It does look like most economists are pointing to a recession (although most do think it will be relatively mild by historical standards) in the next 12 months.
A recession occurs when there are two or more consecutive quarters of negative economic growth, meaning GDP growth contracts during a recession.
When an economy is facing recession, business sales and revenues decrease, which cause businesses to stop expanding.
How do the economists know this? And what does this mean for interest rates and real estate values? Read on for more…
Recessionary Indicators
The Yield Curve
One of the major indicators for an upcoming recession is the spread between the 10-year US treasury yield and the 2-year US treasury yield.
While various economic or market commentators may focus on different parts of the yield curve, any inversion of the yield curve tells the story – an expectation of weaker growth in the future.
What does this inverted yield curve look like? Here’s a good depiction:
Why does inversion matter? Well, the yield curve inversion is a classic signal of a looming recession.
The U.S. curve has inverted before each recession in the past 50 years. It offered a false signal just once in that time.
When short-term yields climb above longer-dated ones, it signals short-term borrowing costs are more expensive than longer-term loan costs.
Under these circumstances, companies often find it more expensive to fund their operations, and executives tend to temper or shelve investments.
Consumer borrowing costs also rise and consumer spending, which accounts for more than two-thirds of U.S. economic activity, slows.
Unemployment
Unemployment is a recessionary factor, too – as economic growth slows, companies generate less revenue and lay off workers to cut costs.
A rapid increase in the overall unemployment levels—even if relatively small—has been an accurate indication that a recession is underway.
Here’s a chart that shows what happens when unemployment starts to trend upward – and notice that recessions follow shortly thereafter:
As you can see, when things in the economy starts to slow down, one of the first things business do is to reduce their labor force. The curve is flatting now, and unemployment might be ticking up soon.
Mortgage Rates During Recession
When a recession hits, the Federal Reserve prefers rates to be low. The prevailing logic is low-interest rates encourage borrowing and spending, which stimulates the economy.
During a recession, the demand for credit actually declines, so the price of credit falls to entice borrowing activity.
Here’s a quick snapshot of what mortgage rates have done during recessionary periods:
Obtaining a mortgage during a recession might actually be a good opportunity. As mentioned, when the economy is sluggish, interest rates tend to drop.
Refinancing or purchasing a new home could be a great way to get in at the bottom of the market and make a healthy profit down the road. A borrower should be market- and financially savvy when considering large real estate purchases in a recession
Real Estate During Recession
Believe it or not, outside of the “great recession” of 2007 (which was caused, in part, to a housing crisis), home values and real estate actually appreciate historically during times of recession.
That seems counter intuitive…but because interest rates generally drop during recessionary periods, homes become MORE affordable to potential buyers (even though property values are higher), due to the lower payments provided by those lower rates.
When more people can qualify for homes, the demand for housing increases – and so do home prices.
In Closing
Although no one likes to see recession, you can observe that it actually can be beneficial for homeowners and would-be purchasers to refinance or purchase during these periods.
If you have more questions and or would like to strategize about purchasing or refinancing, don’t hesitate to contact me, as it would be my pleasure to help you!
