Benn Steil, the director of international economics with the Council of Foreign Relations (CFR), recently wrote in a blog post on the CFR think tank’s website that the gap between home prices and income point to a recession within the time frame of the 2020 election.
“Looking back at the years preceding the 2008 financial crisis, a critical warning sign is the surging gap between the growth in home prices and household income. Today, a parallel dynamic is playing out,” wrote to and with the CFR former analyst Benjamin Della Roce.
Just as in 2015, August 2018 saw the US median home price hit +4.7%, according to the National Association of REALTORS® (NAR), and then that increase began cooling with significant drops in several major markets. (Think NYC’s prices in “near free-fall” per Miller Samuel Appraisers.) Simultaneously, the annual median household income rose +1.3%, according to Sentier Research.
Steil continued with his CFR blog post. “The trend line in existing home sales growth has…been down since 2015, tipping into negative territory (beginning with) the start of last year. Similar drops have preceded nearly every recession since 1970…when income fails to keep pace with home prices, the latter will fall back. Falling home prices, in turn, drive down household spending by way of the so-called ‘wealth effect’ – that is, consumers cut spending when their assets fall in value.”
It’s important to remember that consumer spending counts for approximately 70% of GDP, or Gross Domestic Product, in this country. When consumers stop spending, the GDP drops and when the GDP drops, the economy contracts.
AND, it’s important to remember that economists define recessions as two subsequent quarters of negative GDP.
Steil wrote, “If these trends continue, we should expect broad falls in home prices beginning mid-2020 which will, in turn, drag down household spending against a dark economic backdrop.”
Steil refers to “a dark economic backdrop” as being an economy in which growth is slowing, a tariff war that is hitting exports, a manufacturing sector that is contracting, a retail sector that is stalling and an economy in which consumer confidence is falling.
Steil does NOT believe that the Federal Reserve has many options left in its monetary policy toolbox that might stave off a recession since the reality is that the Fed’s current benchmark interest rate is already so low.
This director of international economics with the Council on Foreign Relations concluded his blog post by focusing on the Federal Reserve with these words, “If we are really on the cusp of a recession, it will likely take more than 175 basis points of easing to prevent it (a recession) – and that is all the central bank has to play with before we’re back to the zero lower bound. At that point, applying monetary stimulus becomes considerably more challenging.”
And, by the way, chances of a recession hitting the US markets within the next 12 months hit 27%, according to the Bloomberg Tracker.
Thanks to HousingWire’s Kathleen Howley for source material.