56 // FEDER AL RESERVE AND MONETARY POLICY //
We project that 25 out of 36 of our profiled communities will see residential prices turn lower in 2019. However, those anticipated results are shaped by several key global drivers, as well as regional conditions that for now remain unsettled. We at RSIR will be watching closely for signals as to which directions our real estate markets may take.
AREA JOB GROWTH CONTINUES
TO STOKE EBULLIENT
ortgage interest is a critical factor in home prices and purchasing, and Fed acquiescence to the President’s demands bodes favorably for prices in the year ahead—as long as mortgages continue to be serviced, and bank balance sheets can be sustained. However, contrarian observers warn that the Fed may have met with a liquidity trap, as the benefits of quantitative easing are exhausted with no further room for the bank to maneuver. Such a scenario would likely take months or years to play out, so the effects may not be felt until later in 2019 or in 2020. The last three recessions all took place with three months of the first rate cut after a hiking cycle! In other words, one can argue that it was the Fed's official admission of economic weakness—by cutting rates—that triggered the economic contraction that was gathering pace as a result of higher rates and tighter financial conditions. If that is indeed the case, then the next U.S. recession will begin just a few months after the Fed cuts rates.16
The initial effects of a recession could benefit some cash purchases of properties, as in a flight to quality, sellers needing cash meet with buyers to convert risk-laded liquid assets to real estate. Yet selling prices would fall, as mortgage-financed purchases dry up. Realogics Sotheby's International Realty is not predicting either a recession or a real estate slump, but our clients and customers are advised to be especially mindful of interest rates and business conditions this year. The foregoing argument lays out the conditions under which the following events might occur. It’s the underlying conditions of the business cycle that cause mean reversions in prices, not merely the passing of time or changes in the current trajectory of prices. Without a liquidity crunch, home selling prices may level out, and declines are expected in some locations; but prices will not collapse.
Realo g ics S otheby's Inter national Realty | 2 018/2019 Market Repor t