Tuesday, October 10, 2006 - Inverted Yield Curve Could Spell Trouble for 'Soft Landing'

The Texas housing market, however, continues to fly high. The state’s population has soared by two million so far this decade. Home inventory remains low, and prices continue to appreciate.

Some speculative money has made its way to Texas , much less than in Florida , Nevada and California , says Real Estate Center Chief Economist Mark Dotzour.

Despite the smooth flight Texans currently enjoy, Dotzour sees two blips on the radar screen that might spell trouble ahead. 

“At this time, the most significant risk to the Texas housing markets is the possibility of large-volume builders attempting to make up for lost volume in East and West Coast markets by increasing volume in Texas cities,” said Dotzour. But he added, “I’m confident that will not happen.”

The second is one the entire U.S. housing market faces — a recession in 2007. 

Dotzour is concerned because the United States has had a flat or inverted yield curve for nine months. This artificial situation occurs when short-term interest rates are higher than long-term rates.

“It almost always causes a recession within 12 to 18 months,” said Dotzour.

The Center’s chief economist says the declining ten-year treasury rate and home mortgages indicate that bond investors are convinced the 5.25 percent Fed funds rate is high enough to slow things down considerably.

“I don’t expect any movement on interest rates between now and the end of the year,” he said. “The Fed doesn’t like to take action before elections. But I think it’s highly likely that every day the yield curve stays inverted as it is now, is another day closer to a national recession.”

PREPARING FOR RECESSION

COLLEGE STATION (Real Estate Center) – In Tuesday’s RECON, Real Estate Center Chief Economist Mark Dotzour raised the possibility of a national recession in the next 12 to 18 months.

That elicited this question from a RECON reader: How does one go about recession proofing a real estate business and personal portfolio?

Dotzour’s reply: “There is good news. Although the United States could have a recession, it’s highly possible that Texas won’t participate in it. Our economy is not overheated in the housing market, and we don’t have a lot of ailing auto plants in our state.

“When an economic cycle is near the top, the best plan for businesses is to not take on a lot of new debt. If revenues start to flatten, the people who can continue to meet their debt obligations will be around for the next cycle.”