Eric Fedewa is managing partner of Ascend Capital Partners
LLC, a boutique real estate financing and consulting company
with offices in Boston, Florida, San Francisco and Washington
D.C. Fedewa is an award-winning real estate developer with
degrees in economics and international relations from The
College of William and Mary, and is a graduate of Harvard Business School’s Owner/President Management program.
Ascend Capital’s “Canary Index” is updated weekly. Find it at
ascendcapp.com/ascend-capital-canary-index. Reach Fedewa
Canary in the Coal Mine
When should mortgage originators expect the next recession?
By Eric Fedewa
An old coal-mining safeguard used caged canary birds to detect carbon monoxide and other toxic gases before they hurt humans. If the canary died, miners needed to get out of the mine quickly.
As the first quarter of this new year moves toward a
close, fresh tax cuts and unpredictable stock markets
have many people in the mortgage industry wondering how long this economic expansion will last. If
only there was a canary that could predict oncoming
recessions, mortgage originators and other financial
professionals could know when to get their clients into
safer products or out of the market.
This past November, Janet Yellen, then-chair of
the Federal Reserve, stated, “My colleagues and I may
have misjudged the strength of the labor market.” She
said a weaker labor market coupled with low inflation
would strengthen the case for gradually increasing
interest rates. Most experts believe incoming Federal
Reserve Chair Jerome Powell will follow the same basic
The question is, in this environment of lower corporate taxes and a generally strong economy, what
does this mean? Will the new corporate tax cut push
back the next recession a year or two? When will the
cycle end, and when should originators help their
clients get out of the proverbial mine?
Residential construction builders, for example, work
with a one- to two-year lead-time, so, perhaps they
should begin pulling back from investing earlier rather than later. Top mortgage originators want to know
when the next recession will arrive, and how it will
Power of feelings
Even though the economy seems to be moving well
currently, over the past year or so some housing-
industry professionals — noting the historically long
and weak expansion — have been saying: “I think we
are in the late innings of this one, so we better be care-
ful.” When pressed, most of these professionals seem
unable to explain why they are concerned, except that
they have a “feeling.”
These troubling feelings about the economy often
accumulate into expectation curves, which then end
up becoming self-fulfilling prophesies. This is what
happened a decade ago. There were many happy real
estate developers and borrowers in 2006 who had a
feeling it was getting late in the cycle so they made
preparations for a correction.
Sadly, the Great Recession was far worse than almost
everyone predicted, and prices fell dramatically further
than many expected. The aftermath was painful for
everyone, including the mortgage industry. Now,
with more than 100 months of expansion behind us,
shouldn’t we get a better dashboard on the economy?
Have we learned anything from the last recession?
Maybe it is time to dispel these “feelings” with some
good old economics.
Patterns in lending
When we change from economic expansion to contraction, a pattern builds in the lending industry. At
first, many customers are looking for loans because
they want to invest in expanding home values.
As a result, the Fed usually starts to increase the interest rates in an attempt to stop inflation caused by
an overheating economy. Then, after rates increase
enough, borrowers start to get concerned and lending slows down.
If lending slows down a small amount — but the
economy continues to expand — all is well. If major
players in the market start to believe a recession is
coming, however, then borrowing practices might
begin to slow down a great deal. If this triggers a
strong recession, like we had last time, business slows
down greatly, and regulators start to change the rules
in an attempt to learn from the experience.
Therefore, mortgage originators want to make the
best use of their time before a recession, and have
strategies in place to allow for a good transition to a
recession when it does occur to protect their business.
If you know when the recession is actually coming, you
can plan accordingly.
If you study recessions and other downturns in the
economy over the past couple of generations, you
begin to see there are indicators that can be monitored to keep people’s knee-jerk feelings in line. The
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