Economic recessions in the history of the American economy have varied in duration and intensity. When the gross domestic product (GDP) — i.e., the total value of all the goods and services generated by the U.S. — declines for two consecutive quarters, financial analysts recognize that recessionary conditions exist. Regardless of the scope and impact of each recession, incumbent politicians minimize the effects while their challengers invoke the Great Depression to describe them. Some forecasters see another downturn on the horizon. The extent and fallout from a prospective recession is the subject of consumer anxiety, fierce speculation, and vigorous debate.
What Are the Signs?
According to Fortune magazine, 60 percent of economists see a slump in the future. The predictions of an oncoming recession are based on certain indicators and patterns.
1. The Yield Curve Is Inverted — A yield curve is an arc where interest rates for bonds of equal credit status are plotted at a single point in time. When inverted, this line represents longer-term bonds with a lower yield than those of a shorter term. This means investors are placing their confidence in newer bonds over older ones. Every previous recession of the past half-century was preceded by an inverted yield curve.
2. Declining Confidence — Granted, consumer confidence endures at a robust level but the recent direction is downward. Any slackening represents less buying and investment. Meanwhile, business certainty is also lessening as indicated by fewer manufacturer purchasing contracts.
3. Reduced Manufacturing — A drop in orders does not happen in a vacuum. Automobiles, airplanes and other capital goods with hefty pricetags have seen sales fall in recent months. The contraction of overall factory activity is likewise cause for concern.
4. Ongoing Trade Conflicts — the rightness or wrongness of imposing tariffs can be debated elsewhere. What is fairly indisputable is the fact that they make prices higher. When that happens, consumers become more frugal and willing to put off purchases until a later time. This restraint is exacerbated as new, higher tariffs kick in…and are retaliated against. Formerly profitable markets are closed for businesses as the global economy slows down.
None of the above necessitate a recession but their combined presence portends some sort of slowdown. How, then, does this affect the U.S. housing market?
Economic Recession and Housing
If the last recession (2007 to 2009) serves as a lesson, recession can leave those with little equity in their homes to begin with, in worse shape, i.e. underwater, owing more on the mortgages than the property is worth. This problem lives on long after a recession ends, with 30 percent of mortgagors still underwater in 2012. Tightening credit, shrinking home values and lost jobs made refinancing impossible for many households. It must be noted that easy credit and loose mortgage regulation took the blame for the last recession.
Not only did refinance activity drop off, but purchases dipped as well. Because of this, the inventory of available properties soared in 2008-2009. Things are different today. In 2017, the supply of houses for sale plummeted to its lowest level ever and has not risen appreciably since then. Would a recession change things? For some, it might. More retirees, for example, could stay put in the homes in which they raised their families as opposed to downsizing and relocating because fewer buyers will make acceptable bids. So a downturn might spur less inventory as potential sellers wait out the hard times. This would be a reverse of the last recession’s consequences.
Still, as noted above, the “Great Recession” had its genesis in real estate and its housing aftermath followed from those problems. If an impending recession affects housing markets, one place to look for scars is new home construction. According to U.S. Census data, housing starts reached a 10-year zenith in 2018, an impressive prospect albeit insufficient to meet the current demand. A recession could blunt this progress because inventory could rise in response to job losses and materials can grow more expensive because of the U.S. trade conflicts with China and other countries.
With all of the variables, educated guessing is the optimal recourse.