When I first heard this term 30 years ago, it sounded like an uncomfortable medical condition. This week, the yield curve inverted.
The two-year treasury bill was offering a yield higher than an investor could get on a five-year T-bill or a 10-year treasury bond for the first time in a while, and when the yield curve inverts, historically, that is a sign of a recession possibly coming down the road.
The best way to explain this to folks that have money in a federally insured savings account is for them to visualize a marketing banner up above the bank teller that says, “hey customers, open a 90-day CD today and we will pay you 2% or a one-year CD and you get 1%.”
When short-term rates are higher than long-term rates most people will choose the shorter maturity. When a two-year treasury bill pays 2.5% and the investor’s money is backed by the government and their money is only tied up for two years, this tempts people that are fearful to get out of stocks, real estate and riskier investments and park their money on the sidelines for a couple years with no risk, or I should say, their only risk would be the U.S. defaulting on their debt like Putin and Russia. I wrote about this flight to quality phenomenon a couple months ago.
A recession is when the U.S. GDP declines two quarters in a row, and if we see one because of the war, pandemic, inflation, the FED, the supply chain or the government, it should be a light one because there are job openings everywhere and the current economy has not been bolstered by mortgage fraud financed by Wall Street, which pumped trillions into the system.
Remember, you guys, people were buying lots of boats, motor homes and rental properties from 2004 and 2006 using their artificially inflated home values as a source of cash which boosted GDP.
The residential housing market is as solid as a rock because buyers have had to prove income, make a down payment, and have good credit to buy a house this past 12 years. There is a 3 or 4 million house shortage in America, and right here in little old Solano County, it will take years for these builders to build enough homes to keep up with the demand.
I am not saying home values will continue to rise at 10% per year, but what I am saying is that we will not see a big increase in mortgage delinquency or foreclosures because even if home prices decline by 5% or 10% temporarily, who the heck is going to walk away from their $3,000 or $4,000 house payment and pay $3,000 to $4,000 rent for the same type of house? Most of our local homeowners have very low and safe fixed-rate mortgages that they can afford.
Buy American stocks and real estate and please take your long-awaited vacation to the Happiest Place on Earth because I own some Disney stock and it is down 30% since this darn pandemic broke out in 2020 when our last recession hit for a few months.
Jim Porter, NMLS No. 276412, is the branch manager of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protection and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.
