[REN #350] Zillow: Could the Next Recession Happen by 2020?

picture of sand timer for Real Estate News for Investors Podcast Episode #350

The chance of a recession is rising, according to a new Zillow survey. Real estate economists and other experts surveyed say there’s a 52% chance of recession by the end of 2019 and a 73% chance of recession by the end of 2020. But these experts agree it would happen for entirely different reasons than the Great Recession of 2008.

Zillow and a company called Pulsenomics surveyed more than a hundred panelists about the risk of a recession as part of a recent Home Price Expectations Survey. What they feel will trigger the next recession won’t be a banking crisis, or a subprime implosion, but rather a “geopolitical crisis.”

Zillow points out that this would be an unusual situation because most recessions don’t begin with a geopolitical event. It’s not a surprising thought, however, with the exchange of threats between North Korea and the Trump administration.

Zillow Chief Economist Dr. Svenja Gudell says of this scenario that “it’s a sign of the times we’re living in.” She says, “Historically, geopolitical events rarely cause a sustained recession, and other contributing factors, such as oil price shocks, play a more predominant role.”

Geopolitical Crisis Likely Cause of Next Recession

The panelists were asked to rate various triggers as a 1, 2, or 3. When adding up the results of those selections, 67 panelists ranked a geopolitical crisis as the most likely cause with a score of 138. That ranked higher than a monetary policy issue or a stock market correction, although they were both high on the list with scores of 111 and 101 respectively. Trade policy, fiscal policy, and military action were in the lukewarm range. A housing slowdown only scored 14 and was only ranked higher than the possibility of a municipal debt downgrade, which got a score of 7.

These experts don’t believe the next recession will be triggered by any sort of a housing crisis, although it would likely “impact” the housing market. But, they say the impact will be “moderate.” Places that will be affected the most are the metros that have appreciated the most during the recovery. They say that San Francisco and Miami will be hit the hardest followed by Los Angeles, New York, San Diego and Seattle.

This is something they expect to happen in two or three years. For 2017, they are predicting that home prices will increase from an average of about 4% to more than 6% nationally. That’s an overall average of 5.2%. Zillow says if that average manifests this year, the national median home value would squeak past the $204,000 level. That’s about $10,000 below what they believe it would be if the Great Recession never happened.

Continued Economic Growth Ahead

Near-term expectations appear to be positive. Fannie Mae is keeping its economic forecast for growth at 2% for the year. It just released that expectation as part of an economic and housing outlook report. The report shows a 1.9% growth rate for the first half of this year, and a full-year growth rate of 2%, so Fannie Mae expects a slightly stronger economy over the next six months.

Fannie Mae researchers apparently don’t feel that the geopolitical tensions going on right now will have a near-term effect on the economy, They also don’t believe that the Congressional budget battle and the risk of a government shutdown will slow economic growth.

Fannie Mae Chief Economist Doug Duncan says: “We are keeping our full-year economic growth outlook at 2% as risks to our forecast are roughly balance.” He believes that positive factors will outweigh the negatives. This includes increased consumer spending which is, of course, based on job growth, and when there’s job growth, the housing market usually does well. My point being, positive economic factors are synergistic, as are the bad ones, but Fannie Mae doesn’t believe there’s a thumb on the scale anywhere that would destabilize the economy right now.

Long-Term Double Bubble Trouble

Geopolitical risks aside, there are long-term monetary concerns that we should all be concerned about. Forbes recently wrote an article about this called “The Next Recession: We Are Witnessing the Largest Twin Bubbles in History.”

Those two bubbles are “global debt” which is mostly comprised of “government debt,” and what Forbes says is an even larger bubble of “government promises” which includes things like “social security” and “pension obligations.” The article cites investor John Mauldin’s name for these twin bubbles as “The Great Reset.” It’s something that is impossible to predict, but is expected to have a big effect on everyone.

The U.S. national debt is approaching $20 trillion according to the U.S. Debt Clock. Forbes says the total debt-to-GDP is 248% right now, and the Government Budget Office expects it to increase to 280% by 2027. That’s based on an annual GDP increase of 4%, and right now, the GDP is less than half of that. Forbes says if the debt burden keeps going up, and the growth rates continue to stagnate, the “next” recovery will be even slower than this one.

The article points out that government entitlements, like Social Security, and Medicare, are underfunded. With the enormous surge of retiring baby boomers, which has already begun, those funds will disappear even more quickly.

The first boomers have already turned 70, and many are collecting their retirement benefits. With an average of just $136,000 in savings, and expectations of a longer life, they are expected to put more pressure on the entitlement system. According to Mauldin Economics, those unfunded liabilities will end up consuming “all” tax revenue by 2019.

And it isn’t just in the U.S., Forbes says the global debt-to-DDP ratio is 325% and that OECD countries have $78 trillion in unfunded pension obligations. OECD stands for Organization for Economic Co-operation and Development.

Investors Should Expect Volatility

Economists say that investors should expect volatility over the next few years. And, when you are facing volatile times, you should seek investments that are historically “less” volatile. I’ve always believed in real estate as a way to protect your wealth, because it will probably not disappear from the face of the earth. Yes, it could be flooded and declared an ongoing risk for real estate development. Yes, it could possibly be contaminated and unusable somehow, but the likelihood of that happening is not as great as some of the other possibilities. The best time to arm yourself against the next recession is “before” it happens.

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