How Long Will the Recession Last? What Caused it and Should You Invest in Real Estate?

The economy has been in a recession for over a year. It contracted rapidly towards the end of 2008, and is likely to continue contracting through the first half of 2009 and probably beyond.

What exactly is a Recession?

The generally accepted definition of a recession is a country’s drop in gross domestic product (GDP) for two consecutive quarters. The U.S. based National Bureau of Economic Research (NBER) defines economic recession as: “a significant decline in the economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales.”

United States Recessions

Since 1854, the U.S. has encountered 32 cycles of expansions and contractions, with an average of 17 months of contraction and 38 months of expansion. However, since 1980 there have been eight periods of negative economic growth over one fiscal quarter or more, and only four periods considered recessions:

· January to July 1980, and July 1981 to November 1982 (2 years total)

· July 1990 to March 1991 (8 months)

· March 2001 to November 2001 (8 months)

· December 2007 to January 2009 (17 months and counting) *

* Note that the current recession doesn’t meet the traditional two quarter drop in GDP, yet it is considered a recession by the NBER.

From 1945 to 2007 the NBER has identified 11 recessions averaging 10 months in duration from peak to trough.

What Caused the Current Recession?

One could write volumes on the subject of what caused the current recession and economic crisis, and in fact many good books have been published on the subject. Future articles will address the causes in greater detail; however the following will provide a brief summary:

In short, the collapse of the mortgage-backed securities triggered the economic crises of 2008. This was caused when former Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and the SEC Chairman Arthur Levitt opposed and defeated the regulation of financial instruments known as derivatives (a security whose value is determined by fluctuations in its underlying asset and characterized by high leverage).

It was also the lowering of the federal funds rate to only 1% for a period lasting more than one year, which according to the Austrian School of Economics, injected huge amounts of “easy” credit-based money into the financial system thereby creating an unsustainable economic boom.

Many libertarians, including Congressman and former 2008 Presidential candidate Ron Paul and Peter Schiff in his book Crash Proof, predicted the crisis years before its occurrence. They are critical of theories that the free market caused the crisis and instead argue that the Federal Reserve printing money out of thin air and the Community Reinvestment Act are the primary causes of the crisis.

The Bottom Line

The economy will likely be in a recession until the end of 2009; however, economic forecasting has a well-deserved reputation for being notoriously imperfect.

Norada Real Estate Investments forecasts the U.S. economy being only halfway through the current recession and that it will be the longest and most severe in the post war period.

The fact is we are already 16 months into a recession and we haven’t hit the bottom yet.

Even if the economy hits the bottom by mid 2009, recovery may be a long and gradual one. In fact, it is possible that it may exceed the length of the 1973-75 and 1981-82 recessions that lasted 16 months each, making this the longest since the Great Depression (August 1929 to March 1933) – a total of 43 months!

The “good” news is there are some excellent conditions for accumulating investment real estate and this would be a great time to invest. Low interest rates combined with high inventory and prices not seen in over six years offer some great deals.