Freddie Mac: Another Recession Could Be on the Horizon

Home sales will reach 6.35 million, housing starts will reach 1.3 million and home prices will increase 5.7% in 2018, Freddie Mac forecasts in its January 2018 Outlook.

The report covers some of the biggest risks to the U.S. economy and housing markets, including declining affordability, obstacles to millennial homeownership, and the possibility of another recession on the horizon.

Although economic growth is expected to remain positive in 2018 (2.5% versus 2.6% last year), Freddie Mac doesn’t expect it to be strong enough to generate income gains that keep pace with rising home prices. This will result in decreasing affordability that could slow housing market activity.

Although a recession does not appear imminent, the company’s economists are keeping an eye on potential recession indicators, including the flattening (and potential inversion) of the U.S. Treasury yield curve and the current rate of unemployment (4.1% in December 2017).

History has shown that an inverted yield curve and an unemployment rate below the natural rate usually leads to a recession in two to three years.

“Starting off the year, things are looking pretty good for the U.S. economy and housing markets,” says Len Kiefer, deputy chief economist for Freddie Mac, in a release. “Mortgage rates are low, economic growth has accelerated in recent quarters, and housing is coming off its best year in a decade. Although housing markets have been improving year after year for nearly a decade, there’s still room for improvement. We forecast moderating growth in U.S. housing market activity through the next two years.

“However, there are factors worth keeping an eye on in 2018. Namely, is another recession on the horizon, how will housing markets respond to declining housing affordability and how will young adults move the housing market? – more are living at home with their parents today than in 2000,” Kiefer adds.

To access the full report, click here.

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