Economists surveyed by the Urban Land Institute predict fairly broad and optimistic improvements in real estate fundamentals over the next three years, with housing starts nearly doubling from their 2011 levels and home prices rising by 3.5% in 2014.
The ULI report, compiled from interviews with 38 economists and market analysts, concluded single-family housing starts will rise from 428,600 starts in 2011 to 500,000 in 2012. From there, starts are forecasted to jump to 660,000 in 2013 and 800,000 in 2014.
The average home price is expected to remain steady in 2012, rise 2% in 2013 and increase 3.5% in 2014, the report said.
"While there are certainly geopolitical, economic and other events that could upset this forecast going forward, the respondents to this survey of leading real estate economists and analysts believe that most facets of the U.S. real estate economy will strengthen considerably or remain healthy through 2014," the ULI report said.
The only major downside is the risk of inflation, which is expected to creep up over the next few years, making the cost of borrowing more expensive. Inflation is expected to decline in 2012 and then rise again in 2013 and 2014. The 10-year Treasury rates are expected to rise 2.4% by the end of 2012, 3.1% by the end of 2013 and 3.8% by the end of 2014.
Economists answering questions about the report told reporters housing trends in the coming years will be based more on local data than on national trends.
"I think we stopped having a national housing story about a year ago," said Peter Linneman, principal of Linneman Associates and CEO of the the Philadelphia-based American Land Fund. "For the last year or so, you've seen a lot of variability. It’s a national story when everyone is falling or everyone is rising."
While they expect housing markets like Florida and Arizona to continue dealing with a shadow inventory of distressed property for the next few years, other local markets that fared better in the recession have mostly worked through the shadow overhang and are closer to seeing a turnaround, the economists said.
The surveyed economists also expect a pickup in the commercial real estate segment, with the commercial real estate transaction volume expected to soar from $211 billion in 2011 to $312 billion in 2014.
Commercial mortgage-backed securities issuance could rise from $33 billion in 2011 to as high as $75 billion in 2014.
Investors focused on apartments also are braced for a relatively positive period, according to the report. Vacancy rates are expected to remain low for the next few years, and rents are expected to rise as much as 5% this year.
The overall economy is looking better, according to the report, with gross domestic product expected to grow 2.5% this year, 3% next year and 3.2% in 2014. Furthermore, unemployment, now at 8.3%, is expected to edge down to 7.5% by 2013 and 6.9% in 2014.
Returns on quality real estate investments are expected to remain solid, the report said. Citing research from NAREIT, the economists predict equity REIT future returns will rise to 10% in 2012 before slowing to 9% in 2013 and 8.5% in 2014.