The inverted yield curve is one of the best predictors of a recession. You can see below that each time bonds with a shorter duration return higher yields than those that have longer duration’s that the economy falters (indicated by the grey highlights). We have been slowly marching towards this point since 2014. As the Fed continues to set rate hikes, based on their perception of the economy’s strength, it has continued to press the two rates together. This tells me that investors have less confidence in the near-term economy than the government.
My economics professor Christopher Schwarz at UCI recently supported this notion when he plotted the market’s forecast of the fed fund rate diverges from the Fed’s internal forecast. They start to diverge by an entire rate hike by 2018. See the chart below for a visual of this.
There has been a lot of new about the stagnation of sales even as inventory has started to come up slightly. This is indicating that we are going to see some price softening. When taken by itself this data suggests a housing recession is around the corner. However; below is a the most recent information around housing starts that paints a different picture.
Having worked in real-estate for 15+ years it is my belief that this is a great gauge of the housing market. When new homes start to drop by a couple of million units a year you can bet that we will hear many of the pundits start to talk about how the housing market is way down. Similarly; if we get back to the 2,000,000 units/year number you can also count on most everyone saying things are starting to heat up. It is the later that generally causes the real-estate professionals to start saving their money to invest.
The chart below indicates that we are still somewhat in the middle of the two with an upward trajectory. This gives me pause in jumping on the sky is falling bandwagon. It looks like we still have at least a couple of years before a downturn to me. We might not see the staggering growth of the past couple of years, but it would be unique to see that type of growth given how it has outpaced both inflation and wage growth.