Gap In Housing Market Between Home Prices And Income Point To Recession By 2020 Election
The housing market is signaling there will be an economic recession by the 2020 election. Council on Foreign Relations Director of International Economics Benn Steil joined JPMorgan Chase CEO Jamie Dimon predicting a recession:
Looking back at the years preceding the 2008 financial crisis. A critical warning sign was the surging gap between the growth in home prices and household income. Today, a parallel dynamic is playing out.
Household incomes have been growing. However, it hasn’t come close to keeping up with the increase in home prices. The median annual household income in August rose by 1.3% from 2018. Yet, data from the National Association of Realtors shows the median home prices in the United States housing market rose 4.7% in August from a year earlier.
Steil also wrote:
When income fails to keep pace with home prices, the latter must fall back. Falling home prices drive down household spending by way of the so-called wealth effect. That is, consumers cut spending when their assets fall in value.
A slowdown in consumer spending also points to an economic contraction. Economists define a recession as two subsequent quarters of negative GDP.
Steil also wrote:
We should expect broad falls in home prices beginning by mid-2020. In turn, drag down household spending against a darkening economic backdrop. Growth has been slowing with Trump’s tariff war hitting exports. Manufacturing is contracting. Retail sales, excluding autos, have stalled. Consumer confidence is falling.
The Federal Reserve more than likely doesn’t have enough power to stop a recession. When the economy slows, the Fed will cut its benchmark rate to make it cheaper to borrow and encourage economic growth. However, the rate already is so low it probably won’t be enough to help.