ities such as the two-year Trea- sury, has flattened substantially in recent months. When this measure of the yield curve slope inverts, a recession almost always follows. The slope, as measured by the difference between the 10-year and two-year Treasury for April 12, was at just 16 basis points. Not invert- ed, but close. If you stick this yield curve metric into a simple proba- bilistic model of recession over the next 12 months, the implied proba- bility of a recession starting over the next year is about one in five. That’s up from an implied probability of about one in six a few months ago. Why might the yield curve invert? One key factor driving the slope of the yield curve is the likelihood of future monetary policy actions. Since late last year when financial markets expected further rate hikes in 2019, expectations have shifted dramatically. Market-based measures of expectations are now pricing in a significant probability that the next Fed rate move could be a cut rather than a hike. business cycle in the United States, and housing market indicators have also been flashing warning signs recently. Home sales, housing starts, and house price growth all declined last year. While single-family house prices increased nationally in 2018, some regional markets experienced declines in house prices with sharp declines in house price growth rates in many markets in the western Unit- ed States. For most of the economic recovery, residential investment was adding to overall GDP growth, but in the last three quarters, residential HOUSING MARKETS TYPICALLY LEAD THE BUSINESS CYCLE Housing has typically led the
MY TAKE
The Risk of Too Few Homes
Mortgage rates declining in the early months of 2019 is a reason for optimism about housing market activity, but there is more reason for optimism than just the short-term boost from lower rates. When we look at housing market activity, it helps to think beyond the business cycle. Statistical decomposition of housing market indicators reveals medium-term (8-32 years) and long-term (>32 years) trends are important drivers of housing market activity. These trends reflect demographics that, over the long run, will dominate housing market activity.
BY LEN KIEFER
T he current economic expansion is set to complete its tenth year this fall, surpassing the 120-month expansion of the 1990s for the lon- gest in U.S. history, dating back to the mid-1800s. However, despite a low unemployment rate and robust job growth, several forward-looking indicators have started flashing warning signs causing the outlook from my peers in the economics profession to turn negative. In a survey earlier this year for the National Association for Business
Economics (NABE), two in three economists surveyed expected that the next U.S. recession would begin by 2021 (though not me for reasons discussed below). Despite the potential warning signs and negative sentiment among my peers, the economy looks pretty good. The unemploy- ment rate as of March 2019 sits at 3.8 percent, a very low level by historical standards. However, the unemployment rate is a poor pre- dictor of future economic activity.
The average number of months between the cyclical low of the unemployment rate and the start of the next recession is seven months. WARNING SIGNS Financial market indicators, which move faster than economic data, have pointed to a deteriora- tion in growth prospects. The yield curve slope, or the spread between long-maturity bonds like the 10- year Treasury and shorter matur-
16 think realty housing news report
june 2019 17
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