Yield Curve Inversion, Buyers market around the corner?

72 Replies

I'm curious to know how many investors have been waiting and preparing for this time to come, I personally believe what's coming is going to be worse than '08 and would like to know the thoughts of more experienced investors. 

@Jason D.

Our economy wasn’t fixed after ‘08, the FED simply cranked up the printing machines and began injecting cash into the economy giving it the fancy name “quantitative easing”. In my opinion the ‘08 crash and bailout is the equivalent of a balloon having a hole popped in it, but instead of fixing the hole in the balloon they decided to just make sure more air was going in the balloon than coming out the hole. Hope that analogy makes sense 😂

@Logan Causey There were also a boatload of new consumer protection and predatory lending laws enacted as well. Banks simply cant do what they were doing in in 2007, which is why I disagree.

I actually think the economy in my market will continue to grow and housing, especially mid-priced rentals, will continue to boom

@Logan Causey I know they say that it's an indicator. What I don't know is that if every inversion has led to a recession, or that every recession was preceded by an inversion.

The old Correlation vs. Causation argument

@Logan Causey the market is cyclical. It goes up and goes down. I don’t think we will see it nearly as bad as last time because of the new lending laws. That being said the lending laws are loosening. It will never get back to where it was though.

The thing I’m curious to see how it affects housing is the student loan debt. The buyer base is going to dwindle as time goes on if nothing is done.

You’ve really got two types of markets though , coastal and inland, so it really depends on what type of market you are in as to bad how things will be.

The next crash is always, always, always 12-18 months away, due to some very convincing indicators:







Maybe this time it really is... and maybe there is a massive price drop that will hammer everyone. But if your strategy depends on this happening, or you will wait to take action because of the latest one, even if the yield curve does truly seem to be the latest and greatest doomsday predictor, you run the risk of slowly losing and waiting a really long time.

@Logan Causey

Who wants to sell me at 20% discount today so you don’t have to sell at 50% discount in a few months :).

On a serious note, those who made deals in up economy will make deals in the down economy. Most others like the last downturn will be mostly locked out. Banks usually do a pretty thorough job vetting their customers when times are tough.

Car repos have happened for as long as there were cars.  2007-09 Saw plenty of them too.

The 07-08 crash was especially devastating because it was multiple vectors that were "super safe" and "never" really could align in an unfavorable way:

1. Mortgages are totally safe - the last thing a borrower wouldn't pay.  (Unless they were effectively fraudulent and property values dropped significantly.)

2. Mortgage funds are made up of completely safe investments - AAA rating.  Investors bought them like crazy, enabling more of #1.

3. Banks max out their lending ratios to generate fees.

4. Investors in #2 and #3 wanted some protection, so financial companies engaged insurance companies in these "can't fail" investments creating a huge, invisible liability some of the major insurance companies actually couldn't cover.

All of this is on top of massive real estate price inflation.  Then, the first folks who never really could afford their mortgages are exposed through foreclosures.  The flood of sudden sales, short sales and foreclosures puts a downward pressure on prices that triggers increasing sales and foreclosures.  Borrowers can't afford the payments and actually can't afford to sell because the debt exceeds equity.  They walk away, yielding even more foreclosures.  (Greatly, oversimplified - I know.)

5. Mortgages fail --> mortgage funds drop significantly --> banks must increase reserves without funds coming in --> insurance company calls for coverage result in bond and insurance defaults impacting their re-insurance.  Bankruptcies emerge, starting with Lehman and multiple other major financial companies about to fail.  In parallel, the auto industry collapsed too.  The U.S. economic system was literally on the brink of total collapse, which led to the bailouts.

I don't see anything anywhere close to this today.  Prices are up, but still affordable in most locations.  Mortgage regulations are still generally intact.  The crowd funding market has emerged which effectively replicates what was happening back then, but on a much smaller scale and risks are better understood.

A recession will pressure all the normal financial aspects recessions always effect.  In this one, I think trade-based investments might be most at risk.  Storage-type businesses for logistics and warehouses (not self-storage) were being marketed like crazy to hold all those Chinese products that are now being constrained.  Will we need so much?  Will those prices hold up?  There will probably be some softness, but a localized impact; not Great Recession II.

Inverted yield curve happened in 1998/9 but no recession followed until the curve inverted again which a recession followed. It's an indicator but not a sure thing. Eventually things will pull back and we are closer to it today then we were in 2015 but how much closer is the question. We all know it will happen. It's just WHEN.

@Bill S.

Agreed. The yield curve is definitely a concern but we can be 12-20 months later until something happens. Not everyone will lose their shirts in a recession either. Best bet is to be conservative with your numbers and not to speculate on appreciation or increased future cash flows, although it is tempting.

@Logan Causey , I basically said the same thing as what I'm going to say now in another post, but I actually think the risk to us real estate investors (especially apartments/commercial), is not with the next recessions. It's what happens after the next recession during the recovery. Our investments (along with everybody else's) are totally drunk on low interest rates right now. So the recession will probably be fine, but anything that forces interest rates back up is going to bring a lot of hurt for people who can't lock in long term interest rates. 

It's just a matter of time of course, but when I say that I do believe we're getting close to a recession and I do agree that little has been done to really cure the economy's vulnerability outside of housing. 

There's so many things that can precipitate a recession. The fact that we're at maximum employment right now doesn't help things. At best the economy will chug along at 2% but the days of 3% are a fallacy when the labor force is already effectively fully employed because now we're reliant predominately upon productivity gains for growth. Discretionary spending power continues to dwindle and household debts continue to increase. For me these factors are enough to potentially trigger a recession, but even if they don't, the don't bode well for rising home prices. There comes a point where people just can't afford more than 40% of their take home on housing and we're about there. Then we have the fact that housing creation has apparently finally caught up with housing need in the US. Historically this points to a slowdown in construction as well as a cooling of the market.

That said, with winter coming, economic headwinds prevalent, an already extended housing market, an inverted yield curve, and an election coming up, I don't see why one would rush into this market. I'm looking to buy one home in the next 12 months, maybe two if the right deal presents itself, but I'm not looking to jump in guns blazing. Wy is right; be conservative. If you can have rentals with more than 20% equity I'd do it. I'd also use a 5/1 arm if the rates are better because good ole uncle Sam can't afford his own debt if rates go much higher than where they're at, but don't get me started on that.


@Robert C. I think you're both right and wrong interestingly enough. The Fed can't raise rates much without seriously hurting the deficit that's already out of control (half a trillion just on debt servicing). 

So let's suppose they print away our deficit (what other option is there?) and thus enact in a policy of inflation, what happens to mortgage rates? I think they have no choice but to decouple from the Fed rate, and I think they will in the next 10-20 years. Think about it; who can lend you money at 5% if inflation itself is at 8%? Nobody, not even the government for long. So I may take back what I said to Logan; A 5/1 ARM is great if you hope to refi or plan to sell. But locking in that rate for 30 years sure does help one sleep at night longer term when we're navigating uncharted waters.

@David Smit , I think what you're saying is fair. After all, we're talking about predicting the future here, and I don't think we're disagreeing that much. Eventually somethings got to give, but we're in unprecedented territory I think. If I could lock in more 30 year rates right now, I would, too!

@Logan Causey Not anytime soon. Though the 2yr / 10yr yield curve inversion has predicted every one of the previous recessions, we didn’t enter an “official” recession until 18 months later. For the record, a recession is defined as 2 consecutive quarters of negative GDP growth. However, in every case leading up to current, the inverted yield curve was sustained blow inverted points. Since the official inversion happened yesterday, it has already crossed back. I wouldn’t bank on seeing an economic slowdown any time soon. And even if we do see a recession, remember, recessions are a normal and natural part of an economic cycle. There may be a time to have the conversation about a slowdown in housing value, but not yet my friend.

@David Vitarelli

I like your optimism and I hope you are right but I doubt it. Just look at the global data, things are slowing down.

Consumer's sentiment in the states has also started going down.

The biggest issue that I see is that the Fed is trying to alter the natural cycle by cutting rates now. when the recession finally happens what would they do??

They should have just let the pull back happen

Yield curve inversion is not a statistically significant indicator for a market crash. Even if it was, as Trench says, staying on the sidelines is not the right approach. In fact, if the markets are any indication, moving into “safer assets” will actually cost you money.

“We find no evidence that yield curve inversions can help investors avoid poor stock returns.”


Do your homework, pick the right areas, buy deals that are actually deals, ensure positive cash flow and keep moving forward. If a crash does come, just be ready for a great buying opportunity.

Yield curve indicator was months ago as I recall, media a little slow. The convergence of indicators is more reliable than one. The next and unreported is transports, that is down. Say 70% chance now and who knows how it effects RE as this was not the cause like last time, might slow down and flat line or short lived. 

@Robert C.

Drunk and straight up addicted to low interest rates - sure is fun right now! The hangover/withdrawal is gonna naaaasty

Honestly until rates change upwards It’s just fuel for people to stay out of dollars in the bank earning zero dollars. It encourages Either invest the dollar or spend the dollar.

What’s really messed up to think about

Keep your $100 dollar in the bank you earn $1 a year.

You spend $100 on gas at Costco you get 4% instantly. Spending pays more then saving........ unless your investing 😁

Why do people consistently refer to lending laws changing as a sign that real estate won't be affected?

We've created a bubble in the BP community that has this echo chamber thought that because of these new lending laws that real estate investors won't lose like they did in 2008...

But what happens if your tenants lose their jobs?  They can't pay you.

What happens if lending constricts and you can't refi any of your loans?  Well, I hope you don't have 2+ hard money loans outstanding while you're flipping.

What happens if your buyers can't access a loan in order to buy your properties?  Well I hope you weren't planning on selling and I hope you have a huge spread for a price drop.

What happens if the next recession is something none of us are seeing right now but causes a huge bubble pop to people renting?  There goes your tenants.  There goes your monthly cash flow due to price drops because no one can afford your rental prices.

I'm not someone you should listen to regarding economics, but real estate will be affected by a recession no matter what. There will be people who lose their shirt just like in 2008. There COULD be people doing the BRRRR method who will have "infinite returns" but because of low reserves COULD lose everything. It COULD happen. Volume flippers may not be able to sell their homes forcing them to declare bankruptcy. It COULD happen.

No one knows for sure when it will happen or how it will look, but the #1 factor WE SHOULD ALL BE TALKING ABOUT is our end user's ability to rent, purchase, acquire a loan.  That will determine our ability to succeed in a downward market.

I agree a recession is around the corner, but historically, no two recession are similar. Something nobody anticipated will happen, but unlikely housing.