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Real Estate vs. the Inverted Yield Curve
A renewed center of attention on the yield curve inversion this week raised fears of an upcoming recession. On Wednesday, the S&P 500 declined 2.93%.The 10-year US Treasury yield fell below the 2-year yield for the first time in over a decade – a negative sign since yield curve inversions have occurred prior to each of the past recessions. In addition, the 30-year Treasury yield fell to a record low in a flight to safety, suggesting investors expect low rates to persist for an extended period. The price of gold, up 1% Wednesday and 18% for the year, is another sign of investor fear. Despite such indications of concern from the market, we only see a minor chance of a
This may be a warning sign for recessions, but they are shocking as timing indicators for selling real estate investments. Unlike trade conflicts, an inverted yield curve by itself has limited economic impact. Instead, its signal about the health of the economy is what matters, and it is not as negative as some investors fear. Historically, there has been a long and variable lag between initial yield curve months for the last five recessions. Additionally, the length of time the yield curve is inverted, and by how much, matters. If Fed rate cuts successfully steepen the curve into positive territory, this brief curve inversion may be a premature recession signal. Neither does a yield curve inversion indicate it is time to sell real estate investments. Since 1975, after an inversion in the 2-year/10-year yield curve, real estate continued to rally.
So hold on to your hat and try to enjoy the ride. Remember, one of the best lessons you can learn in life is to remain calm. Before you panic over the latest inverted yield curve story, keep in mind the Fed can lower interest rates any time they feel like it to restore a rising yield curve, and that even telegraphing that they might do so in the future can impact the real estate markets. The Fed is very aware that a prolonged inverted yield curve won’t be interpreted as a healthy sign. They can drop rates almost instantly whenever the spirit moves them. However, predicting what they might do or when is a loser’s game. The only people who really know aren’t talking.
ABOUT THE AUTHOR: Eugene E. Vollucci, is considered to be one of the foremost authorities on taxation and real estate investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for Real Estate Studies, a real estate research organization. To learn more about the Center, please visit our web site at http://www.calstatecompanies.com