Where Are We Now … What’s on the Horizon
Generally, I’m pleased with my projections for the economy over the last several years … especially as it has impacted residential real estate investors and tenants. Now, I offer a note of caution as I envision embryonic, yet clearly evident, signs that the market is slowing. In my mind, there is unmistakable evidence that recession is looming as we approach the end of the peak economic cycle we’ve enjoyed these past nine years or so.
Admittedly, while I am firmly convinced that the downturn will come, my crystal ball does appear a bit cloudy as to when. That said the following article will offer some indications that several trends are afoot that quite often are 2-year precursors to a financial slump.
A Bit of History – Recessions > Recoveries > Recessions
As you are reading this, the U.S. will have experienced the third longest period of economic expansion following a recession. In this case, it is particularly dramatic for two reasons:- The Great Recession of 2007 – 2009 was the worst business contraction since WW II.
- If the expansion continues to perk along, it will break an all-time record of 120 months at the end of June of this year.
It’s now over 9 years since the end of the Great Recession. While the median time between recessions is a little over 4 years, we may see a 10 year run in this recovery … or longer. Of course, as the chart above illustrates, there is no set timetable for recessions or recovery times. But there is one thing you can count on, business cycles are a reality and “all good things economy-wise” will come to an end.
What to Expect … What to Look For
Many experts point to the extended recovery time record due to the Federal Reserve exercising an accommodating, super-cautious approach to Fed interest rate hikes. Since WW II, the Fed responded to recessions with a series of interest rate hikes. In contrast, the U.S. central bank kept its benchmark short-term interest rate near zero until recently and then only with disciplined increases. By one report, even the most hawkish committee members anticipate interest rates to remain at historic low levels for years to come.Four Items to Watch with Measured Concern
Delinquent Car Loans The Federal Reserve Bank of New York reports at least seven million American consumers were seriously late on auto loans at the end of last year. Notably, most of which are Millennials. In 2018, auto debt accounted for about 9 percent of total U.S. consumer debt, up from 6 percent in late 2011… a 50% jump. In contrast, that’s one million more delinquencies than at the end of the Great Recession.
The report found that a majority of the borrowers who were behind on car payments were under the age of 30. This makes sense since Millennials and Generation Z are the ones who are already straddled with budget-crushing student loan payments. Add a crippling car payment and it is a recipe for financial calamity.
So given a young borrowing population, unemployment at four percent and job openings at an all-time high, may prompt incurring car loans for a coveted new vehicle while ignoring the fiscal consequences if it ends up they can’t afford the “ride”.
Home Mortgage Loan Delinquencies
No less an authority than Moody’s reports that mortgage delinquencies are on the rise. The drivers seem to be twofold:
- Loosened underwriting standards by lenders, and
- Slowing home price growth (more on that in a moment)