Is there a recession coming in 2020 or sooner? And if so, what does that mean for the real estate industry? Additionally, how do Chinese buyers affect California real estate? Jay Vorhees of JVM Lending (with a little help from The National Real Estate Post) has you covered:
The National Real Estate Post had a great video today with information I thought was well worth sharing. Marketing commentator Barry Habib discusses margin compression, the coming 2020 recession, why he is bullish on real estate even if a recession hits, and why Chinese buyers influence California real estate so much.
RECESSION IN 2020 – WHY?
Mr. Habib agrees with other prognosticators I have cited in previous blogs and illuminates two reasons why a recession is likely in 2020:
- Short-term rates are almost the same as long-term rates. I won’t explain the economics, but I will say we are at this stage in the interest rate cycle now; and
- Unemployment has likely bottomed out and will only increase at this point.
BULLISH ON REAL ESTATE EVEN IN RECESSION
Mr. Habib remains very bullish on real estate – even if a recession hits. He thinks a 10% correction is very unlikely for several reasons:
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- It is different this time for reasons we have explained in previous blogs – tighter lending guidelines, more structural housing demand, etc.
- Rates come down during recessions and that props up real estate prices; and
- According to Mr. Habib, if you look at data from the last six recessions (other than the 2008 meltdown) you will see that real estate prices usually do not decrease significantly.
CA PRICES HURT BY CHINESE BUYERS PULLING OUT
15% of the money spent on real estate transactions in California is from China. But b/c China’s currency is now so much weaker than it was relative to the U.S. dollar, Chinese buyers are now sitting on the sidelines. This drop off in demand is already affecting prices, particularly on the high end. But, according to Mr. Habib, this too will end and Chinese demand will return.
I hope this helped you learn a little something about the impending recession, how it affects real estate, and why Chinese buyers may affect the market long-term!
Now, with a little input from us:
Comments from Bob Schwab – Inverted Yield Curve
Our in-house lender has remarked that one of the indicators a recession may be on the horizon is an inverted yield curve. I asked what that means, and here was his response (note any errors are mine via translation):
“The U.S. runs a deficit, and in order to pay on the deficit, they sell treasury notes and pay interest to the purchaser. Normally, the longer the you take the note, the higher the rate or return; [in the] shorter term, the lower the rate the government will pay you. When the short-term notes have a higher rate than the long-term is when we have an inverted yield curve. That margin has been steadily decreasing, and we have been about 30 points away from an inverted yield curve, and thus why the buzz of a correction is coursing through the media. I am seeing a different effect; in June we had a wave of listings come on the market, when it usually quiets a bit due to summer vacations. I believe sellers are thinking prices might have reached a peak and now is the time to get their home on the market, which means we now have more inventory and more for buyers to choose from. The outcome is price reductions, things sitting longer, etc., because buyers now are thinking they will have a wait-and-see strategy!”
