Opinion: Q4 of 2022 Will Be THE Recession

Bond Yield Curves Explanation 2022

Let’s be clear – right now in August of 2022, we meet the definition of a Recession currently. We are already in a slight recession. But Quarter 4 of 2022 and 2023 will be the period that defines this Recession. Get your assets ready.

Treasury Bond Yields – The Predictor of Recessions

Inflation soared to a staggering height in June of 2022. The Treasury Bond Yields have been inverted for quite some time, and despite the multiple Fed Rate hikes intended to curve inflation, the opposite has occurred. But why do Treasury Yield curves matter?

Treasury Notes, Treasury Bonds, Treasury Yields… Ay yah yah. Is your head spinning yet? That’s okay, this is a common recurrence for me too. Don’t feel alone.

Treasury Yields reflect the confidence that investors have in the economy. That’s a brief explanation, but not the definition of what a Treasury Yield is. You can learn more about them in this article from Investopedia.

The major point: There are people that study the economy, and these yields, as a career. These professionals have spent years developing a fundamental understanding of when seismic shifts will occur. You can choose not to pay attention, but I wouldn’t advise that!

Economic Growth Under President Trump

After researching economic stats in the United States for the last ten years, it’s noticeable that economic sentiment during President Donald Trump’s tenure between 2016 and 2020 boosted the average American’s ability to spend. See below:

Source: U.S. Bureau of Economic Analysis – BEA, if you’re reading this THANK YOU!

If you wish to read more about Trump’s Presidency from a research standpoint, read this article by the Pew Research Center. I’ll save the politics for the politicians. They’re really great.

Between 2016 and 2020, America experienced record low Mortgage Rates. The Stock Exchange posted record highs. In 2017, Bitcoin soared from $900 to $19,000 per share with the emergence of Blockchain technology. Is all of this ringing a bell yet?

The point is, Americans accumulated some serious wealth. That’s the only thing keeping us from a noticeable Recession at this moment.

Americans Are Big Spenders

The average American has a serious problem. Our lack of financial discipline results in big spending. Bankrate’s study revealed that the average American household earns a little over $84,000 per year. Guess how much of it they spend?

A little more than $70,000… Yeah, not good. At least it isn’t $80k, right? Who’s counting.

The major point: Eventually, the “well of money” (cash and retirement reserves) that Americans are dipping into and spending will run dry if we fail to display more financial discipline. Technology is making profit propensity easier. There’s no denying that. But if you believe in balance as fiercely as I do, you may agree that as earning becomes easier, spending will become more flamboyant.

Parents, teach your kids how to manage money. If you don’t know how, find someone who does. Even if you pay them for their teachings, you could very well be building generational wealth through their financial habits.

Housing Market Implications

We’ve discussed the underperformance of the Treasury Yields. We’ve talked about recent income growth of the average American and how that money will eventually get spent because of our habits.

Right now, (at least in the Nashville, Tennessee & Savannah, Georgia real estate markets) we’re seeing a sizeable swell of “Days on Market” for homes in the region. Why is that relevant? Housing Statistics usually are not updated until the homes close. This is critical, because it allows us to make projections and advise our clients accordingly. Average Days on Market stats have not recorded a significant shift yet, but I expect those to show up in the data in later publications in Q4 of 2022.

The recent Fed Rate hikes depleted the population of homebuyers immensely. Overall home buying sentiment has also hit it’s lowest point since 2011, according to Fannie Mae. We’ve also seen lower drops in number of mortgage applications reported by month this year than increases (more elasticity toward the dips). And the drops have been significant, “lowest since” type of numbers.

source: tradingeconomics.com

The major point: How do a majority of Americans liquidate their invested equity? By selling homes. These stats currently reflect more difficulty to sell real estate nationwide. Remember, the longer a property sits on the market, the more we as Americans decide to drop our prices until it sells. Right?

We’re going to see a deflation in Median Home Prices. We’re already seeing the Equity Growth Rate drop. CoreLogic (a major real estate data and software provider) reported that Q1 of 2022 reflected a 32.2% increase in equity growth from Q1 of the previous year. It’s grown around 20% annually for the last decade. That equity is expected to slow to 5% by May of 2023, according to this August 2022 post by CoreLogic.

Less equity means less cash flow being circulated through the American economy.

Conclusion: Cyclical Flow of Money Will Decline

Recessions have one common characteristic… People substantially slow their spending, due to fears of job loss and not being able to sustain comfortable lifestyles.

As mentioned, we’ve experienced an immense income growth for the last 10 years. But the changes that have been made to U.S. Economic Policy (thank you Federal Reserve) and politics in general under the new administration leading to an increase in fuel prices (January 2021 Oil Reform) has shock waved through the entire Economy.

The major point: With Summer ’22 ending, the average American Household will travel less with children going back to school, and they’ll splurge less as they prepare for the Holidays. Imagine less people at restaurants, less fuel spending, less goods being bought overall… With Economic uncertainty already setting in, the major decrease in spending will cause a large population of startups and low profit businesses to lay off workers or even close altogether. Job losses equate to the inability to pay mortgages. If we couple that with difficulty selling, we’re looking at a rise in foreclosures.

It will take longer for the major employers nationally to begin layoffs and Place of Business closings. But mass layoffs have already begun for some major businesses. This will worsen in the days to come.

I expect 2023 to be the “bottom” of the Recession.

To my readers: I just want to thank you profusely for following these articles. I jokingly call this blog “Real Estate University.” But I do this for you guys, ALL of you. Even if we haven’t met, I care about your overall knowledge and awareness of real estate and how it impacts the U.S. Economy.

Thank you so much for following this blog. God bless you my friend!

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