Are We in a Recession, Soon to be in a Recession, or Just Slower Growth?

What a crazy month! Last week was spent entirely with clients and educating myself on the changes we are seeing in the housing industry at multiple lectures and events. Clients are still going under contract on home purchases and there are still new homes coming to the market daily which are sitting on the market for an average of 17 days. Now, back to that education bit.

On September 15th, The Hedges Team at Southern Trust Mortgage invited me to join Prestonwood Country Club, for a Lunch and Learn with guest speaker Michael Walden, Ph.D. 

 "Who?". Michael Walden, Ph.D., is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University and President of Walden Economic Consulting, LLC.

He is recognized as an expert on the state economy and public policy, has won numerous awards, including two Champion-Tuck Awards for Excellence in Broadcasting, the UNC Board of Governors Award for Excellence in Public Service, the Holladay Medal for Excellence from North Carolina State University, and the Order of the Long Leaf Pine. He is also a member of the North Carolina Economic Development Association. So- you could say he is kinda qualified to discuss our local economy!

It is his firm belief that we haven't yet seen the uptick in mortgage rates, and discussed how Paul Volcker (former chair of the Federal Reserve). History lesson begins here.

Before 1965, inflation was stable for years, hovering around or below 2 percent. Things got worse under Richard Nixon who printed more money and drove down the value of the currency as a result of on-goings like the Vietnam War. Before Volcker took office as Fed chair on August 6, 1979, the Fed had tried small increases in interest rates in hopes of taming prices, to little avail. Enter Volcker. After a couple of modest increases in the first month of his tenure, Volcker called a surprise meeting, and set the Fed on a new, dramatically tighter course of monetary policy. The Fed would allow a much wider band on interest rates, effectively allowing them to go higher than before, and announced it would recalibrate policy regularly in response to changes in the money supply. If the money supply was growing too quickly, the Fed would crack down harder.

That month, the Fed’s interest rate was set at 13.7 percent; by April, it had spiked a full 4 points to 17.6 percent. It would near 20 percent at times in 1981. Higher interest rates generally reduce inflation by reducing spending, which in turn slows the economy and can lead to mass unemployment. When the Fed raises interest rates, rates on everything from credit card debt to mortgages to business loans go up. When it’s more expensive to take out a business loan, businesses contract and hire less; when mortgages are pricier, people buy fewer homes; when credit card rates are higher, people spend and charge less. The result is less spending, and thus less inflation, but also slower growth.

The crisis would end, and most economists give credit for ending it to Paul Volcker, the chair of the Federal Reserve. Volcker got inflation under control in the 1970's through the economic equivalent of chemotherapy: He engineered two massive, but brief, recessions, to slash spending and force inflation down. 

If you skipped the history lesson, in short, the Fed must raise interest rates to account for the money the US has hemorrhaged over since 2020 during a time of global pandemic and the Ukraine invasion. However, similar to Volcker's outcome, the rates will again drop (expected in spring of 2023). So there is some good news for you! Please don't forget, you can also purchase now despite the rates and refinance when rates drop- which I highly suggest as home prices in this local market (Raleigh, NC) are not expected to decline in the foreseeable future.