Recession Obsession – What Does it Mean for Real Estate?

Unless you live under a rock, it’s hard to avoid the dire warnings about an impending recession. Dedicating an entire blog post feels like adding a little fuel to the fire, but clarification and perspective are always useful. So if the idea of a recession makes you anxious, especially in terms of real estate, stop, breathe, and read on.

The Definition of Recession

A recession, by definition, is a period of temporary economic decline spanning at least two quarters. Trade and industrial activity slow, sometimes significantly, and this typically becomes evident by a fall in gross domestic product, or GDP.

That’s not ideal, but life does indeed go on. And here’s the thing – as a society, when we hear recession, we remember the last one our country navigated.The 2007-2009 Great Recession earned its name – it was closer to a true depression. But to put it into perspective, GDP declined a whopping 26.7% during the Great Depression, which was a true once-in-a-century occurrence. During the last recession, it dropped by 5.1%. 

Here’s some comforting news. Most of the driving forces at play between 2007 and 2009, including an absolutely enormous subprime mortgage market and a global financial crisis, aren’t factors today, and certainly not at nearly the same levels. If you were burned during the last recession, it’s human nature to get a little panicky about talk of another economic downturn. But while we’re looking back at history, let’s round things out:

  • 64% of recessions since 1929 lasted less than twelve months. 
  • There have been 14 recessions total since and including the Great Depression of 1929, which averages one every 6.4 years. We have not had a recession in 10 years.
  • The average GDP decline during recession was 5.9%. This average is enormously swayed by the Great Depression and its astounding decline of 26.7%. In the past 50 years, the average decline was just 2.2%. Currently, the USA GDP is growing over 2% annually.
  • Unemployment rose above 10% in only three recessions. In the past 50 years, unemployment averaged 8.25% during recession.

The fact is, recessions are a normal part of the economic cycle in a capitalist society. We’re quick to forget that.

Can You Predict a Recession?

It’s a common question. But we’re still waiting on that crystal ball. Experts can predict to their hearts’ content, but no one knows precisely when a recession will begin. Indicators present now that in the past warned of recession don’t necessarily apply to allrecessions. And here are the current facts.Employment numbers are outstanding. When people are working, they earn, spend, pay their mortgages and rent, and generally don’t need government assistance. GDP growth is currently more than 2% annualized. Yes, the trade wars are a drain on growth, but let’s hope that they’re resolved sooner rather than later.

What about Real Estate?

Many buyers rationalize that waiting to buy for a recession will mean a market filled with bargains. This may be true for certain all-cash buyers, but history has shown us a few things about real estate and recessions.

  • The best properties are often withdrawn from the market if there are signs of price declines. Home prices don’t always decline
  • Interest rates may be lowered, but financing can become harder to get.
  • If you lose your job, it’s almost impossible to obtain a mortgage.
  • Cash buyers are always waiting for opportunity moments to buy. Competing with these buyers is tough enough during good times. It gets much harder during tough times.
  • Employment numbers matter. Some 70% of the US economy based on consumption, and when people are employed, they consume
  • Rents tend to rise during recessions as fewer people qualify for a mortgage to be able to buy.
  • Even during strong economic times, economic advisors give a 20% chance of recession.
  • During recessions, hobby real estate agents leave the profession and allow committed professionals to increase market share.

The Takeaway

At this point, no one needs to panic. A recession may be in the works, but understanding what they are, how often they happen, and how unreliable predictions tend to be brings some much-needed clarity to an often intimidating scenario.Remember – perspective is everything. If the time is right for you to buy or sell in San Francisco, understanding the local market and the bigger picture can ease some of your concerns. And I can help.

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