Economists reduce expectations on housing starts, price growth

Real estate economists' outlook for single-family housing starts through 2021 weakened compared with six months ago even though they are relatively bullish on the economy, an Urban Land Institute survey found.

The panel, which consisted of 41 economists and analysts from 32 companies, projects single-family housing starts will decrease by 25,000 to 850,000 in 2019, following a string of increases over the previous seven years.

Over the next two years, starts are expected to decline even further to 810,000 in 2020 and 800,000 in 2021.

This is much more pessimistic than the ULI's May survey, when the economists projected an increase to 900,000 housing starts this year, followed by a decline to 888,500 next year and 850,000 the year after.

If housing starts slow, that would only exacerbate the for sale inventory shortage that persists in the marketplace.

Home price growth is expected to continue to moderate over the next three years, the respondents said. Annual growth peaked at 6.8% in 2017, according to Federal Housing Finance Agency data cited by the ULI. Last year it fell to 5.9%. It is expected to fall to 4% this year and 2.5% in 2020 before rebounding to 3% in 2021.

In the May survey, economists projected prices would appreciate 5.6% in 2019.

When it comes to the 10-year Treasury yield, which is a benchmark for long-term mortgage rates, the economists revised their predictions downward from not only six months ago, but one year ago as well.

They now call for the yield at the end of 2019 to be 1.8%, followed by 2% at the end of 2020 and 2.3% for 2021.

In the survey six months ago, economists projected a slight rise over 2018 to 2.8%, and a 2.9% average yield over the next two years.

In the year-ago ULI survey, the respondents said the yield was expected to rise to 3.3% by the end of this year and 3.5% at the end of 2020.

The decline in the expected 10-year Treasury yield "is a remarkable shift and should be positive for real estate values," William Maher, director of Americas strategy and research at LaSalle Investment Management, said in the ULI press release.

Given that the economic expansion set a new longevity record in July and that forecasts for next year generally continue to be positive, "real estate fundamentals should stay healthy, with returns to the asset class changing little over the forecast period," Maher said.

He expects this to occur despite headwinds from recent developments like the inverted yield curve, the U.S.-China trade dispute and slower growth overseas.

Gross domestic product is expected to grow by 2.3% this year, down from 2.9% in 2019; this outlook is unchanged from the prior survey. Over the next two years, GDP growth should continue to slow to 1.7% before a slight rise to 1.9%, the ULI survey found.

Other economists are slightly less optimistic about economic growth. In its September economic forecast, Fannie Mae predicted GDP growth of 2.2% this year and 1.6% next year.

On the commercial side, transaction volumes set a record of $579 billion last year, which was considered not to be sustainable.

Therefore, the economists surveyed projected that transaction volume would total $475 billion in 2019, and $450 billion and $415 billion in the next two years, respectively.

Commercial mortgage-backed securities issuance is expected to fall slightly to $75 billion this year and $65 billion next year, before rebounding to $75 billion next year.

The ULI survey estimate for 2019 issuance is similar to a recent projection from Morningstar.