What Is a Recession?
The BCDC monitors several types of economic data to identify when economic activity peaks and when it hits its lowest point. The period between these dates is labeled a recession, and might be referred to colloquially as a financial crisis.
According to economists, there have been 33 recessions in the United States between 1854 and 2018, and ten recessions since 1948. The most recent recession was between December 2007 and June 2009.
How Is a Recession Different from a Depression?
The best-known depression is the Great Depression. According to the NBER, the Great Depression in the U.S. consisted of two severe economic downturns. The first lasted from August 1929 until March 1933, followed by an economic expansion from March 1933 to May 1937. But the economy slipped again from May 1937 until June 1938.
Here’s a comparison that might illustrate the difference between a recession and a depression: During the Great Depression, U.S. unemployment reached 25 percent. However, a downturn between 1973 and 1975 led to unemployment levels of just nine percent. That’s still incredibly stressful for United States workers, but not nearly as severe. Additionally, the U.S. real gross domestic product (GDP) fell by about 25 percent during the Great Depression. In the 1970s recession, the real GDP only dropped by 3.4 percent.
How Is a U.S. Recession Measured?
Real GDP covers all goods and services produced by a country’s economy. It accounts for inflation by measuring only economic growth, not price increases. In this way, real GDP differs from nominal GDP, which includes rising prices.
The U.S. Bureau of Economic Analysis (USBEA) releases real GDP numbers every quarter. Because of this timing, a slowdown may have begun before the latest numbers show a significant decline in real GDP. This is one of the reasons the BCDC considers other economic data when it evaluates a recession.
The BCDC also assesses the real income of people in the U.S., adjusted for inflation. This number also excludes payments from programs like Social Security. A decline in real income can indicate a drop in consumer spending, which in turn affects the manufacturing supply chain.
Employment numbers provided by the Bureau of Labor Statistics help the BCDC measure economic activity. The BCDC also uses manufacturing and retail sales figures and the Federal Reserve System’s monthly industrial production data.
The BCDC does not consider stock market performance, however. Wall Street stock prices change based on investors’ expectations, not economic activity.
What Causes a Recession?
For example, several factors caused the 2007 to 2009 recession, which is often called the “Great Recession.” Consumers started purchasing fewer durable goods in October 2006, and the Federal Reserve didn’t raise interest rates in 2004 and 2005. Stagnant rates allowed home values to reach exuberant heights. Home prices then started falling in late 2006, depriving homeowners of equity. Banks lost money when home values plummeted, and investors who owned mortgage-backed securities panicked. All of this led to a significant downturn in the world economy.
What Are the Impacts of a Recession?
High unemployment numbers mean less spending, which slows the economy further. Businesses like manufacturers, retail stores, and restaurants may suffer first. But if a recession lasts long enough, or is severe enough, other businesses could be negatively affected. For example, people may fall behind on their mortgage payments. Borrowers not paying their mortgages may cause banks to struggle.
Despite all the downside, there is one positive impact of a recession: It prevents inflation. Inflation is the steady increase in the average prices of goods and services. During a recession, prices typically stay the same or might even drop.
How Does a Recession Impact Real Estate Investing?
But there are risks and challenges to investing in real estate during a recession. For one thing, banks may be more hesitant to lend money. Even if interest rates are low, investors may find it challenging to secure financing. And a recession’s length can affect an investor’s return, depending on their investment strategy. For example, it can take years following an economic downturn for property values to rise. Lack of home price appreciation can keep an investor from profiting by flipping a property.
It’s important to stay smart during a recession by avoiding the seductive temptress of the first upturn — when the first investors after a downturn cause a brief, unsustainable dip.
Other variables, such as location and timing, can also determine the outcome of a real estate investment. For example, in Seattle, the median home price dropped as low as $308,000 following the 2007 to 2009 recession. By 2016, the median price increased 79 percent to $550,000, an increase of 79 percent. In Toledo, Ohio, home values over the same period rose two percent.
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