Fed Sees Strong Economic Growth Continuing

According to the Federal Reserve, economic growth within the United States is holding up well amid concerns of a trade war with China. The issue of stifling trade with the second largest economy in the world has the potential to cause concern over a slow-down that could lead to a recession. However, in my view, a recession will hit in the next two years or so regardless of what transpires with China. A trade war can certainly expedite the process and cause the economy to take a harder hit but avoiding one can’t stop the inevitable process of a recessionary cycle.

I had a conversation with a local real estate investment fund manager who shared something with me that I found interesting. First, let me say that it’s no secret that I believe we are nearing an economic slow-down that will also impact the housing market. Although I don’t see a severe housing crash by any means, I do see a market correction. The Fund Manager I spoke with talked about the merging trend lines of CAP rates and market interest rates. If a CAP rate happens to fall beneath the current interest rate, a correction is coming. He said that as the margin between the two narrows, it will put downward pressure on interest rates and/or downward pressure on home values. With the Fed tightening its balance sheet, it will make it difficult to see rates head much lower until the US hits a recession. That leaves housing prices vulnerable to soften.

Bonds remain beneath a critical ceiling of resistance. As a result, we will maintain our locking bias.