What will cause the recession to end?

January 23rd, 2009 9:25 AM

To understand what will cause the recession to end, we must understand what caused the recession. There were many causes, but the most visible culprit was an uncontrolled real estate boom. First it was the sub-prime crisis halting the boom. The government indicated that real estate would weather the crisis. Well, the real estate market did not weather the crisis. Then the government said the economy could weather the real estate crisis. As we pointed out in The Real Estate Report 12 months ago, as the real estate market goes, so does the economy. The housing industry directly or indirectly employs about one-fifth of Americans, depending upon how the numbers are counted. You can't have a weak link in a chain which is that significant of a segment of the overall chain. Now the recession has spread across the globe because of the importance of our economy.

So, when will the recession end? The end of the weak real estate market will bring the end of the recession. Of course, it is likely that you will then ask us, when will the real estate market become strong again? Here we would suggest you look at the cost of ownership vs. the cost of renting. At the height of the boom, the cost of owning was significantly higher than the cost of renting--though some of these costs were masked by easy lending standards and innovative products. Now housing prices are going down and so are rates. There are already areas of the country that are reporting that owning is becoming cheaper than renting--especially after taxes are taken into consideration. When we reach this point in the majority of the country, the price of housing will stabilize. And when prices stabilize, banks will be more willing to lend. This cycle will lead us out of the morass. When will that happen? We wish we had a crystal ball, however, we do know that the lower rates go, the more quickly the date is likely to arrive.

Mortgages continued their assault on record lows as they dropped for the 11th week in a row. Freddie Mac announced that for the week ending January 15, 30-year fixed rates averaged 4.96%, down from 5.01% the week before. The average for 15-year fixed rose slightly to 4.65%. Adjustables fell as well with the average for one-year adjustables decreasing to 4.89% and five-year adjustables falling sharply to 5.25%. A year ago 30-year fixed rates were at 5.69%. "Rates for 30-year fixed rate mortgages fell for the 11th straight week to another record low, due in part to the slowing economy and government actions," said Frank Nothaft, Freddie Mac vice president and chief economist. "So far, both the U.S. Treasury Department and the Federal Reserve have added over $100 billion in liquidity to the mortgage market since September 2008, which put downward pressure on rates for fixed-rate mortgages. The Federal Reserve may add up to an additional $570 billion more this year, based on its November 25, 2008 announcement, to further shore up mortgage lending and keep rates low. In December, the unemployment rate rose to 7.2 percent, the highest since January 1993, and the economy lost 2.6 million jobs over 2008, the largest annual drop since 1945. That brought down yields on Treasury securities."

Type the characters you see in this picture, click "Submit" when finished.

		This helps us prevent automated programs from creating bogus contacts and adding them to your contacts database.