Recession Obsession: The Truth About Market Declines
Recession talk has become somewhat obsessive…
over the past few weeks and many have reached out to me for my opinion on this subject. While I am reluctant to even mention the word so as not to add fuel to this chatter, I thought it prudent to address the subject more substantively. First and foremost, what is a recession? It is defined as a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. No, the economy does not stop. No, people do not stop living. Economic growth slows into a decline for two or more quarters.
The worst aspect of today's current chatter and fear is that if a recession were to come, it will be as bad as the last recession. The last recession was closer to a DEPRESSION. It was unusually harsh and most of the fundamentals that were at play then - massive subprime mortgage market and a global financial crisis - do not exist today, certainly not anywhere vaguely close to those levels. Much stricter banking regulations exist today. Humans remember that which is most recent: equating ALL recessions with the 2007-9 GREAT recession is unwise and overtly pessimistic. And even during 2007-9, GDP declined by 5.1%.
The next question is when will a recession strike?
No-one knows the exact answer although some form of a recession is inevitable sooner or later. Yes, there are certain indicators now that have in the past warned of possible recession: They do not necessarily apply to ALL recessions. Currently the US is experiencing outstanding employment numbers: when people are employed, they earn, spend, pay their mortgages and rent and don't require government assistance. GDP growth is currently over 2% annualized. The trade wars are a drain on growth, but hopefully these are resolved sooner rather than later.
Here are some facts about recessions since - and including - the Great Depression, a once-in-a century occurrence:
1. 64% of recessions since 1929 lasted under 1 year
2. There have been 14 recessions total since and including the 1929 Great Depression of 1929, or one every 6.4 years. We have not had a recession in 10 years.
3. The average GDP decline during recession was 5.9%. This average is enormously swayed by including the Great Recession AND the Great Depression where GDP declined by 26.7%! In the past 50 years the average decline was just 2.2%. Currently the USA GDP is growing over 2% annually.
4. 57% of all these recessions/depression had a GDP decline of less than 3%.
5. Unemployment rose above 10% in only three recessions. In the past 50 years, unemployment averaged 8.25% during recession.
Many buyers think waiting till a recession hits will allow them to buy 'bargains'. This may be true for some all-cash buyers, although history has taught us that when a recession hits:
1. The best properties are often withdrawn from the market IF there are signs of price declines. Home prices don't always decline.
2. Interest rates may be lowered, but obtaining financing becomes tougher as banks usually tighten lending standards.
3. If you lose your job, its almost impossible to obtain a mortgage.
4. Cash buyers are always waiting for opportunity moments to buy. Competing with these buyers is tough enough during good times. Its worse during tough times.
5. So much depends on employment: 70% of the USA economy is consumption and when people are emplyed they consume. Even during these crazy times with bad news broadcast 365-24-7, the US consumer is strong.
6. Rents tend to rise during recessions as fewer people qualify for a mortgage to be able to buy.
7. Even during strong economic times, economic advisors give a 20% chance of recession.
8. During recessions, hobby-real-estate agents leave the profession and allow committed professionals increase market share.
In this lies an abundance of real estate opportunity.
While I think speaking about recessions can fuel un-necessary fear, I also think its important for us to be clearly aware of what they are, how often they happen, and how unreliable predicting their timing can be. We should also be well versed in arguing the subject with our clients and colleagues. Most importanly, we need to remind ourselves that even in the WORST recessions life goes on: people get married, divorced, die, give birth, etc and the vast majority continue working and earning.....and living.
SOURCE: Leonard Steinberg