A resurgent Real Estate sector has been one of the major factors behind the recovery that the economy is currently witnessing. So a lot of focus remains on how this segment continues to perform in 2014 and beyond. Going forward we can spot a few trends that are likely to arise. First home prices should continue to rise, but at a gentler pace than 2013. As a result of the continued rise in prices, a larger number of home owners who weren’t in a position to enter the market because of extremely low valuations of their properties will be able to finally buy and sell real estate. This means that for the first time in a very long time most of the mortgages will pertain to purchases rather than refinancing.
However the rising mortgage rates will temper both the sale of homes and the gains made there to more sustainable levels. Lower inventories will facilitate new construction activity and possible less purchasing by investors. The data so far shows a steady increase in prices in at least the metro areas. But, in the absence of a sustained rise in average income, rapid price increases are not sustainable and we can expect an easing of the high gains scenario going forward in 2014. 2013 was an exceptionally good year in this regard with 10% growth in value — double the historical average… except 2005-2006 when the gains were higher at between 11.7 to 13%.
2014 will see a return to sanity in terms of gains and the proclivity to over-correct due to the recession will have been replaced by a conformance to a more normal gains trajectory of 4 to 5%. There will of course always be outliers that will buck this expected trend and either outperform or underperform. So the prognosis is that though the recovery will continue, it will do so in a far more tempered manner. It will primarily be shaped by a combination of factors like inventory, rate of interest, availability of credit, investments and the general sentiment obtaining in the market.
The commercial market too has played a critical role in the resurgence of US Real Estate. Boston for example has seen the prime asking rents go up by a whopping 22%. Economic and demographic developments and change more than anything else will determine the demand for Real Estate. In so far as commercial real estate is concerned there is every expectation that the growth will be uniform for all property types.
If we were too individually look at issues that will determine the direction that recovery will take place, some interesting observations come to light. According to a study by consultancy firm PWC, job growth, interest rates, income and wage growth, inflation, tax policies, global economic scenario, and federal fiscal deficits are the most critical factors in that order of importance. In so far as the issues specifically impacting the performance of the Real Estate sector are concerned construction costs, vacancy rates, land costs, refinancing, and infrastructure development in that order are the major influencers.
Perhaps the most important thing about 2014 will be the fact that it will see the return of rationality and normalcy to the market in a manner not seen in the market in a very long time. One of the demographically significant trends to emerge in the next six months or so is the sheer number of people wanting to buy a new home is propelled to quite an extent by the entry of young people into the market. This vital and normally vibrant segment of population had been largely kept out of the market due to lack of employment or low salaries. Quite a few will begin to rent their own homes, but high rent on account of low vacancy will push many of them towards buying their own homes.
Another important thing to consider is the fact that consistently good returns at the stock market have created a market for even high priced houses and luxury real estate. However it is important to note that the given the fact that it will be some time before inventory reaches normal levels, 2014 is primarily going to be a sellers’ market, with all that it entails. However buyers will definitely be able to take advantage of the fact that there will be fewer pressures exerted by rank investors on account of the fewer distressed properties that they typically covet. All in all 2014 should be an interesting but stable year.