The American economy is humming along in the middle of a nine-year winning streak: The gross domestic product (total output of goods and services) grew 4.1 percent in the second quarter, the fastest pace since 2014, and unemployment is near an 18-year low. Yet some economists are starting to see cracks in the paint of prosperity.
In a trio of recent surveys conducted by the Wall Street Journal, the real estate website Zillow, and the National Association for Business Economics, a majority of economists said they expect the United States to enter a recession before or during 2020. Such a slowdown would affect home buyers and sellers in very different ways. But first, why do so many experts think we’re due for a recession in the next two years?
“Part of it is just a belief that all expansions come to an end sooner or later, and this one will have to end as well,’’ said Barry Bluestone, a professor of public policy and urban affairs at Northeastern University. The current economic expansion, which began in June 2009, is the second-longest growth streak in postwar US history; by the second half of 2019, it would be the longest ever, according to the Wall Street Journal report.
“You expect the economy will slow down, the question his how sharply and how long,’’ Bluestone added. “But it is likely to occur probably in the next couple of years.’’
Many economists cited monetary policy as the most likely trigger for a recession. “Americans have benefited from historically low interest rates and the low cost of credit throughout much of the economic recovery,’’ said Sarah Mikhitarian, Zillow senior economist. But with the engines of commerce running at full speed, the Federal Reserve is expected to continue hiking interest rates to keep inflation in check. That makes it more costly to borrow money, which, in turn, could slow down the economy more than intended.
Another warning sign is the flattening “yield curve,’’ or the spread between interest rates on two- and 10-year Treasury notes. Rates are ordinarily higher on longer-term bonds, because buyers are taking on more inflation risk. When the inverse happens — it hasn’t yet, but we’re pretty close — it signals a lack of faith among investors that has preceded each of the last five recessions, analysts say.
While any number of factors could send us into a recession, Bluestone is most concerned about tariffs the Trump administration is imposing and the retaliatory responses they’ve elicited from our trading partners. He worries that an escalating trade war could make goods more expensive while at the same time putting people out of work, leading to a “rare and very dangerous’’ scenario known as “stagflation’’ for the first time in decades.
“That would mean we have an increase in prices — inflation — at the same time as we have a recession,’’ Bluestone said. “The reason that’s so frightening to economists is that the remedy for rising inflation and the remedy for negative growth are polar opposites.’’ To control inflation, you’d generally increase interest rates and slow down federal spending, he said, while spurring growth demands the opposite: lowering rates and increasing spending or cutting taxes. While such monetary and fiscal policies can limit the damage of a typical recession, “there’s very little we have in our toolbox to rectify’’ stagflation.
Lawrence Yun, chief economist at the National Association of Realtors, is more optimistic. He said the length of the current expansion naturally prompts the question of when it might end, but he doesn’t see any fundamental reasons for a recession. “I would say the probability over the next couple years is still low,’’ Yun said. “The fundamentals are very solid in terms of the wealth of the country, company profits, [and] the borrowing level not being too excessive.’’
Yun added one caveat, however: If new tariffs ignite a full-blown trade conflict, all bets are off. “If there’s an all-out trade war, a major disruption to global trade, that would put many countries into a recession, including the US.’’
Home prices, meanwhile, have risen in step with the economic expansion. The median sales price of a single-family home in the Boston area rose 54 percent, to $652,500, in June 2018 compared to $423,500 in June 2009, according to the Greater Boston Association of Realtors.
Now, nobody likes a recession. But could an economic slowdown put the brakes on home prices and allow buyers boxed out of the Greater Boston real estate market finally to catch a break?
It’s probably not a silver lining you want to count on. The same economists and experts who predicted a recession in the Zillow survey expect home prices to keep climbing into 2022, albeit at a slower pace of 2.6 percent to 2.8 percent after 2020. “We don’t expect home prices to fall, especially on the national level,’’ Mikhitarian said. “So for hopeful buyers, it’s unlikely that they’ll see lower prices, but a slower-growing market will give them a chance to build up savings and might ease some of the competition for those few available homes.’’
Yun said housing inventory is so scarce, especially at the lower end of the market, that prices are unlikely to fall. “Even with a recession, I don’t think entry-level home prices would decline. There’s a pent-up demand ready to pounce if there’s any softness in prices,’’ he said.
The shortage is painfully obvious locally. In Massachusetts, the inventory of single-family homes for sale has dropped year over year in an astounding 76 of the past 77 months, according to the Massachusetts Association of Realtors. And the Boston area ranked among the most competitive real estate markets in the country in June, according to Redfin, scoring a 92 out of 100 on the brokerage’s new Compete Score feature. That means the majority of listings received multiple offers, often with waived contingencies, and spent less time on the market. (With a score of 100, East Arlington was one of the most challenging neighborhoods in America to buy a home, with the median listing selling in six days for about 12 percent above the asking price.)
Folks thinking about selling, meanwhile, have to decide whether to take the bird in the hand. Andrea McDonough, a Boston realtor with Compass, said the market might not soften for a couple of years, but she’s selling her investment properties now. “I do think we’re seeing a peak,’’ McDonough said, noting that rising mortgage rates might start to put a ceiling on what buyers can afford. McDonough wants to buy down her debt and have cash at the ready for any deals a recession might create — probably outside Boston proper. “In downtown you’re looking at 5 percent off, maybe,’’ she said. “There are ultra-wealthy people there who don’t need to sell. So when things start to come down, it’s on the outskirts of the city.’’
Bluestone, who’s the lead author of the annual Greater Boston Housing Report Card, doesn’t expect home prices to dip much around Boston in a recession, even if they drop elsewhere. “My belief is while single-family prices and condo prices will decline, they’ll decline a lot less than in other parts of the country and probably recover much faster, and the reason for that is twofold: We continue to have a huge demand for housing, and we have very little new supply,’’ he said.
While home prices in cities like Las Vegas and Fresno, Calif., plummeted during the late-2000s housing crash and have yet to fully recover — some are still down by as much as 30 percent since 2007, according to Bluestone — he noted that the condo market in Greater Boston only fell 8 percent at its very worst, and was already fully recovered by 2012.
One reason for that resilience, Bluestone said, is that, with the exception of financial services and tourism, many of Boston’s biggest industries are “almost recession proof.’’ People get sick and go to college regardless of whether the economy is growing, he said. “Our key sectors of higher education and health care and biotech should weather a recession reasonably well.’’
In fact, the biggest threat to Boston’s economy may be its own success. The high cost of both rent and real estate here “ultimately could harm the economy of Boston if employers are unable to recruit the talent they need because it’s too expensive to live here or the firms find they have to offer extraordinarily high wages to attract the workforce they need,’’ Bluestone said. “It’s the downside of the upside of Boston.’’