Economist: "Existing home sales really are at very recessionary levels"
Back in the day, certain key characteristics had to occur before an economy could be labeled as being in a recession – a period of economic decline, an increase in unemployment, a dip in the stock market and a dip in the housing market.
One out of four would seem firmly in place, as mortgage professionals will only be too aware.
Yet the economy itself – as measured by real GDP – has expanded at an estimated 2.0% to 2.4% annualized pace through the first half of the year, according an a JP Morgan analysis. “Consumer spending – which drives 65% of GDP – has been resilient throughout,” analysts wrote. Not terribly robust GDP growth, but growth, nonetheless.
In terms of the unemployment rate, it rose by a mere 0.3 percentage points to 3.8% in August, and the number of unemployed persons increased by 514,000 to 6.4 million, according to the Bureau of Labor Statistics.
Surely, then, the stock market must be tanking. Well, no, according to Investor’s Daily: “US stock market gains in the first half of 2023 have been rosier than some entire years in the past.” Especially notable was the S&P 500’s rise in June of almost 16% -- surpassing full-year gains in 2010 (up 15.1%), 2011 (2.1%), 2014 (13.7%), 2015 (1.4%) and 2016 (12%), the publication reported.
Talk of recession continues
Still, talk of a recession continues – triggering further anxiety among would-be homeowners waiting on the sidelines for rates to drop or existing homeowners staying in place, unwilling to extricate themselves from mortgages secured with considerably lower rates than those today.
Mortgage Professional America spoke to Fannie Mae’s chief economist Douglas Duncan, for an explanation. The GSE has predicted a “mild recession” by next year, despite the other positive dynamics once factored into the mix.
“The beginning and the end of a recession are defined by the business cycle dating committee the National Bureau of Economic Research,” Duncan said during a telephone interview. “That’s the official body. They look at seven different variables – two of those variables are gross domestic product and gross domestic income, two things that should, over time, converge because gross domestic product is measuring the value of production and gross domestic income is summing up the sales related to that production. So the two of them should be equal.”
Here’s where things start to get fuzzy: “There are some statistical discrepancies right now - they are quite diverged and when they diverge it is always the case that gross domestic product converges toward gross domestic income,” Duncan said. “Gross domestic income fell in the last two quarters and the first implication for this quarter is that it was just barely positive. So that suggests if they converge just as they have in the past, that growth is actually going to be a lot lower than people think.”
This is not your grandfather’s recession
Turns out, this is not your grandfather’s definition of a recession. There are multiple other factors at play. “There are five other monthly indicators,” Duncan explained. “A couple of them in the labor markets - industrial production, for example, which right now is being impacted by energy related issues. There’s only one of those five that’s pointing today to recession.
“But there are other things they don’t consider like the index of leading economic indicators which is a summary of 10 different measures highly correlated with recession when it goes negative and it’s been negative for 15 months. Inverted yield currency, and you have heard, about short term interest rates being higher than longer-term interest rates - that is a very strong correlation to recessions. It’s been negative for a year just about – that’s a long time. Those are correlations. That’s not causation, so it’s not a guarantee, it just says that when one happens the other one typically happens.”
With all that, the housing industry emerges as the biggest spoiler. As Duncan sees it, the segment is the most recession-presenting of them all. “Existing home sales really are at very recessionary levels because the current range of existing home sales is very similar to the very bottom of the great financial crisis which was a very serious recession,” he said. “Existing home sales at that point fell to about four million; right now, they’re at about 4.1 million.
“So very recessionary sales on existing homes, but not for reasons driven by financial market disruptions or huge unemployment or anything like that: driven because of the lock-in effect and the Boomers aging in place. It’s really a supply issue. New home sales, not recessionary, they’re doing very well. They’re expansionary. That’s why I say mild recession. If it’s a soft landing it won’t surprise me. It’s kind of a break-even proposition.”
Yet for all the updated and modernized definitions of what goes into the making of a recession, one’s own perception is the one constant – a timeless, intangible data point working independently of economic machinations. Duncan himself reached back to a bygone era in quoting President Harry S. Truman to convey perspective: “It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.”
At the end of the day – recession or not – we’re far from a doom-and-gloom scenario, the economist agreed. “What people forget is that if unemployment goes to say, 8%, 92% of people are still working. So it requires putting it into context.”
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