I’ve been hearing about an impending recession for over a year. It’s not hard to imagine it, especially when looking at the horrific data that is piling up.
As you can see, we did have similar contractions in the ISM in the mid-1990s, and they didn’t result in a recession in the United States. I remember that period vividly, and it did lead to recessions in other economies.
The reason this is pretty interesting is that if the U.S. economy prepares for the worst but doesn’t actually slide into a recession, the bounce back is VERY STRONG.
Based just on historical ISM data, a recession isn’t assured.
But then you start to see more information coming in, and it is not pleasant. There’s rampant deterioration in earnings as well, and I feel that is the worst piece of important knowledge.
There are many more points of relevance that I want to present, but I think that we need to consider the most important one, the sole catalyst that will make or break the U.S. economy and decide if this will be a period of sluggish growth or a recession, and that is residential real estate.
So, here’s where we find ourselves after mortgages have nearly frozen.
First of all, the most reliable surveys of buyers say this is the worst they’ve ever felt about conditions. Sellers are saying the same. In other words, this is not a market where sellers are happy and buyers are discouraged…
Both think they’re getting the short end of the stick. This means buyers are signing mortgages and sellers don’t want to lower prices.
The market is frozen.
Or, at least that’s what the most widely read publications claim.
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The Case-Shiller index, which is the barometer that everyone uses, is a delayed one. As you know, it collects SALES TRANSACTIONS, averages them, and forms the chart.
In other words, if prices have bottomed out, it will show that at least 90 days after the fact.
What I did is actual legwork… I called relators on active listings, and the prices are CLIMBING while buyers are paying.
The yield curve steepening is the most reliable recession indicator, and it is showing clear signs that a recession is imminent, but…
As you can see above, not all recessions are created equal.
Some are mild while others are lengthy.
Some bring with them double-digit unemployment numbers, and others aren’t as severe.
This recession finds us dealing with:
· Rapid deglobalization
· Meaningful conflict in Europe
· A labor shortage
· A housing shortage
· Very high inflation
At the same time, markets and small businesses have already adjusted to the new reality.
Buyers of real estate have come to grips with normalized interest rate levels, and venture capital has accepted that zero interest-rate policies are a thing of the past.
If you ask me, don’t build your entire life on the script that the worst is yet to come.
We believe that while there is a slowdown underway, it won’t lead to a recession, but rather a churning followed by resumed growth in 2024.
The playbook is to be extra patient and ONLY pull the trigger on real value.
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