While a sharp economic downturn wouldn’t be good for the housing industry at any time, the Federal Reserve is predicting a slightly less cynical scenario for housing markets in the event of a downturn in 2016 when compared to its 2015 numbers, according to David Stiff of CoreLogic.
In the 2016 Adverse and Severely Adverse Scenarios, the Fed predicts home prices to fall 12% and 25% from peak to trough, respectively. Although these are dismal numbers, they are better than the 14% and 26% declines posited by the 2015 scenarios. The Baseline Scenario stays roughly the same with 9.0-9.5% cumulative appreciation over three years.
This less pessimistic view of housing market downturns reflects a change in the Fed’s narratives of hypothetical economic shocks. The 2016 Adverse and Severely Adverse Scenarios assume that the U.S. and global economy will experience severe disinflationary/deflationary recessions, with periods of negative or nearly negative inflation and short-term interest rates. The Fed’s thinking about how things could go wrong in 2016 reflects the current state of the global economy – commodity prices are crashing, manufacturing output is slowing in some countries and falling in others, and inflationary pressures are non-existent.