My Mortgage Blog

Moody’s now rates the chances of the U.S. economy falling back into recession at roughly 1 in 3. We don’t have to look far to find a more depressing outlook. The harshly sober view of economist Nouriel Roubini sees little chance of avoiding another recesson (as of August 23). “So can we avoid another severe recession?” he asks. “It might simply be mission impossible.”

Now, just because Mr. Roubini is, as usual, very unhappy about the future prospects for American economic growth is not necessarily enough to make us assume we’re stuck in a leaky life raft. Still, his past forecasts, even when they have run sharply counter to the predictions issued by other economists, have proven prescient enough that we really can’t avoid paying close attention to what he says.

So—let’s work with the Roubini forecast of a lengthy slowdown and try to gain some insight into what it means to real estate and real estate financing.

First, and very important, a lack of economic growth may well throw a wet blanket over even the tepid recent job growth data. And weaker job growth dampens the willingness of potential homebuyers to make probably the biggest investment of their lives—in a personal residence. (Granted, recent job growth and the mild decline in new applications for unemployment insurance have been weak tea, at best…but they are workable, and the economy can continue its slow-growth pattern at that pace. Weaken them further, though, and the economy—including the real estate market—is likely to tank.)

Second, a lack of economic growth has already meant that the real estate finance industry is—as most global investors are—reluctant to take on risk. Global investors have pushed the value of the ultimate safe (alternative) currency, gold, to astonishingly high levels, and kept the value of safe-haven U.S. Treasury securities very high…but slow growth has made investors avoid risk, even if that risk is to be found in the recently-resilient stock market.

What this has meant in real estate financing is a dearth of purchase money (riskier) lending. The qualification restrictions on such lending have remained counter-productive to increased real estate property sales—especially as lenders have been preoccupied with a strong refinancing market, powered by falling interest rates.

Thus far, we can find little cheer for the future of the real estate market if the overall economy remains slowed by its movement toward recession (assuming the economic train hasn’t already limped into that station). But there is some small reason for hope.
If indeed, the economy continues to slow, it is very possible that mortgage rates, egged on by a declining rate for 10-year Treasury notes—which is reasonably likely to fall deeper into record territory (perhaps all the way to 1.5%)—will not only make further refinancing attractive, but will motivate more homebuyers to step up to the proverbial plate and take out purchase money loans.

Surely some lenders will become aware that there is more money to be made in purchase money financing that they are now making. And perhaps the government, if it gains a bit of sobriety about how important a lively real estate market is to overall economic growth, may develop programs stimulate purchase money lending. Perhaps.

Time will tell, and we can only hope that the time isn’t overly mired in political theatrics that divert the nation’s attention for the simple steps that can be taken to help get the economy back on track. As Roubini writes, “Another recession may not be preventable. But policy can stop a second depression. That is reason enough for swift and targeted action.”