Can a Recession Help Housing?
The transcript discusses whether a recession could paradoxically benefit the housing market through lower interest rates, while highlighting a major constraint: persistent US government deficit spending may keep rates elevated even during a recession, creating an unprecedented economic challenge.
Summary
The speaker examines the relationship between recession risk, interest rates, and housing market dynamics. The conventional wisdom suggests that recessions could help the housing market because they typically trigger rate declines, which would improve affordability. However, the speaker identifies a critical complication: the unusually high demand for US dollar debt and large government deficits could prevent rates from falling significantly even if a recession occurs. The speaker notes that narrow credit spreads are currently driven by rising nominal rates, and emphasizes that as long as the US government continues running deficits at current levels, it's possible to experience a recession while rates remain elevated. This scenario—simultaneous recession and high rates—represents what the speaker characterizes as 'the biggest problem,' as it would deny the housing market the traditional rate relief that normally accompanies economic downturns.
About this episode
Today’s housing market is sending some unusual signals. Amherst CEO Sean Dobson joins Willy Walker to unpack why housing remains expensive, what’s keeping the market in place, and where the biggest risks could emerge. Watch the replay. #WalkerWebcast #SeanDobson #WillyWalker
Key Insights
- A recession would normally be helpful for the housing market because rates would be expected to decline, but this traditional relationship may not hold if large government deficits keep rates elevated
- Current narrow credit spreads are being driven by rising nominal rates rather than improving credit conditions, which constrains the beneficial spread-narrowing that might otherwise occur in a recession
- Continued US government deficit spending at current levels creates a scenario where a recession could occur simultaneously with higher or stable rates, representing an unprecedented and extremely painful economic situation
Topics
Transcript
[0:01] So, the most important thing we're paying attention to right now with rising rates—are we really headed for a recession? Or if you don't expect this recession, it will be extremely, extremely painful. And since housing interest rates The flip side of this is that a recession would actually be good for the housing market. Because we are likely to see rates decline. Well, new recessions can be helpful, but recessions require lower rates. So if rates go down, but as we said before, there's such a huge demand for dollar debt that we discussed—will spreads narrow ? The reason spreads are narrow is because nominal rates are rising. So as [0:31] long as the US government continues to…
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