Five Questions With NAR Chief Economist Lawrence Yun

The Delta variant surge and the emergence of the Omicron COVID-19 variant, as well as high inflation, have many business leaders nervous heading into 2022. The residential real estate sales market has been booming in the United States, thanks to strong demand and low borrowing rates.

What’s in store for the residential and commercial markets next year. Real Estate In-Depth turned to National Association of Realtors Chief Economist Lawrence Yun for some answers.

In a recent blog, Dr. Yun noted that anyone under the age of 40 has never experienced inflation rates this high, noting that consumer prices rose 6.8% in November.

“We are already well aware of higher food and gasoline prices, up 6% and 58% respectively from a year ago. Rents are up 3% and accelerating at better than 5% on an annualized basis. The heating bill will not be pretty, as natural gas prices are higher by 25%. This rapid inflation is the reason higher mortgage rates are expected in 2022. The Federal Reserve will have to raise interest rates to contain them. The average 30-year fixed mortgage rate is likely to reach 3.7% by the end of 2022 from the current near 3% rate,” Dr. Yun predicted. He did note that real estate has historically been used as a hedge against inflation.

At the National Association of Realtors, Yun supervises and is responsible for a wide range of research activity for the association including NAR’s Existing Home Sales statistics, Affordability Index, and the Home Buyers and Sellers Profile Report. He regularly provides commentary on real estate market trends for its 1.4 million Realtors.

He also creates NAR’s forecasts and participates in many economic forecasting panels, among them the Blue Chip Council and the Wall Street Journal Forecasting Survey. He also participates in the Industrial Economists Discussion Group at the Joint Center for Housing Studies of Harvard University. He appears regularly on financial news outlets, is a frequent speaker at real estate conferences throughout the United States, and has testified before Congress. Dr. Yun has also appeared as a guest on CSPAN’s Washington Journal.

Dr. Yun received his undergraduate degree from Purdue University and earned his Ph.D. from the University of Maryland at College Park.

Recently, Dr. Yun responded in writing to Real Estate In-Depth’s submitted five questions on key economic trends heading into 2022.

Real Estate In-Depth: What is your forecast for single-family, condo and co-op sales for 2022 and do you expect a more normalized market next year based on recent sales results?

Dr. Yun: A slight decline, by 2% or so, from the super robust figures in 2021. That’s due to the anticipated rising mortgage rates.

Real Estate In-Depth: How will inflation influence the market in 2022? Do you expect rising consumer costs to be an issue for the entire year or do you think that some of the things influencing inflation, such as supply chain problems, labor shortages and high gas prices, will be resolved or sufficiently addressed in the near term?

Dr. Yun: Inflation is annoying and quietly eats away at people’s savings. One impact to real estate is that some homebuilding activity will be delayed due to materials and needed supply not being able to get to U.S. shores on a timely basis. The other more important impact is that the Federal Reserve will need to raise interest rates to contain inflation. The higher interest rates of course hurt homebuying affordability.

Real Estate In-Depth: Will the commercial office market continue to struggle in 2022 or will return to office programs begin to eat away at vacancy rates in major markets, such as New York, San Francisco, etc.?

Dr. Yun: A big wild card is “what is going to happen to office spaces?” I believe the work-from-home hybrid will become fairly normal and hence the demand for office spaces will not pick up on net. The office vacancy rates will continue to hover at high levels even as the economy is adding jobs. The expensive markets of San Francisco and New York will have a harder time as some of the workers who would have been there can now work-from-home in less expensive locations.

Real Estate In-Depth: Will the Infrastructure Bill and the Build-Back Better legislation, if passed, have a beneficial impact on the overall economy and the real estate market and if so, how?

Dr. Yun: The upgrading of highways and bridges, along with the expansion of broad band into rural communities facilitate economic commerce and job creations. Any dollars to boost housing supply will be a major positive. At the same time, the bill has many other components with an unclear impact on how to pay for them. Even if taxes are not raised, the higher budget deficit can boost the borrowing costs for all, including for homebuyers.

Real Estate In-Depth: We all know that the COVID-19 pandemic has been a wild card for the economy. Is that still the case and are there any other wild cards that could change your 2022 forecast for the better or worse?

Dr. Yun: COVID has brought about the work-from-home flexibility for which I think we are only in the first or second inning of a long game. Many Americans are mis-housed. Too small or not needing to be so close to the downtown office locations. Therefore, there will be steady readjustment to find the right home and that will support home sales in the upcoming years.