Even after US president Donald Trump has taken measures to cool tensions in the trade war, Wall Street is growing uneasy about another threat to the US economy that could trigger an economic downturn, as per a report.

A Warning Rooted in History

Citi Research issued a warning about the US economy by citing the economist Ed Leamer, who passed away in February, who had published a research paper in 2007 that highlighted that, "residential investment is the best leading indicator of an oncoming recession," according to Fortune.

US Housing Activity Weakens

The investment bank's analysts wrote in a note that, “Housing activity looks set to contract in Q2 after advancing only weakly in Q1. The rise in longer-term Treasury yields will weigh on residential investment and the broader economy,” quoted Fortune.

As per the official data, private residential fixed investment hit a seasonally adjusted annual rate of $1.22 trillion in the first quarter, which has increased 1% from the fourth quarter and is up 3% from a year ago, according to the report. However, when private residential fixed investment is adjusted for inflation, the investment is flat from the previous quarter and from a year before, as per Fortune.

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US Mortgage Rates

While, the 30-year mortgage rates have risen back up toward 7% along with increasing yields for Treasury bonds, which have been impacted by the worsening US deficit forecast tariff-laden US inflation projection, reported Fortune.

Citi analysts pointed out that, “Residential fixed investment is the most interest rate sensitive sector in the economy and is now signaling that mortgage rates around 7% are too high to sustain an expansion,” as quoted in the report.

Signs of a Housing Slowdown

The bank also explained that other data indicates that the United States housing sector is shrinking, which includes a fall in permits for single-family home construction and a rise in the effective supply of homes on the market during a weak demand, even amid the peak spring selling season, reported Fortune. Even the median home prices of existing homes are also declining on a monthly basis, as per the report.

What Will the Fed Do?

Citi also mentioned that, “The Federal Reserve will not respond to the housing market alone,” adding, “But if signs emerge that the weakness in housing in spreading – particularly to the labor market – the housing contraction may have the Fed considering a faster pace of cuts," quoted Fortune.

FAQs

Are people buying homes right now?
Not as much. Even during the busy spring season, demand has been weaker than expected.

Is the Fed going to cut interest rates?
Not just yet, but if the housing slump starts affecting jobs, it might move faster to cut.