Though it may feel remote from the day-to-day pressures of running a real estate business, it’s vital that agents and brokers watch the economy carefully. Real estate is a cyclical sector of the economy and one that’s dependent on a variety of factors. The job market, earnings and mortgage rates all come into play for consumers who are considering buying a home, as does the availability of desirable homes in areas that are attractive to buyers.
Lately the economy hasn’t been all that fun to watch. Wild stock market fluctuations in the final weeks of 2018, uncertainty over the impact of economic tariffs and a predicted drop in the gross domestic product are all a bit stomach-turning.
However, while the economy is expected to slow in 2019, a drop into a recession is not in the vast majority of forecasts that came out at the end of last year. Goldman Sachs anticipates that the rate of economic growth will drop from 2.9 percent to 2.5 percent. Additionally, the Congressional Budget Office expects the growth rate of the gross domestic product to drop to 2.4 percent in 2019, down from the 3.5 percent rate seen in the third quarter of 2018.
Thomas Smith, an associate professor of finance at Emory University’s Goizueta Business School in Atlanta, believes that a dramatic slowdown may be on the horizon, though he’s unsure of the ultimate cause. “I don’t know if people are just becoming skeptical about what the trade war is,” Smith says. “I don’t know if people are over-leveraging and just taking out too many loans, I don’t know what’s going to be the shock. It could be a trade shock. It could be that a bunch of farmers end up going out of business and this escalates into other parts of our economy.”
Future instability aside, many sectors of the economy are still in expansion mode and that could be a big driver for the Atlanta area. Jill Petersen of Berkshire Hathaway HomeServices Georgia Properties points out that corporations are still moving to Atlanta and that those relocations can keep the housing market healthy.
“Atlanta continues to be a leading destination for corporations. We’re seeing growth among those middle managers and higher-end managers, so that $500,000 to probably $800,000 price point continues to be a good market,” she says. However, she notes that purchases by first-time homebuyers have fallen off. “First-timers were once our leading source of buyers in the metro Atlanta area; I’m seeing that change.”
Slowing sales indicate to Compass agent Chrissie Kallio that the housing market in the Atlanta area and across the country is evening out after several years of rapid growth. “While we may see some shifts in the economy bringing change in some of the more outlying areas, I think the heart of Atlanta and in-town Atlanta markets will continue to have a good year,” Kallio says. “It’s just going to be more realistic here in the sense that everything has been elevated over the last four to five years. Actually, you reach point where you can’t continue to go up any further. I feel like we reached that point; it’s just a natural stabilization of the market.”
The interest rate impact
Nationally, rates on a 30-year, fixed-interest mortgage stand at about 4.73 percent, according to BankRate. In Atlanta, rates cover an eye-popping span between 4.197 percent and 5.49 percent.
While the prospects of purchasing another home at a rate in the neighborhood of 4.5 percent can be daunting to homebuyers who last bought at 3 percent or so, the rate shock effect is not nearly as bad as it’s been in the past.
Emory University’s Smith notes that the Federal Reserve is increasing their federals funds; the central bank raised rates from 2.25 percent to 2.5 percent at its last meeting on Dec. 19. “Mortgage rates go up and it becomes costlier to borrow, and that slows down borrowing, slows down demand and slows down price growth,” he says. Smith worries that inflation without wage growth could depress homebuying. “That impacts the consumer’s total budget and how much you can spend on housing. Those are the things I’m fearful of.”
The rising cost of borrowing may lead to regression in the housing market, Kallio says, as potential homebuyers stay put rather than spend more to purchase a new home. “As those interest rates go up, even just a little bit, it is changing how much they can afford,” she says. “If you were lucky enough to get in that window where rates were right around 3 percent and now you’re looking at 5 percent to 5.75 percent, that’s a huge perception difference.”
Still, Petersen predicts that as rates rise, Atlanta’s favorable pricing when compared to homes in other major metropolitan areas will help the area compete. “I know interest rates are rising, but they are still historically low,” she says. “Compared to other metro areas in the U.S. our housing costs still remain very attractive.”
In the Atlanta region, the housing market is expected to slow and lose some ground. Realtor.com predicts that sales will decrease by 1.9 percent, while prices will trend upward by about 3 percent, reflecting the ongoing inventory crunch.
But even as sales drop off, new construction remains strong throughout the area. Smith is wary of inventory build-ups that may occur as prices are pushed down due to interest rate increases and other pressures, particularly in wealthier areas north of the city. But so far new development in Atlanta has gone over fairly well.
“We’ve seen some really enthusiastic support for the developments that we’ve had over the last couple years,” Smith says, citing in particular the Quad City Market, the Avalon, and the repurposing of the Krog Street Market. “Atlanta is on the cutting edge of how developers are thinking about space and how they’re thinking about what it means to live in an urban environment. It’s always good to be in a situation where you’re seeing people and how they’re using the urban space that’s provided for them.”
Petersen says she’s seeing the residential construction industry react to affordability issues by building in cheaper areas and by reducing square footage. “It’s driving our builders further out into the suburbs to areas that haven’t been developed yet. I’m beginning to see a lot of high rises in downtown in Midtown area. Some of my builders are also building much smaller homes, even tiny homes,” Petersen says. “It’s quite interesting. I don’t think we’re getting as much for our money as we have in the past, but I’m seeing a lot of new construction again.”
Kellios expects a slower market may force builders to focus on quality rather than volume. “The market has been so skewed in one direction for so long and buyers are tiring of it,” she says. “Sellers don’t think they have to do any work and investors are building crappy products. In the neighborhoods that I work in and where I live, we don’t want to see that kind of product in the community. We want something that is going to have a little more thought put into it to appeal to the buying public.”
Rethinking a city
Atlanta’s BeltLine project is proving to be a major draw for homebuyers as stages of the multiuse trail are completed. Developments that run with the live-work-play concept of mixed-use construction are on the rise. In the neighborhoods that surround the BeltLine, Petersen sees the walking and biking trail as a significant driver for home sales in the coming year.
“Those areas did very well, and they’re expanding the BeltLine. That’s going to be a great opportunity for growth,” Petersen says. She also believes many investors are ready to move onto projects that take advantage of the financial incentives for development baked into the 2017 Tax Cuts and Jobs act. “The Opportunity Zones, where they have a great tax advantage, will also start to get a lot of attention. The central perimeter area’s still hot with a lot of corporate growth. Midtown is very hot with high-rise condos.”
Smith believes the new developments springing up along the BeltLine project are likely to withstand any economic downturn, as more people in the city seek out opportunities to move into mixed-use communities. “Downtown, there are quite a few developments that are kind of like live-work-play,” Smith says. “There are a bunch of condos and townhomes going up around Avalon [like that], just north of the city and some other areas that are sort of building up those live-work-play kind of residential and commercial spots.”
For Kellios, the new developments promise to provide better community anchors where people can have meaningful interactions with each other and with their environment. “We’ve just seen so many better things that are anchoring neighborhoods in the in-town communities,” Kellios says. “They look vastly different from what we had years ago. Live-work-play is such a big thing now and people gravitate toward those sorts of places.”