Some points are only temporary, while others might be here to stay
By Patrick Duffy
As New Year’s Eve clocks gradually rang out at midnight throughout the United States to ring in 2022, the country would soon be facing a series of economic inflection points which would impact the rest of the year in ways which had few historical precedents. Now, as many of us plan to gather for holiday traditions and peer suspiciously at 2023, it’s reasonable to wonder which of these inflection points are limited in scope and which will be with us more permanently.
A year before, as 2021 began, both COVID-19 caseloads and deaths were spiraling upwards to new daily records which would not peak until later in January and the roll-out of vaccines to most Americans was still in its infancy. The new Biden Administration, not yet knowing how successful these vaccines would be in the real world and fearing a repeat of the aftermath of the financial crisis in which too-little fiscal stimulus meant a decade of an economy stuck in low gear, decided to go big with more stimulus.
Unfortunately, the scale of the $1.9 trillion American Rescue Plan, passed at a time when the economy was already rebounding strongly thanks to pent-up demand for goods and especially services, gradually helped to spark the highest inflation rates in four decades. Even with that poor timing, however, a report by the Federal Reserve Bank of San Francisco estimates that the plan, along with the CARES Act passed by the Trump Administration in 2020, accounted for just half of the overall jump in inflation above pre-pandemic norms (or about three percentage points), with the rest being attributed to supply chain snafus and, more recently, economic sanctions levied against Russia. Those factors, in turn, prompted the Federal Reserve to initiate some of the sharpest interest rate hikes in history a year later, thereby halting what was, for many, the strongest housing market in their careers.
Fortunately, following months of inflation continuing to rise throughout 2022, the October Consumer Price Index (CPI) came in significantly under forecast, giving investors some hope that the Federal Reserve will consider smaller rate hikes in the months ahead as it attempts to negotiate a soft landing for the economy. Still, considering that October’s annual inflation rate of 7.7 percent was significantly higher than the Fed’s target of closer to 2.0 percent, steeper borrowing rates for everything from cars to homes will likely be with us throughout 2023. Even if and when the Fed reverses its rate hikes as inflation continues to ebb, it can still take up to a year after that for the housing market to see a sustained recovery resulting from lower mortgage rates.
Another inflection point could be economic growth. While more companies in technology, finance and real estate are announcing job cuts, an unemployment rate below four percent and nearly 11 million open positions could absorb more job hunters for months to come. After declines of 0.6 to 1.6 percent in the first two quarters of 2022, GDP rebounded by a stronger-than-forecast 2.6 percent in the third quarter, and is forecast by the Fed to end the year in the green. Whether or not we experience a recession in 2023 is still up for debate, but for now over 40 percent of CEOs polled are planning for a slowdown, and initial unemployment claims are trending up slowly.
A third inflection points to just how widespread the rise of remote work will remain, especially if there is a recession. That’s because the “out of sight, out of mind” adage could easily apply disproportionately to those working from home, with 60 percent of managers polled by software maker Beautiful.ai responding that remote workers would likely be the first to go in a round of layoffs. With so many housing markets in the Sunbelt and elsewhere exploding during the pandemic, these areas could also see less demand if workers are required to move back to the country’s largest employment centers.
For now, much of the housing market remains in suspended animation as builders continue to finish up homes they sold months ago, apartment developers race to meet pent-up demand and buyers wait for more affordable times ahead. When those times return, look for the housing market to roar back strongly for a chronically under-housed nation.