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What’s the Shape of Our Recession?

By Brian Summerfield, Online Editor, REALTOR® Magazine

One of the interesting things about this economic downturn has been the debate among serious thinkers about what letter of the alphabet it would most resemble when mapped on a chart. For those of you who haven’t been keeping track, here are the four current challengers:

  • The V-Shaped Recession: The best possible scenario right now, the “V” recession would be characterized by a short economic bottoming out, followed by a sharp upturn.
  • The U-Shaped Recession: This would be tougher, but still manageable. The difference between “U” and “V” recoveries is that the former has a longer period of economic stagnation and a slower recovery.
  • The W-Shaped Recession: In this scenario, businesses and consumers are tantalized with a budding resurgence, but the economy collapses again before it truly improves for the long term.
  • The L-Shaped Recession: This would be the worst of all of these options. An “L” recession means that following a drop, the economy essentially would not grow significantly for a sustained period.

While these models are perhaps oversimplifications of the macroeconomic picture and have obvious limitations, they point to another, more important question: What will the nature of a recovery be? Will it be quick? Smooth? Bumpy? Sluggish?

Time will tell what impact the government’s combination of tax incentives, loan rescue programs, and flooding the financial sector with money will have on the economy. (For instance, some fear “rampant” inflation, which could artificially increase the value of homes and other goods and services.)

Right now, the consensus view from experts on both the general economy and the housing market seems to be that we should expect something like a “U” recession. This isn’t necessarily reassuring in and of itself — think back to what the consensus view on the economy was in early 2007.

Yet, there are reasons to be hopeful. For one thing, consumer confidence is on the rise. The dollar is actually looking stronger than it was a year ago. And the volume of home sales has been creeping up. Still, unemployment numbers and business bankruptcies should moderate any overly positive outlook.

Based on what you’ve observed, what do you think a recovery in the real estate industry and the economy will look like? And when will it come? Let us know!

Brian Summerfield

Brian Summerfield is Manager of Business Development and Outreach for NAR Commercial and Global Services. He can be reached at bsummerfield@realtors.org.

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Comments
  1. Hi Brian, the key here really rests on the job market. Basically, too much of the economy is more a reflection of headlines than true economic principals. Basically, we are in world that I call a media economy. But l expect that things will begin to improve next year. The difference is will the improvement meet expectations of the public…that I’m not so sure about.

  2. Central Texas & the Highland Lakes Area seem to have been on the outer ripple of the nation’s real estate woes. We have been, in my opinion, experiencing the worst of the recession just in ’09. There is currently a tremendous amount of inventory and days on the market is generally about 20%-30% more than in ’08 and ’07.

    However, we are extremely fortunate that we are not considered a declining market. Property values are hanging on by a thread and are not appreciating as in the past 3-4 years, but holding their own.

    Listings are way up and buyers are “hit or miss.” This is what I am experiencing, and what I hear from other agents within a 60 or so mile radius of Austin. Median range homes are selling; land and lake properties are getting a lot of showings- yet upper end homes seem to be drawing few lookers currently.

    Personally, I am optimistic that our market area has seen the worst, and will see an increase of pending sales and closings by the end of the summer and into fall. I am, after all, selling pieces of Heaven (the beautiful Texas Hill County,) one real piece of property at a time.

  3. I really believe we are in for a longer recovery period so more of a “U” then a “V”. I have seen higher end sellers, that started out a year ago, now in short sale with homes that should have sold months ago. The job market is somewhat stabiliziing but company owners who thought they could hang on are now closing their doors instead of buying more inventory. So we will have to ride it out a little longer. I do think things are picking up and I have seen this in the way of closings on medium price homes in our market. The confidence level seems to be rising and that will encourge people to take the funds they have sitting on the sideline and begin again investing them in real estate. Real estate is the best place to invest!

  4. Doug in CT

    You ask the $64,000 question.

    It depends in part on what’s meant by “recovery”, and this isn’t just semantics.
    If “recovery” means “back to what we thought the economy looked like prior to its implosion”, then we could be talking many years (possibly decades) because the last years of the dramatic & long (decade and a half?) economic run we just had, were – we now see in hindsight – based on a number of false premises (re use of credit, actual asset values, etc.) So what’s eventually considered a (stage of) “recovery” may simply mean “better than what we have now” vs. high times.

    “Economic recovery” is a pretty broad term, and a related issue here is who ultimately gets to benefit from a future recovery and who doesn’t, and how such improvements & declines occur (e.g. whether sooner or later vis-a-vis the curve of the economy as a whole.) We know that some sectors will do better than others, and that within each sector, some businesses will thrive, some will be happy to survive, and some will fail.

    Specifically as respects Real Estate, this being a R.E. blog, it’s well understood that two significant factors (towards sustained increased activity and forward home price movement) are a.) lenders’ ability to recover and regain confidence and get back to the business of lending, and b.) working through the huge home-for-sale inventory that’s built up.

    On all fronts, I expect the shape of a recovery to be a very wide “U”. An awful lot of damage was done to financial institutions etc. before the problems were recognized (largely due to faulty assumptions; see: “mortgage backed securities”), and it’s just going to take a long time to deal with what we’ve got. Much depends too on how much “snowball effect” takes place (business>jobs>spending>business etc.) It will be very interesting to see what the R.E. brokerage business is like say five years from now… It doesn’t take a crystal ball to predict that It’ll certainly look different – one major R.E. company is already insolvent, and an eventual R.E. turnaround is still too distant to see…

  5. Brian Summerfield

    Hello everyone:

    Some great comments here. As a couple of you mentioned, the job market is pretty critical in all of this. With the unemployment rate creeping up toward — but hopefully not passing — double digits, it’s tough to imagine a broad-based economic turnaround, even if some sectors are starting to look better.

    Also, I agree that it’s important to establish what the term “recovery” really means, as it’s probably highly subjective. In my mind, this does not mean a return to the 2006 economy, which was rife with problems. Instead, it would entail:

    1. Unemployment at or below 5 percent.
    2. Stable prices in real estate (neither today’s precipitous declines nor the bubble market we saw a few years ago).
    3. Greater stability in key economic areas (stocks, bonds, U.S. dollars, food, oil, precious metals, and a few others).
    4. A substantial reduction in bankruptcies and toxic assets.
    5. Greater consumer confidence.

    Incidentally, I just posted a blog featuring comments from Kathleen Hays of Bloomberg TV, who commented on positive economic indicators. (You can find that at http://tinyurl.com/nlljny.) She’s admittedly more optimistic than I am, but she has some interesting points. Give it a look.

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