Experts Not Panicking After Inverted Yield Curve
While a recession has been predicted, industry economists don’t see calamity ahead.
By Scott Sowers
The Treasury bond yield curve became inverted in mid-August, triggering a sell-off on Wall Street and the corresponding media firestorm of an impending recession, even though economists have been predicting the event for months. The yield curve is a key economic metric that measures the difference of yields on short-term (two-year) Treasury bonds versus long-term (10-year) Treasury bonds. When the short-term bonds are worth more than the long-terms, the yield curve is “inverted” and a recession typically follows about 18 months later.
Metrostudy chief economist Mark Boud predicted the event in May, saying, “We expect it to go inverted sometime this year, and that corresponds with a recession in the later part of 2021.” The yield spread has been dropping since 2014 and has been flirting with inversion since the fourth quarter of 2018. Since then, many financial experts have tried to allay monetary fears by downplaying the news and reassuring investors that the recession will be nothing like the 2008 crash.
Calming voices come from commercial real estate firm CBRE, which is not worried about liquidity in the world of CRE investment. “Various factors will continue to support capital flowing into real estate,” says Richard Barkham, CBRE’s global chief economist. “Debt and structured finance opportunities have increased as many borrowers are refinancing at lower rates for longer terms than they have in years to capture the benefits of a low-cost, highly liquid debt environment.”
Barkham has some data to back up his optimism. CBRE’s Lending Momentum Index, which tracks the pace of commercial loan closings in the United States, reached a value of 244 in June, up 2.3% from March’s close. Compared with a year ago, lending growth is 20.8% above its June 2018 close. The firm is also expecting another interest rate cut this year, which may juice things up a bit. Overall CBRE’s analysis shows things tightening up while staying mostly stable.
Drilling down into the rental market, Ten-X Commercial, based in Irvine, Calif., sees less product coming into the market, which eventually will have a positive effect on vacancy rates. Its recent analysis reveals, “the first quarter of 2019 was the first time in five years there was a decline in the number of new rental properties coming to market. This decrease helped the multifamily market vacancy rate hold steady in the upper-4% range, the level it’s been since Q3 2018. Yet these figures are relative as the actual number of vacant apartment units remains at its highest since mid-2012. As the number of new apartments begins to decline, those on the market will be rented faster.”
Unfortunately for the home building industry, Ten-X believes the strength of the rental market is a direct response to the high costs of homeownership, which they say is “unattainable for many Americans. This allows for the rental market to remain largely unthreatened and strong, despite the slight uptick in homeownership.”
In Boud’s most recent presentation for Metrostudy, he commented on the home selling market still being too “top heavy,” with a glut of higher-priced homes that are not selling while pent-up demand on the other side of the scale awaits affordable options.
Homeowners with locked-in low interest rate mortgages aren’t selling out, preferring to remodel as needed. Boud also doesn’t see anything like the 2008 crash on the horizon, mostly due to a lack of supply and tighter financial regulation.
“We’re not building nearly enough homes to create such a scenario nor are lending standards nearly as loose the last time around,” he says. “As we go into a normal cyclical recession it will not be anything like what we experienced last time and may not even be much of a recession.”