While a yield curve is a good leading indicator for the housing market, it is not the only indicator, according to CoreLogic. Over the past several years, CoreLogic’s Market Risk Indicators (MRI) shows that since 2016, as the yield curve flattened and the spread got close to zero, the percentage of markets that saw an early warning of a price decline increased significantly. As the yield curve steepened, the percentage of markets that had early warning signs based on the Indicators dropped too.
The yield curve became inverted in 2006 and what followed was a housing bubble burst in 2007 that preceded the 2008-2009 Great Recession. However, the yield curve inversions prior to 2006 only led to local housing market downturns instead of nationwide ones.
One reason for the localized downturns is that housing demand and supply is local and there are many factors that drive local housing price dynamics.
As Frank Nothaft, the Chief Economist at CoreLogic pointed out, there have always been areas with home price decline even when home prices are up nationally. The flip side is also true: there have always been areas with home price increases even when the home prices have declined nationally.
The housing market accounts for about 15% of gross domestic product (GDP), so it is a large part of the economy. If the economy is in recession, housing demand weakens and more neighborhoods experience home-price declines. Thus, CoreLogic notes, it seems natural to expect that the yield curve is a leading indicator of the housing market as well.
“It appears the yield curve is a good leading indicator for the housing market, but it is not the only factor,” CoreLogic notes. “In a fast-changing environment, it is critical to leverage tools that can help assess the real estate risk in a timely manner.”