Are We Coming Into a Mild Recession?

For months, the Fed has been predicting an economic slowdown, and at its last FOMC meeting on May 2-3, it indicated that a “mild recession” could come later this year. A recession is generally defined as two consecutive quarters of negative GDP growth, and although GDP growth has yet to dip below zero, it has slowed down recently.

Other troubling economic developments include rising interest rates, an inflation rate still well above the Fed’s 2% target, recent high-profile bank failures, and a barely avoided U.S. debt default. Unsurprisingly, consumer sentiment is down, which itself can dampen the economy by discouraging investment.

The Inverted U.S. Treasury Yield Curve

One of the strongest recessionary signals, however, is the U.S. treasury yield curve. It compares the yield of long-term bonds to short-term bonds. Under normal conditions, long-term bonds have a higher yield than short-term ones, resulting in a yield curve that slopes upwards. However, when the yield curve starts to flatten and invert, it means investors are more confident about the current economy than they are about the future, indicating a recession could be looming.

While not every yield curve inversion has been followed by a recession, an inverted yield curve has preceded the last 10 recessions since 1955. Now that the current 10-year bond to 3-month bond yield curve has been inverted since last fall, the Federal Reserve Bank of New York suggests there is a 70.85% chance of a U.S. recession occurring in the next twelve months. That’s nearly twice the probability it reported right before the Great Recession in 2008.

Positive Labor Market and Consumer Spending Signals

Despite negative economic signals, the labor market remains surprisingly resilient. According to the Bureau of Labor Statistics (BLS), U.S. employers added a seasonally-adjusted 339,000 jobs to the job market in May and the unemployment rate is at 3.7%, which is still near historical lows.

Additionally, consumer spending, typically measured by personal consumption expenditures (PCE), remains high, helping generate business revenue, jobs, tax revenue, and overall economic growth.

Ultimately, it’s impossible to tell for sure whether there will be a recession, especially given the mixed economic signals. But even if there is one, it’s important to remember that recessions are relatively common, occurring about every six years on average, and they don’t always last very long. The most recent one in 2020 lasted only two months.

What About the Housing Market?

Now that you have a taste of the country’s general economic outlook, let’s talk about the housing market specifically. Is it headed for a major crash?

If you follow some celebrity entrepreneurs, you might think so. Elon Musk recently tweeted, “Commercial real estate is melting down fast. Home values next.” Barbara Corcoran echoed this sentiment when she told Fox Business she thinks office buildings won’t recover from the remote work trend and “all hell is going to break loose.” Whether or not these forecasts prove accurate is another matter.

The truth is that the current housing market is a complicated story. Yes, the market is slowing down. The median home sales price is steadily coming off its recent peak of $479,500. Rising mortgage rates have dampened buyer demand, putting downward pressure on home values. However, there are large disparities between Western and Eastern housing markets, with home prices falling in the West and rising in the East.

Furthermore, even if we enter a housing recession (and many argue that we’re already in one), it probably won’t be as severe as the one in 2008. For one, stricter lending practices put today’s homeowners in a much better financial position than many homeowners were in then. As a result, current homeowners are less likely to be forced to foreclose if times get tough.

Another thing setting the current market apart is low inventory. The U.S. is experiencing one of the greatest housing shortages in its history. This is partly due to the slow pace of construction by developers who want to avoid a repeat of 2008, in which they get stuck with undervalued homes. But another driver behind the shortage is a lack of existing homes for sale. Many current homeowners don’t want to give up their record-low mortgage rates, so they aren’t selling. This keeps the housing supply low and home prices from falling too dramatically.

Lastly, millennials, America’s largest generation, are in their prime homebuying years. Many are looking to settle down and are ready to buy a home despite poor market conditions. This trend may help keep housing demand up and, consequently, property prices high. All in all, if there is a housing recession, it will most likely be a mild one.

What a Housing Recession Means for Real Estate Professionals

For real estate professionals, a housing recession poses certain risks. For example, it could mean that your investment property loses value or that it’s harder to find clients as an agent or mortgage broker. At the same time, however, it can present new opportunities.

Consider that even a mild recession can put many homeowners under financial stress. As an investor, you can use this as a chance to find distressed homeowners who are willing to sell you their house at a discount or through creative financing. That way, they are relieved of a financial burden, and you get a good deal.

Similarly, mortgage brokers can win more business by offering distressed property owners helpful financial solutions, such as loan consolidation or refinancing. Agents can help struggling homeowners list their properties for sale or help buyers find below-market deals. Whatever your real estate profession, there are ways to take advantage of a housing downturn and not let it hurt your livelihood.

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