• Michael Belfor

Recessions and Real Estate

Updated: May 16



I've been wanting to write something on this for some time as I was watching this first quarter this year. Remember as brought up in past posts, market cycles are necessary for a healthy market. I had a short post published on this which can be read here:

The Real Estate Cycle


Most are concerned about the Fed Funds rate and how it effects borrowing or interest rates however as we noted back in 2020 when the Fed brought rates down, the Fed Funds Rate is not something that directly effects interest rates for mortgages as mortgages generally are a long term versus a short term instrument. This is why we generally follow mortgage backed securities and treasuries, notably the 10 Year Treasure Bill is one that most look to and compare.


That being said, keep in mind that treasuries are effected by inflation. I mentioned this in a previous post which can be found below, which unpacked the fact that inflation is the arch enemy of interest rates/treasuries. To read these, please visit:

Inflation and Interest Rates

Inflation Is On The Rise


It's important to then understand that inflation would cause the Fed to adjust their rate as the Fed adjusts based off of their balance sheet. We have seen this in the past, including recession and inflationary periods as what can be seen in the example below.


Note that in the early 1980's when hyper inflation appeared, the then Fed Chair did nothing, but this changed when the chair changed. Essentially Volcker raised the rate, which curbed inflation and gave a response to the interest rate drop of that era. Note, things also calmed down in the 2000's when Alan Greenspan did the same.


Most forgot what took place in December 2015 when we saw a rate cycle. It was then that rates started to jump and of course, in 2017, we saw pricing improve as a result. Time will tell what will take place throughout this period however it is more than likely that the markets will indeed eventually calm down versus continue to jump as it has so far this year.




Note the correlation for the 10 Year Yield (10 Year Treasury) and interest rates below:





There are a couple of anomalies I think we should also remember however, as the Fed decided last August to slow or tapper on their bond purchases, which caused interest rates to go up as well. It is really anyone's guess, however unlikely that we'll see interest rates go back to their all time low throughout 2020-2021 due to the fact that the Fed assisted with this due to their purchasing of these instruments for the sake of stimulating borrowing activity.


Note, that this played a role in the interest rate rise we saw throughout the fall and winter of 2021 and in my opinion, is unlikely to take place again due to the debt ceiling issue that presented itself in the fall. I had a few posts on this which can be found here and here.


Recession Looming


We saw last month that consumer demand remains high even in the face of rising prices, which hit another 40-year high with prices rising 7.9 percent over the last twelve months. One of the main drivers of the gains was energy prices and those are not expected to moderate anytime soon. Consumer sentiment fell to its lowest level since mid-2011 as consumers recognize their purchasing power has been reduced because their income is not keeping up with inflation. Demand is expected to recede over the coming months leading to lower discretionary spending activity and weaker economic growth.


These are all signs for a recession and note we also have been watching key technical date that deliver the evidence of a recession as well. Some of these include the 2 Year Treasury and the 10 Year Treasury crossing or causing what is called "inversion."


This is a simple thing that can be charted out our found as something that was an early sign of a recession as what can be found in the graph below, dating back to 1970:



This also can be seen on this graph:



The big question I get surrounding a slowing market and recession is what happens to interest rates and what is the trend with interest rates. I find it important to note that interest rates tend to do better in recessionary periods, or improve.


Their improvement is not necessarily a measurable amount however, as what can be seen with the averages below. I think noting the fact that there is generally an improvement however is, allowing for improvement should one be in a position to refinance or improve their situation.


Housing Stability


So this is a loaded question. If you've seen my posts throughout 2020 and 2021 which can be found here here and here it is more than likely that housing will remain strong.


I do believe that a correction of sort is inevitable as it allows for a healthy market. We have had double-digit appreciate for the last few years and this simply is not sustainable. It is more than likely at some point a correction will occur however as what can be found in my previous posts it is more than likely it would not be a disaster like 2007-2008.


Remember, that particular recession was brought on by the housing bubble, which was largely brought forth by the over appreciation, over development of homes while deregulating underwriting and credit guidelines. The deregulation and credit availability overextended most to the point that they were underwater often before ever stepping into their home. In this market, more than 50% of homeowners have 50% or more equity in their home, and let's not forget the growing demand due to the lack of building over the last decade and the stark increase in population.


Further, to look at past recessions, the graphs and charts indicate that it is more than likely that if a slight correction or a correction of 5-10% took place, it's more than likely that housing would continue to appreciate as what can be seen in the charts below. This should give most the reason to buy if they're ready and able to do so as no one truly knows when the correction would take place, if at all.




It might also be important to note that with job growth and employment wage increase, affordability is likely to continue as what can be seen in the chart below, which includes the appreciation we've seen as well as a rate increase:



The end question is what should people do if they're looking to purchase a home? I think with the relative data we have it's still a great time to buy if you're contemplating purchasing a home. With interest rates rising for the interim, it's more than likely that there will be an opportunity to own versus the fierce competition we've been seeing. It is also more than likely that there would be a slowing of the rising interest rates, and perhaps even an eventual decrease which would allow for a home owner to buy at a rate today to refinance and put themselves in a better situation.


The bottom line is, if you're looking or had a desire to buy and can do so - there is still plenty of opportunity. If you have any questions about any of this, I am always here, feel free to contact me as I'd be more than happy to unpack this further for you.



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