A Federal Reserve economist says the current housing backdrop is similar to recent economic slumps, with several metrics “consistent with the possibility of a late 2019 or early 2020 recession.”
“Data on single-family home sales through May 2019 confirm that housing markets in all regions of the country are weakening,” the St. Louis Fed’s William R. Emmons said in a report posted on the central bank district’s site. “The severity of the housing downturn appears comparable across regions—in all cases, it’s much less severe than the experience leading to the Great Recession but similar to the periods before the 1990-91 and 2001 recessions.”
Specifically, Emmons looked at sales numbers for the 12 months ending May 2019 compared to the average over the past three years. He uses December 2019 as the “plausible month for peak growth” in the current case, and then looks at how far back from the peak was the first month in which sales fell below their three-year average in the previous three recessions.
The process may seem at least somewhat opaque, but Emmons said it has been a reliable indicator from the housing market for when the next recession is due — usually about a year away, according to historical trends.
In the Northeast, for instance, August 2018 was the first month that sales fell below the region’s three-year average. That would be 16 months from the December 2019 assumed peak. In the previous recessions, the first negative month respectively came 23, 10 and 21 months before the peak. That would put the current pattern within the historical range, Emmons wrote.
These charts look at how each region stacks up. The four lines each represent a recession; the deviation of the 12-month sales average toward the three-year average decreases until it goes negative; the charts then show how long it took before a recession hit:
In addition to the sales numbers, Emmons said current mortgage rates, inflation-adjusted house prices and residential investment’s contribution to economic growth are similar to patterns that preceded the most recent three recessions.
Single-family home sales work best as indicator, he said, because the other metrics are national in nature and thus don’t reflect whether the deterioration has spread through all regions.
“Considering signals from other housing indicators and from indicators outside housing with good forecasting track records (such as the Treasury yield curve), the regional housing data noted here merit close attention,” Emmons wrote.
Calling for rate cut
The St. Louis Fed, where Emmons works, is led by its president, James Bullard, who has been one of the loudest voices on the Federal Open Market Committee advocating for an interest rate cut. Bullard was the lone member of the monetary policymaking body in June to vote against keeping the benchmark funds rate steady. He is advocating an “insurance” cut to head off anticipated economic weakness.
Markets are anticipating up to three rate cuts this year, though most Fed officials have not committed to policy easing ahead of the July 30-31 FOMC meeting.
There are mounting signs that global weakness and business concerns over tariffs could hamper U.S. growth or cause an outright recession.
The New York Fed uses the spread between the 10-year and three-month Treasury yields to determine the probability of a recession over the next 12 months. That part of the yield curve has inverted, which has been a reliable recession indicator. Chances for negative growth by May 2020 are at 29.6%, up from 27.5% in April and the highest level since May 31, 2008, just as the financial crisis was set to explode in September.
Still, there are hopes that the U.S. can withstand a significant downturn.
Cleveland Fed President Loretta Mester, in a speech Tuesday, pointed out that the economy has been resilient through growth scares during a recovery that began 10 years ago. Mester said she expects housing to be neutral for growth this year.
Also, Joseph LaVorgna, chief Americas economist at Latixis, said a diffusion index of leading economic indicators is showing positive trends for six out of 10 components, indicating that “the risk of a downturn remains relatively low.”