To offer an unorthodox perspective on the state of the U.S. economy and housing market, October Research welcomed acclaimed “Bowtie” Economist Elliot Eisenberg, Ph.D., to speak at the 2024 National Settlement Services Summit (NS3) in Naples, Fla.

His energetic and entertaining delivery kept the audience of title and mortgage professionals engaged as the former National Association of Home Builders senior economist wove insights about the factors impacting economic growth and interest rates into a tapestry of anecdotes and real-life scenarios that made for a gripping presentation.

While unemployment and wage growth are key indicators for evaluating the health of the overall economy, so too is housing inventory.

“The problem with housing is there are no houses to sell,” Eisenberg said, adding, jokingly, that the problem could be solved if every Realtor in the country (approximately 1.5 million, according to the National Association of Realtors) simply sold their own house. He then noted, seriously, that housing inventory has been rising in several states (Texas, Florida, etc.) but the fact that this has happened as rates remained high is troublesome.

“I’m nervous about something,” he said. “If you see increases in inventory, like you’re starting to see now, and interest rates are remaining high, that’s a bad combination. That could cause prices to decline. If we see increasing inventory and declining interest rates, OK, fine, we’re happy. More people are going to come in and there will be more homes to buy. But if there are more homes to buy and not a lot of buyers, that could be a problem. So, I’m a little bit nervous that we could see some small declines in prices in areas where inventory is really starting to go up.”

The country’s strong economic recovery from the COVID-19 pandemic has been due, in no small part, to a healthy amount of consumer spending, despite expectations of an impending recession on the horizon, Eisenberg contended.

One side-effect of high spending is a now low amount of saving, which is cause for concern among economists like Eisenberg. However, he also pointed to historical trends that help lessen his concerns to an extent.

“The last time savings rates were so low was back in 2005, 2006, 2007,” he said. “That was the housing boom. So, home prices were going up rapidly and we didn’t save money. OK, that’s part of this that ameliorates some of my fear. But I’m not thrilled that savings rates are near historic lows with good employment, a good economy, and a large budget deficit. We should be having much higher savings rates.”

The fact that Americans are not saving as much as they should, in theory, while utilizing their credit cards at alarmingly high rates is a major cause for concern, Eisenberg said.

“We’re using the crap out of our credit cards. We shouldn’t be doing that,” he said, candidly, while pointing to a graph representing the steady rise in credit card utilization in recent years and noting that historic trends indicate many Americans may start defaulting on their cards in the near future.

At this point, Eisenberg clarified that he was not terrified by the economic indicators he was describing and was only “a little nervous.”

He pointed out several pieces of “good news” as well which have led to deflationary pressures, such as a reduction in trucking costs and improvements in global supply chains that have been slowing the increase in prices. These factors, among others, are indicators that interest rates may be poised to finally come down.  

“The question becomes how much does the Fed really cut this year?” Eisenberg said. “If you’re telling me they’re going to cut (rates) twice, (I’d say) ‘Yeah, it’s highly likely, in September and December.’ Three times? ‘In that case, once in September, November, and December, depending on inflation, is plausible.’ No cuts? ‘Very unlikely.’ Is it possible they’d raise (rates)? ‘No, no, no, no, no, no, no raising.’ So, you have to think about two and possibly three cuts. That’s really the view you should be thinking about right now.”

Another question for the Federal Reserve regarding interest rates, as Fed Chair Jerome Powell has acknowledged, revolves around the timing of a rate cut. Simply put, dropping rates at the wrong time could cause a recession whereas lowering them at the right time could help avoid a recession.

However, recessions resulting from monetary policy decisions tend to take much longer to develop than those caused by congressional decisions, Eisenberg explained.

“It takes two years to get a recession using monetary policy. If Congress wants to create a recession, they can do it in five minutes,” he said. “They can say, ‘We’re going to raise your taxes. In anticipation of your higher tax bill, we’re going to raise your withholding every paycheck, like $200 bucks.’ If you’re paying twice a month, that’s $400 bucks a month, $5,000 bucks a year. Our economy will go [raspberry noise] in about five minutes.”  

A significant indicating factor of an impending recession is how willing banks are to make commercial and industrial (C&I) loans and that willingness is largely dependent on gross domestic product (GDP), which is impacted heavily by the health of the economy.

“Every three months, the Fed asks loan officers in banks, ‘Hey, are you making it easier or harder to lend money?’ The bottom line is demand for loans,” he said. “When 50 percent of banks are making it hard to get C&I loans, you wind up in a recession.”

When looking at historic trends that have led to recessions and the current state of inflation, the labor market, and GDP, Eisenberg noted he is optimistic interest rates will reach the Fed’s 2 percent target rate, despite some of the more concerning trends present.