Will a recession caused by the Pandemic look like The Great Recession (or worse)?
Hello there, long time no see! I've taken some time off from blogging to really think and figure out exactly what I want to be sharing, and what I want that to look like. I still don't have it all figured out, but with the craziness going on in the world right now I do want to share some thoughts on how the pandemic is affecting real estate, and also whether a recession is going to look like the last Great Recession, or even worse, especially in terms of real estate and housing.
I shared by thoughts in a quick video over on my Facebook and Instagram pages, but wanted to talk in a bit more detail and also share a very insightful article here as well. First and foremost, it's important to understand that historically, real estate has remained fairly stable even through a recession.
The Great Recession was unique in that it was caused by the housing and lending sectors and then spread out into the rest of the economy. There were specific characteristics present at that time that still are not present now. Now that we're a decade out from that recession I have people mention another housing bubble bursting, or another huge housing crash, and the truth is, at least in the Chicagoland area, is that we are still experiencing a relatively low housing inventory in comparison to the number of buyers who are active in the market. For example, as of January of this year there was only a 4.1 month inventory of properties on the market for sale. That means that if no new houses come up for sale, it would take 4.1 months for these to be absorbed, or sold. During the Great Recession there was a two year inventory of homes for sale. THAT is excess inventory.We could also have a conversation about pricing, and how that affects the ability of a property to sell. In 2016/17 we were dealing an extremely tight market with a severe shortage of inventory, we faced more multiple offer situations with our buyers than ever before, and we really didn't even look at active listings because there was so much competition, we had to find our clients something before it came on the market. But even during that time there were plenty of overpriced properties that couldn't get an offer.. that's not the market, that's the price, the seller being unrealistic, a bad agent, or some combination of all three. It's important to know the reality of the market, and currently the housing market is remaining stable. Sellers and buyers are putting their sales and searches on hold, but we are not experiencing people changing their plans, they are just waiting until the stay at home order is lifted, which I think is absolutely the right and most responsible thing to do.Another Compass agent shared a very interesting article by Donald Calcagni of Mercer Advisors, one of the top wealth management firms in the country, which talks in detail about what caused the Depression and compares current conditions and preparedness with the past, which I find not only insightful but reassuring. My colleague also shared a detailed break down of the article that I'm including here as well, it's a bit long, but it's very interesting, and hopefully will give you a little bit of clarity and peace of mind that we shouldn't be facing a very long or severe downturn.
Economic historians generally agree that the Great Depression began as a typical recession in the summer of 1929, greatly exacerbated by:
extreme stock market valuations
the imposition of tariffs
the Feds decision to raise interest rates
a banking crises
tax increases
rigid adherence to the gold standard
a deeply indebted U.S. farm economy which had its genesis during World War I.
These events acted to reduce consumer spending and remove money and credit from the economy when they were needed most. Contrary to popular belief, the Great Depression was an era of unprecedented deflation, not inflation. None of those factors exist today, nor did they exist prior to the onset of the coronavirus pandemic.
Stock market valuations are generally in line with their 25-year averages
Interest rates remain near historic lows
The Federal Reserve and FDIC protect depositors against bank failures
Taxes have been recently cut
The U.S. monetary system is no longer held hostage by the gold standard.
The U.S. economy is significantly less agrarian (farming-focused) today than it was in 1930 and, subsequently, farm-related debt is less relevant to the broader economy.
U.S. household debt is at its lowest level since at least 1980.
The only remote similarity between the economy of the early 1930s and that of today is the series of new tariffs against the advice of most economists.
Today we’re better prepared with real-time data and economic science to guide how we combat economic contractions. Unlike the Great Depression, rather than remove cash from the economy through tax increases, interest rate hikes, and adherence to the gold standard, today’s policy responses have all sought to inject cash into the economy via various forms of stimulus, tax cuts, expanded social programs, and more.
During the Great Depression:
Unemployment rose to over 20%, the economy contracted 30%, and over 9,000 banks failed.
There were no FDIC or social safety nets for workers.
Government removed cash from the economy.
Credit froze, and it took nearly four years for the economy to begin to recover; it didn’t fully recover until 1941.
The stock market didn’t fully recover until 1944, more than 15 years after the infamous 1929 crash. Compare this to the Great RECESSION of 2007-2009, the most severe since the Depression.
Unemployment rose to over 10%,
The economy contracted 4.6%,* 325 banks failed. (less than 4% of the number of banks that failed in the Great Depression)
Social safety nets were expanded.
Depositors were protected by the FDIC
The Federal Reserve ensured that credit continued to flow throughout the economy.
The result? The recession that began in July 2008 was technically over by July 2009. The economy fully recovered and went on to post new all-time highs by early 2010. While the bottom of the housing market in Chicago was felt during 2010 and it took several more years to absorb the excess housing stock, the stock market fully recovered by October 2012, about four years after the crisis began.
Today stands in stark contrast to the Depression. The federal government has been quick to cut interest rates, inject liquidity into the financial system, and expand lending to businesses. None of this would have been possible if we still adhered to the gold standard. The U.S. Congress, rather than increasing taxes and passing new tariffs like it did in the early 1930s, has instead passed a $2.2 trillion plan that provides stimulus, an expanded safety net for the unemployed, and low-cost loans to small businesses (which are analogous to the farmers of the early 1930s). Certain taxes were either temporarily cut or eliminated. While the current economic contraction promises to be painful and steep, economic reasoning and historical evidence suggest it’s unlikely to evolve into something akin to the Great Depression according to this opinion that I align with. There are other opinions on this subject and only time will tell how this plays out economically. I do believe we have a different infrastructure, different circumstances and technology to accelerate things more so now than ever before. Time will tell....
“A Depression is a popular narrative. But this is a pandemic. It shouldn’t last ten years. It should be over in one or two years.” - Robert Schiller, Nobel-prize-winning economist
The truth is that once the stay at home order is lifted, people are eager to get back to life in a more 'normal' way... most of the unemployment we are experiencing right now will vanish, and businesses will be allowed -at-to reopen, and people are eager to keep moving forward with their lives.
Feel free to contact me if you have any thoughts or questions about any of this information, or if you want to chat about your specific situation.
I'll include my email address here again for easy reference nancy.gordon@compass.com
Talk to you soon!