Photo: Robert Clark
Loose lending practices and the eventual collapse of inflated home prices were the chief causes of the Great Recession. But despite rapidly rising national home prices, the US housing market is a long ways away from another bubble.
In a recent webinar, Dr. Frank Nothaft, senior economist at Core Logic, assured viewers that we are nowhere near bubble territory, despite the “frothiness” of some markets.
“In 2006, you had 68 percent of major housing markets overvalued. We’re at about 34 percent now,” said Nothaft in the recent The Current and Future State of the US Economy and Housing Market webinar.
By most standard metrics, the US economy is booming. National unemployment is falling fast, wage growth is accelerating and Americans are spending their money — and not just on housing. Nothaft says that homes are selling at a near-record pace as supply remains well below demand.
And Mark Zandi, senior economist at the financial services firm Moody’s Analytics, told journalists to “enjoy the next 12 to 18 months” but then “buckle in” — because the economic forecast looks bumpy.
“There are a lot of reasons to be optimistic about the economy. At the current rate of job growth, the unemployment rate could hit as low as 3 percent by 2019,” said Zandi.
The national unemployment rate has only hit 3 percent twice — once during World War II, and a second time in the early 1950s at the onset of the Korean War. A rate that low has never been achieved during peacetime.
The job market is growing twice as fast as the labor force. And with the exception of brick-and-mortar retail, most sectors are thriving.
“For the first time in reporting there are more job openings than there are unemployed Americans,” said Zandi.
Currently, there are over 7 million open jobs and under 6 million unemployed Americans. Zandi reports that the job market is so strong that some in the workforce are quitting their jobs before securing a new position.
National wage growth is averaging about 3 percent year-over-year, which Zandi says is “precisely where it needs to be for the unemployment rate.” Over the next two years, wage growth should reach between 3.5 percent and 4 percent annually.
The recent “fiscal stimulus,” which includes the Trump administration’s controversial massive tax overhaul, added what Zandi calls “some juice” to the economy. However, that juice goes dry in 2020 and that’s when we should expect to see trouble.
There is every sign that the unemployment rate will jump from 3 percent to around 4.5 percent over the next 18 months. That’s what Zandi calls a “big move,” and the economy suffers a recession when rises are more pronounced than a quarter of a point.
“It’s difficult to soft-land the economy,” said Zandi.
Typically, there is about a three year gap between recessions, and Zandi says that puts the start of the next recession right on track for the summer of 2020.
There are two main triggers of recessions — the economy overheats, or there is a major imbalance in the economy. Prior to the Great Recession, banks were lending to risky borrowers, and there was an imbalance between what could be sustained by “healthy” mortgages and those that were granted to subprime customers.
In the case of the looming 2020 recession, Zandi points not to predatory lending in housing but to leverage lending as the chief culprit, with over $2.7 trillion in outstanding loans to “low-rated companies.”