Is A Recession On The Horizon? Yes. I Mean, No. Well, Maybe.

Everyone’s talking about impeachment whether or not a recession is on the horizon, and of course what that does to real estate. What follows is part of an email I sent my office last week while in Williamsburg for our state association’s annual conference. I wanted to include for the team my thoughts on the market after sitting in on a session called “The State of the Economy in Virginia”, from Virginia Realtors’ chief economist, Lisa Sturtevant. Often, these reports are rosy and pie in the sky, but I was pleased to see that she seemed to both be reporting realistically, at least realistic to what we’re all feeling on the street level here in the New River Valley. I know the economics might not be something we all geek out on, and that’s fine – my goal is to summarize some things for everyone. Here’s some of what I picked up:
  • Nationally, we’re in the midst of the longest sustained GDP growth in the history of the country. In the midst of that growth, we’re seeing job growth slow, which suggests something is going on.
  • Virginia has traditionally weathered recessions better than the rest of the country, in large part because of the federal government’s influence. Even in a recession, the federal government likes to spend money.
  • Unemployment in Virginia is 2.9%, compared to 4% nationally
    • Lisa explained that while this seems like a good thing, it’s not. We don’t have enough unemployed persons in the state to add jobs, and as you’ll see later we don’t have the housing inventory for people even when they move in from other states, so we’re in a sort of a stall there.
  • Number of sales in Virginia are up 2% year-over-year through July (the New River Valley is DOWN 9.2%)
  • Median home prices in Virginia are up 5% through July (the New River Valley is UP 8.3%)
  • Inventory in Virginia is down 8% through July (the New River Valley is DOWN 15.6%)
  • Homeownership rates in VA are at their lowest rates in the last 30 years (my note – some of this HAS to be because of inventory. If the inventory isn’t there, people aren’t going to buy because there isn’t anything to buy)
  • the 25-34 year olds are starting to get a foothold, with increasing wages/savings/savings rates … if there’s a recession, will this set them back?

So there are a number of positives going on:

  1. Millenials and first-time buyers are entering the market
  2. Wage and income growth is widespread across most demographics
  3. Consumer confidence is strong, but this could change. Political uncertainty around policy can certainly have an impact on whether consumers or businesses buy goods, and all indications are that businesses are slowing their purchases
  4. Interest rates continue to be at historic lows, and will be

And there are some things that are not so good:

  1. Job growth has slowed
  2. Affordability, or a lack of supply, should continue to be a growing concern
  3. Low-interest rates have encouraged lots of refinancing, but not necessarily buying

In her talk, Lisa pointed out some of the indicators of an approaching recession. They include (with an ✅ if we’ve seen it already, and an ❌ if we haven’t seen it yet):

❌ capital investment has slowed
✅ manufacturing index is down
✅ yield curve favors short-term rates over long-term rates
* When the curve is inverted, it shows that people are more optimistic about the short-term than they are the long-term
✅ housing starts have slowed
✅ global economy is slowing
✅ interest rates are already low
✅ and ❌ uncertainty abounds (maybe it doesn’t abound, but it’s there)

So … are we headed for a recession?
The uncertainty is there, and the data is there to suggest both that a recession is approaching … but it’s also there that we’ll weather the storm. Don’t you love the “it depends”, option? It seems to me, however, that indicators like lack of inventory, very few new housing units being created, and growing uncertainty regarding the real estate space, and the economy in general, suggest we’ll see a recession within the next 18 months. Shoot – as I was writing the email to the office, the Fed just cut rates by a quarter of a percentage point … that seems to back up the fact that there’s continued uncertainty, and they’re trying to use rates to stimulate. The real estate market just can’t continue to absorb the gains we’ve been seeing without a correction, and that correction will come. I want to be clear, however, that a recession is not a bad thing. Every economy ebbs and flows, and the incremental adjustments contribute to the overall health of the economy. We’re not going to see anything like what we saw in 2008-2010, which we weathered both at the state and local levels very well. 
I think it’s safe to say that we’re going to see the real estate market in the New River Valley, in Virginia, and nationwide, slow down. That may mean a few less homes in the NRV that are available for sale, as sellers decide not to sell until the market changes again, but it’s also going to mean fewer buyers to compete with, and less competition falsely inflating sales prices as well. There’s a silver-lining to each side of the coin – a recession, when it happens, will not necessarily be a bad thing.
Let me know if you have questions, want to dig into these more, or even have a dissenting position. We’re all smart folks, and there’s plenty we can learn from each other!

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