable to enter the market due to extremely low valuations will finally be able to buy and sell properties. This means that for the first time in a very long time, most mortgages are being used for purchases rather than refinancing.
However, rising mortgage rates will dampen both home sales and home profits to more sustainable levels. Lower inventories will facilitate new construction and potentially less buying by investors. The data so far shows a steady increase in prices, at least in the metropolitan areas. However, without a sustained increase in median income, rapid price increases are unsustainable and we can expect the high earnings scenario to moderate in 2014. 2013 was an exceptional year in that regard, with a 10% gain in value — double the historical average… except for 2005-2006, when gains were higher at 11.7% to 13%.
2014 will see a return to sanity in earnings and the tendency to over correct due to the recession will have been replaced by adjustment to a more normal 4-5% earnings curve. Of course, there will always be outliers that buck this expected trend and either do better or worse. So the prognosis is that the recovery will continue, but in a much more moderate way. It is primarily shaped by a combination of factors such as inventory, interest rate, credit availability, investments and general market sentiment.
The commercial market has also played a key role in the US housing resurgence. In Boston, for example, prime rents have risen by a whopping 22%. Economic and demographic developments and changes will determine the demand for real estate more than anything else. Uniform growth for all property types is to be expected for commercial real estate.
If we look too individually at the issues that determine the direction of recovery, some interesting observations emerge. According to a study by consulting firm PWC, the most critical factors are job growth, interest rates, income and wage growth, inflation, tax policy, global economic scenario and government budget deficits, in that order. Among the issues that specifically affect the development of the real estate sector, the most important influencing factors are, in this order, construction costs, vacancies, land costs, refinancing and infrastructure development.
Perhaps the most important thing about 2014 will be the fact that there will be a return to the market of rationality and normalcy that has not been seen in the market for a very long time. One of the significant demographic trends that will emerge over the next six months is the sheer number of people looking to buy a new home, driven in significant measure by the entry of young people into the market. This vital and usually lively demographic had been largely kept out of the market due to a lack of employment or low wages. Quite a few will start renting their homes, but high rents due to low vacancy rates will push many of them to buy homes.
Another important thing to consider is the fact that consistently good returns in the stock market have created a market for even high-priced homes and luxury properties. However, it is important to note that 2014 will be primarily a sellers’ market and all that entails, given that it will take some time for inventories to reach normal levels. However, buyers will definitely be able to take advantage of the fact that there will be less pressure from ranked investors due to the less distressed properties they typically covet. All in all, 2014 should be an interesting but stable year.