I always take what the “experts” say with a grain of salt. Expert analysis lags real life – they wait for the numbers to “confirm” what the rest of the world – literally – already knew: we are in a bad recession. You and I and everyone else on the street knew this at least 6 months ago. The prices were going up, people were losing jobs, and belt tightening was necessary for nearly everyone. But the “experts” refused to use the word recession.
The National Bureau of Economic Research is one of the major organizations that help define when we are or are not in a recession. While I agree 100% that just about any moderately educated person would have said “heck yeah we’re in a recession” months ago, there kind of has to be some official rules and/or body that defines rules to determine when the economy has hit such a point. The common rule is “2 consecutive quarters of negative GDP growth.” Note that this not declining growth. This is actual reduction in GDP, which is driven primarily by productivity. Which means an actual decline in productivity for two consecutive quarters.
The NBER uses many more stats, though, and determined that we actually have been in a recession since around the beginning of 2008. So forget about 2 consecutive quarters (I think we hit that only in Q3 last year, possibly Q4). According to the NBER it’s been a whole year. That’s pretty scary.
Another reason why defining recession is useful came up yesterday in my macroeconomics class. How can we define “depression” if we don’t define “recession?” Technically, there is no definition of when we are in a depression. Which is kind of scary. That we have some dry definition for recession feels comforting in that light.
The major issues to watch for are the unemployment rate, because GDP growth is based on productivity, and we can’t be productive as a society, on a macroeconomic level, if people aren’t working, and inflation/deflation. If the dollar becomes weaker or prices drop and return on products goes down, then we have serious problems ahead. The specific issues we’re seeing are in many ways responses – no credit because banks are scared about risk and their own futures is a reaction. One that has massive side effects, sure, because in an economy that relies on people spending money whether they have it or not, when banks don’t lend to the population we have a problem. But still a reaction.
Read on for more…
But the flip side will also be true. The recovery will be happening while “they” still think we are in a recession.
I’m actually not so sure about this, since it really depends on whether anyone has a clear idea of what is happening. What will define recovery? How will different people define it? When they are able to get a loan again? When they have cash in hand? When they feel safe enough to spend that cash with knowledge that they’ll get more cash later, in the form of a paycheck from a job they’re pretty sure they’ll still have or something else?
I think that for many people it will be the other way around. The credit system, the mortgage system, the banks, etc will have gotten on much better footing well before people have the confidence to say that we’re in the clear. This kind of stuff scares the bejesus out of people for a long time.
Look at how long it took before people were comfortable with tech companies again. It’s not like people in the valley stopped being innovative or stopped having good ideas because of the .com bust. People were just scared of how terribly skewed everyone’s perceptions had become. So they stayed scared a bit longer than perhaps was necessary.
Then again, that lag time also makes the change all the more dramatic. Google does good stuff, but they aren’t all that different than Microsoft if you ask me. But they’re based in Mountain View and does stuff with the internet so the valley is back, apparently…
So is it a good time to buy a house? If you can get a mortgage approved, yes! Mortgage companies are looking for solid loans to boost their bottom lines, so SOME people are in higher demand for loans. If you aren’t staying in a house for 5 to 7 years, you don’t need a house – that’s been a long-standing rule of thumb, nothing new. If you lose your job or think you will – and you don’t already have a house – don’t buy one! Again, not rocket science here.
My comments in response here are 1) that yes, if you can get a mortgage on the right terms one should take it BUT that the incredibly low rates the government is aiming for are not likely (4%? something like that) unless the banks decide to lend and take on that kind of risk again. Banks are scared of people with FICO scores of 800, since that just represents past credit stability. What if that person loses his job tomorrow because of the economy? Well, that would make that 800 pretty meaningless. And if there is only 4% interest on that loan, it doesn’t cover the risk taken. So banks won’t do it. So if you can get the mortgage on the right terms for you, then great. But it might not be the terms that the government is touting they will be able to achieve.
And 2), the point of the post from MarketWatch was that they were stating something rather obvious. Indeed, if one does not have a job, then one should not buy a house :-).
Actually, most of this recession was caused by people accepting the “too good to be true” lines they were fed at face value. I actually blogged about this back in September of 2007. (http://12amusings.wordpress.com/2007/09/01/sub-prime-surprise/) What? I can get a home with no money down and only a few hundred dollars a month (interest only loan)? Wow! Sounds too good to be true!!
The funny thing about people going with adjustable rate mortgages is that mortgage rates in the..80s? or so were around 14%. So if you took an ARM back then, and gambled that rates would go down at all, then you’d win out. It’s funny how that is.
Of course, an ARM is just adjustable rate. It isn’t sub-prime. A sub-prime loan, once it goes into regular payments on principle, will always skyrocket. You can’t go lower than prime after all.