The “R” Word
Watch any financially related news and you will see people either predicting a recession of blatently stating that we are in one.
This blog will help you sort out the wheat from the chaff with respect to all of this talk and how it affects you.
A recession has a definition. It is “a negative growth in the GDP for two or more consecutive quarters.” What this means in English is that the total Gross Domestic Product, which is the complete total of goods and services produced in the United States is less than was produced in the previous quarter (3 months). In order for a recession to be inplace, this has to happen 2 times in a row. For example, if the GDP for the last 3 months of 2007 is $250 billion dollars, the GDP for the first quarter of 2008 would have to be less than that and the GDP for thew second quarter even less.
Since we have not had any indication that there has been an actual decline in quarter to quarter results as of yet, calls for a recession are very preliminary. Those who call it may have ulterior reasons, although I cannot think of any except a cry for attention, but there they are.
There are a lot of enonomic studies that show that people act while looking to the future. For example, if they expect prices to go up, they buy as much as they can now, which drives prices up and completing what could be described as a self fulfilling prophecy. What this is called in the economics world is the ‘economics of expectations’. If prices are seen to be dropping, people will wait for cheaper prices for as long as they possibly can.
Of course, there is always the real concern for a business slowdown, which affects everyone, whether or not it is a recession, slowdowns affect spending, production, and employment, pushing each to lower levels. This is a real concern and should be addressed by everyone who has a stake in the economy.
With regard to real estate we are seeing the ‘economics of expectations’ coming to the real world in a real way. As prices drop, home buyers put their hands in their pockets and keep them there, waiting for the bottom, or at least, for lower prices. With fewer buyers (lower demand), the supply of available homes goes up, this imbalance does cause prices to drop, thus encouraging the buyers to keep their hand on their wallets and continuing the cycle.
Luckily, there is a point that breaks the cycle. Housing has its own unique market due to its importance in today’s living. Everyone has to live somewhere. Usually this slowdown stops when rent costs approach the cost of purchase. In our market, with the tax benefits reached through home ownership, the switch from renting to buying is sparked by much more than the difference in the rent cost versus the mortgage cost.
I beleive we have recently hit that point in East County. Purchasers of homes are coming out in large numbers, mortgage applications are at a level as high as they were during the recent real estate boom. The smart money (investors with a long experience of buying and holding for investment) are coming back and purchasing homes in rapid order, as they believe these opportunities will not last for long.
If there was a recession, it was only in the real estate market and has been for the past 2 years. We think it is over and a more normal market is about to emerge from the mess.
Will prices go up? Maybe someday, but for the meantime, prices should steady and remain so until the foreclosure and credit markets stabilize.
If you have any questions, please contact us at (925) 308-7045.
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