If only you are willing to take a quick step into the readily ascertainable and prophetic world of interest rate spreads, you will discover the likelihood of either a downturn or upturn in real estate sales activities one year from now. To see if a recession is coming or if a current recession will deepen or begin to fade, you need look no further than the amount of the interest rate spread between three-month and ten-year treasuries, called the “yield spread.”[See the Cleveland Federal Reserve Bank’s “The Yield Curve, December 2008“]
Today the yield spread is +2.555%, the difference between the three month rate (0.325%) and the ten-year rate (2.880%) on Treasuries.
Thus, the likelihood of a decline in general business activities is 0.5%. Nothing.No chance of a recessionary downward trend remaining by December of 2010. This positive forecast sent by the February 2009 yield spread is in sharp contrast with the negative yield spread during the last half of 2006, a negative spread of -0.205% when the three-month interest rate was higher than the ten-year note rate. The negative spread predicted a 40% chance of a recession to take hold one year forward in December 2007 — the month we formally entered the current recession.
Lesson: when the yield curve goes negative, we will most certainly be in a recession within 12 months. Each of the past seven recessions have been preceded by a negative (inverted) spread one year earlier. Said another way, each time since 1960 that the yield spread went negative we were in a recession within approximately 12 months.
If you hadn’t become convinced of a real estate downturn by the mere fact adjustable rate mortgage (ARM) rates began increasing after August 2004, or that the volume of real estate sales and mortgage originations peaked in August 2005, or that real estate prices in Southern California had peaked in December 2005, then the yield curve going negative — inverted with the three months exceeding the ten-year treasury in mid-2006 fully warned you of the inevitable end of the boom and the beginning of a full-blown recession bylate 2007.
You were forewarned!What steps did you take to isolate yourself from real estate’s financial disaster in 2008 through to 2011 — the recent lifespan for the bottoming and stabilization of real estate prices and sales transactions after the beginning of a recession?
But this cyclical downturn is not your ordinary business recession which infects one or two major regions of the United States. All regions have now been affected at the same time (some more, like California or Florida; some less, like North Dakota or Montana) as well as all countries in the world. The only locomotive standing with the strength to pull all economies out of the recession is the almighty US dollar. Hence, Cash Is King — if it’s US dollars you hold (or yen).
To look forward now is to see the positive strength the general US economy will hold going into 2010 — one year forward. Consumer confidence will pick up steam by September 2009 and there will be an upturn in retail business activity by the end of 2009, a pretty good holiday buying season for those employed, as it is written in the amount of the yield spread — today, February 2009.
However, be preparedfor real estate to work its way through the massive excess inventory both on the market and yet to be placed on the market, as that will take well into 2012 for buyers to absorb.