Editor’s note: With the RBA’s decision yesterday to keep interest rates on hold, today we thought it may be useful to look back to an article from earlier this year. On 28 June, Terence discussed the US Fed’s then-recent interest rate raise, and how he predicted it would affect markets for the rest of this year. Read on to see how well his predictions have held up.
The US Federal Reserve raised interest rates by a quarter percentage point this month. It was the fourth rate rise in this current cycle of tightening rates.
There’s a notion in markets that a rate hike is bad for stocks. That it could trigger a stock market collapse.
It’s a notion that often goes unchallenged.
There’s one thing to keep in mind about all that. The Federal Reserve would only raise rates if they were confident in the economic outlook.
They must be buoyed by the figures they’re seeing, because they’ve signaled that they remain on track for another rate hike this year.
US GDP growth remains steady and the unemployment numbers for May saw US unemployment fall to 4.3%. That’s a 16 year low.
None of that is flagging collapse, but economists continue to call that the US is on the cusp of a recession.
Banking giant Barclays released a report last month, which went unnoticed by many. I read that report as hugely bullish for US real estate and the US economy in general.
The report found more than six million US adults will have their personal bankruptcies disappear over the next five years.
It’s big for the US economy. Here’s why.
It means banks can start lending again, which will start greasing the wheels of economic activity once more.
The US is in one of its longest economic expansions in American history. The banks have had an improving economy to lend into for years, but consumers scarred by foreclosure and bankruptcy in the wake of 2008 have had those black marks against their name.
That negative credit history has meant that banks have been unable to lend to those consumers.
But things are changing.
Those foreclosures and bankruptcies are falling off Americans’ credit reports in ever growing numbers. That’s helping to boost consumer credit scores across the US.
Lenders rely on both the reports and scores when determining whether to approve consumers for loans and at what interest rates.
Higher scores lead to more available credit and at cheaper cost. That means more loan approvals and credit card approvals.
See where this is heading?
More available credit, more spending, more demand for goods and services.
That must have a ripple effect across the broader economy.
The bust in 2008 saw a huge rise in foreclosures and bankruptcies. Consumers with black marks on their reports found it near on impossible to get access to credit. Many of those with black marks to their name couldn’t even get access to a credit card, let alone a car loan. So they’ve simply held back on purchases.
Here’s a chart of foreclosure starts by year.
Wall Street Journal
[Click to open new window]
You can see how foreclosures peaked in 2010. Foreclosures stay on credit reports for up to seven years. For those who lost their homes in the wake of that crisis, the black marks are dropping away. For the first time they’re able to borrow again.
Unlike foreclosures, personal bankruptcies can stay on credit reports for a period of seven to 10 years.
Those consumers who filed for the most common form of bankruptcy in 2007 are now starting to see those negative events fall off their reports.
Some of the bankruptcy numbers from 2008 now have only months to wait until the financial scars of the Glogal Financial Crisis are completely wiped away.
It all signals more lending, and more consumer spending.
The first things these consumers with a clean sheet are likely to do is buy a house, buy a car, and get a credit card. And many of them can; US unemployment is at 16 year lows!
It’s huge for US real estate, as those buyers who were scarred by 2008 come back into the market. And it’s bullish for the US banks, which can now start lending to these people once more.
The implications for real estate, banks and the US economy in general will be huge in the coming years.
So I’m not so sure that the US is on the cusp of a recession.
The Barclays report suggests this real estate cycle is just starting to build, and confirms exactly where we are in the real estate cycle.
That cycle knowledge has been distilled in the Cycles, Trends and Forecasts 18 year real estate clock. That clock tells you exactly where the economy is right now. The Barclays report confirms it.
To know what’s coming next, go here.
Lead Researcher, Cycles, Trends & Forecasts