Are We Due For A Recession in 2019?

GDP Graph

Is a recession looming? It’s an important question because the U.S. economy has been experiencing one of its longest expansions ever. There were two recessions in the 1970s, two in the 1980s, one in the 1990s and two in the 2000s. Since 2010, there have been none.

Is there A Trigger?

Every recession has a trigger. In the 1970s it was energy price shocks. Could that happen today? Probably not, because the U.S. is now the world’s biggest oil producer. one potential trigger could be an unsustainable rise in borrowing. But the fact is consumer debt has risen only about 5 percent annually for the last few years. Although that’s fast, it’s not catastrophic. Past recessions were preceded by debt increases of 10 percept or more. More importnat, the largest part of household debt is home mortgages and those loan balances total about $10 trillion today, about the sme as 10 years ago even though housing values in the aggregate have climbed from $18 trillion to $28 trillion.

Another trigger could just be psychological. Pessimism leads consumers to spend less. That leads businesses to scale back, reduce investment, and not build that additional factory or office. But consumer confidence this year is at an index level of 127, the highest reading in more that 20 years!

Finally it could be policy error. Turkey is an example of how a decision – lowering interest rates in the face of rampant inflation – can lead to a crisis.

Although it’s not clear what could trigger the next recession, it’s a good bet it won’t have anything to do with our industry. The housing market still has room to grow. A total of 6.1 million existing homes plus newly constructed homes will be sold this year. That’s the same level as in 2000, when the market was considered well balanced. Homebuilders are at last responding to pent-up demand by increasing housing starts and creating jobs. For these reasons, the odds of a recession in 2019 are slight. And if we do see a drop in GDP, it will likely be mild – nowhere near the intensity of the recession a decade ago.

Concerns about a housing slowdown NOT supported by the data. However, the pace of existing home sales is expected to decline slightly by the end 2018, despite population and economic growth, lower unemployment, and modest wage gains. Declining affordability is the issue.

Interest Rates Rise Again

Interest Rates

In August, the Federal Reserve announced that there would be another raise in the interest rates by a quarter of a percentage point. The vote to raise the rates was unanimous, with all eight of the participants in agreement. They also signaled that there could be an additional two raises over the course of the remaining year, and potentially even more raises than that. This means that the officials at the Federal Reserve are expecting and on track for there to be four increases in the rate this year, which is up from the earlier prediction of three.

The Rates Could Rise Even More During the Remainder of 2018

Most of the experts believe that there will be at least three raises in 2019 and another three in 2020, which could end up putting the rates between 3.25% and 3.5% by the end of the year in 2020. The Federal Reserve later released a statement that the labor market was strong and that the economic activity had been rising solidly. The officials have projected that the gross domestic product will be increasing 2.8% in 2018, which is up by 0.1% from the earlier projection.

Additionally, they believe that the unemployment rate is on track to fall further than the projected amount this year, as well. The early projections were that unemployment would be at 3.8%, while the current projection is that it will be down to 3.6%.

With the new insight into what’s happening with the interest rates, it appears that even after raising the rates and having them reach what is called a “neutral level”, they will continue to raise the short term rates. The neutral level is a term that means the rates are at a point where they are not going to either slow the economy now stimulate it.

The overall economic outlook for the country does seem to be positive, at least according to the U.S. central bank. The bank has upgraded the outlook due to several different factors including rise in global growth, tax cuts that have been approved by congress, and an increase in the amount of federal spending.

What Does This Means for Those Who Want to Buy a Home?

While a rise in the rates might indicate that the overall economy is performing better, those who are considering buying a property will want to think about how the rise in the interest rates are going to affect them. When the Fed raises the rates, it means that the lenders are going to raise their rates accordingly. When this happens, the mortgage rates are going to increases, as you would expect. This will then make it more expensive to buy homes.

However, it does not mean that the homes are going to be come prohibitively expensive, of course. Those who have good credit can still get some very good rates when they get their mortgage, which helps to keep the homes in line with the market and what people are willing and able to pay.