ARE WE HEADED FOR A RECESSION?
Are we headed for a recession? The truthful answer…maybe. Historically, when inflation has passed 4% and unemployment has gone below 5% there has been a recession within 2 years. According to former US Treasury Secretary Lawrence Summers in a Fortune article “Today, the U.S. inflation rate is nearing 8%, and the unemployment rate fell to just 3.6% in March.” He is predicting an “80% chance of recession by next year.”
Another indicator of recession is the inverted yield curve. This means that long-term debt instrument (mortgage) rates are lower than short-term rates. A normal yield curve shows lower interest rates for shorter term loans (think 10 & 15 year mortgages) and higher interest rates for longer term loans (30 year mortgages). The inverted curve occurred between 4/1 and 4/4 for the first time since 2019. Short-lived but sounding alarms. Economists argue over whether the inverted curve actually will signal a recession but it has been a good indicator in the past. Take that all with a grain of salt, however, since we are still amid the infamous “unprecedented times”. The inverted yield curve may not affect mortgage rates directly but will most likely cause lenders to tighten up their loan requirements in the future.
The war in Ukraine certainly isn’t helping matters in relation to humanitarian as well as financial issues. It is tragic to see the scenes playing out on the news and certainly brings down the sentiments of the public watching it all unfold. Ukraine is also the world’s largest producer of neon gas which is used to make all those pretty signs and, wait for it…computer chips! Supply chain issues have already wreaked havoc on consumer spending driving up prices on everything from groceries to cars. And, don’t even mention gas prices. Everything is more expensive right now, not just homes.
With all this chaos in the world what can we do? Don’t panic. It’s all happened before. The Real Estate market as well as Financial markets are cyclical. Sure, it seems like things are spinning out of control but we’ve been here before and it won’t be the last time. Base your decisions on what works for YOU. Do you need to buy a home right now? Do it. Are you planning to “right size” for your changing needs? Go ahead. Even if you can afford less house right now due to rising interest rates and home prices you still need a roof over your head, right? The potential to refinance down the road will most likely be there. And, who knows where interest rates are going?
A couple of months ago I agreed with the sentiments that interest rates likely wouldn’t rise above 5% before the end of the year. I’m eating those words now. Still, the possibility of reaching the 20% interest rates of the late 70s and 80s is far off. The market needs to soften for affordability. Demand is keeping home prices high, for now. Builders are starting to see some relief in the supply chain allowing them to complete houses that were being held up by lack of materials. Foreclosures (remember those?) are starting to pop up in markets that are not as desirable. Lots of outside factors are affecting home prices right now. So, my only advice is keep saving your pennies and working towards what is the ideal situation for you and your family.