As 2022 draws to a close, real estate report predicts recession, housing shortfall in 2023

Housing affordability and the ongoing housing shortage has been a topic of intense scrutiny over the last few years—especially in large metro centers. Driving these conversations, there has been an unprecedented rise in rental and real estate costs across the United States. As 2022 draws to a close, the latest market report from the New York-based commercial real estate firm Newmark doesn’t paint an optimistic picture for cities in the coming year.

“Housing remains undersupplied, with a 400,000-unit shortfall in 2021, when comparing single-family and multifamily completions to new households established,” reads the report,“United States Multifamily Capital Markets Report.” The lack of housing supply, in turn, “has resulted in an annual average effective rent growth of 13.5 percent.”

Meanwhile, interest rate hikes enacted by the Federal Reserve to combat rising inflation have driven the 30-year fixed-rate mortgage average to a 40-year high of 6.7 percent. This represents a 122.6 percent increase over last year’s rate, and further adds “to the elevated cost of single family homes,” the report says. In correlation, as rates have climbed, “mortgage applications have fallen 65.3 percent year-over-year as of September.”

Next year, analysts predict that single-family housing costs will “remain prohibitive.” In high growth cities, particularly those on the West Coast, the report estimates that owning a home costs 35 percent more than renting. These barriers to homeownership are forcing more Americans to rent. Rentals are expected to grow from 4.4 percent to 9.5 percent.

“While inflation has begun to retract, consumer sentiment has yet to rebound,” the report continues. With uncertainty looming, most renters are expected to continue to rent, “rather than risk buying.”

Looking further out, the report predicts that older, “vintage” commercial buildings will be converted to multifamily properties. This is in line with the general consensus across sectors on the fate of large office space, as remote work continues to solidify as an economic norm.

It also highlights a trend. While residential real estate costs have spiked since 2020, the same can’t be said about commercial real estate. Year over year, valuation of office and retail space has declined notably over the last seven years. 

Beyond real estate, the research provides data that sheds light on the economic conditions next year could bring. First, that the economy isn’t yet in a recession—but experts anticipate one will happen next year. 

Unemployment, which skyrocketed during the start of the pandemic, has returned to post-2020 rates. Meanwhile, job openings have steadily climbed to near-historic height.

Labor is tight in cities across the United States, and one benefit of that is wage increase.

The median wage growth hit the highest recorded rate on record this year. Of all workers, “lower income workers, service workers and those without a college degree are seeing the greatest wage growth.” Even so, prices are rising faster than wages can keep up, the report says.

Next year, the Federal Reserve is expected to continue raising rates, and while they should peak sometime next year, the report predicts they’ll stay at or above 3 percent for the foreseeable future.