The gap between home prices and income are currently pointing to a recession by the 2020 election…
The housing market has started flashing a recession warning. The gap between home prices and income are currently pointing to a recession by the 2020 election.
According to Benn Steil, the director of international economics at the Council on Foreign Relations, a dynamic similar to the one in 2008 is currently playing out. “Looking back at the years preceding the 2008 financial crisis, a critical warning sign was the surging gap between the growth in home prices and household income,” Steil wrote in a blog post with former CFR analyst Benjamin Della Rocca on the think tank’s website. “Today, a parallel dynamic is playing out.”
According to a report by Housing Wire, in 2018, as in 2005, housing-price growth began slowing, with significant price drops occurring in several major markets, the post said, linking to a story on New York home prices in “near free-fall” from earlier this month. Part of that is due to the “mansion tax” New York is placing on the sale of certain homes.
Household income has been growing but at an anemic rate. It hasn’t kept up with increases in household debt and it hasn’t come close to keeping up with the increase in home prices. For example, the median annual household income in August rose a meager 1.3% from a year earlier, Sentier Research said earlier this month. That compares with the 4.7% gain in the U.S. median home price in August from a year earlier, using data from the National Association of Realtors. “The trend-line in existing-home sales growth has also been down since 2015, tipping into negative territory at the start of last year,” the post said. “Similar drops have preceded nearly every recession since 1970,” it said. “When income fails to keep pace with home prices, the latter must fall back,” the post said. “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.”
As we have pointed out before, a decrease in consumer spending can also signal a looming recession. Consumerism accounts for 70% of the U.S. economy, and when people are forced to cut costs, consumerism is often one of the first things to take a hit.
The central bank won’t be able to help much during the next recession either, according to the authors of the report. When the economy slows, the Federal Reserve will cut its benchmark rate to make it cheaper to borrow and encourage economic growth. But, the rate already is so low it probably won’t be enough to help, the blog post said. “If we are really on the cusp of a recession it will likely take more than 175 basis points of easing to prevent it – and that is all the central bank has to play with before we’re back to the zero lower bound,” they wrote. “At that point, applying monetary stimulus becomes considerably more challenging.”
That’s why we should prepare ourselves, and never wait for the government or a central bank to bail us out.