2023 Top 3 Trends - Real Cap Daily #28

Here we are, 2023. No flying cars, no Jetsons. Instead we have a new congress, inflation, and cost are going up. So what are the top 3 trends, as it pertains to real estate, in 2023?

Number One. Interest rates are likely going to go higher in 2023. The federal reserve is going to maintain a restrictive policy stance as the hawks continue to fight inflation. There are two things driving this, history or experience of letting off the gas and having inflation come on stronger. The second is the Taylor Rule. The Taylor Rule was introduced 1993 by John Taylor citing an equation used to calculate the values of inflation and economic slack in the economy.

The equation seen here suggests that the short term rate should be between 5.85% but closer to 7.5%. This means mortgage rates could go above 8% this year. The fed could stagnate on rate hikes, probably not likely. They are firm that there will not be rate decreases. They are going to hold the rates higher for longer.

Number Two. Lease rates and profits are going to contract or stagnate this year. Depending on which market you are in, rental rates even with inflation are likely to down. In the overheated and most expensive markets, we will likely see this contraction take place. This is largely due to the pressure on renters ability to take on more expense as other expenditures are applying pressure on their ability to pay more. The markets that did not see frantic growth are likely going to stagnate. If rents go down, so do profits. This is true for real estate and corporate profits, including REITS or real estate investment trusts.

Number Three. Building on the previous two, asset prices and valuations will need to adjust to the new costs of ownership, lower profits, and lower rents. This will likely affect income producing real estate, REITS, the stock market and bond valuations. The housing market will slow, and those that do sell will adjust to the new pricing. On the bright side, this will not be 2008-2011 again. The majority of sellers will stay in their homes.

What are your thoughts on the markets? Leave a comment below. As always, if you need help any help buying and selling real estate, please reach out.