The housing market is signaling there will be an economic recession by the 2020 election, according to Benn Steil, director of international economics at the Council on Foreign Relations.
“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.”
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.
Household income has been growing, but it hasn’t come close to keeping up with the increase in home prices. For example, the median annual household income in August rose 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.”
A slowdown in consumer spending, which accounts for about 70% of GDP, points to an economic contraction. Economists define a recession as two subsequent quarters of negative GDP.
“If these trends continue, we should expect broad falls in home prices beginning by mid-2020, which will, in turn, drag down household spending against a darkening economic backdrop,” the post said. “Growth has been slowing, with Trump’s tariff war hitting exports. Manufacturing is contracting. Retail sales, excluding autos, have stalled. Consumer confidence is falling.”
The Federal Reserve probably doesn’t have enough power to stop a recession, the authors said. When the economy slows, the Fed cuts 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.”
