Definition
A recession is a business cycle contraction when there is a general decline in economic activity. In macroeconomics, it is traditionally recognized after two consecutive quarters of negative GDP growth. Besides shrinking GDP, other characteristics of a recession include higher unemployment, lower consumer and business spending, inactivity in production and manufacturing sectors, and decreased personal incomes.
In the real estate industry, a recession can also cause substantial impacts, often resulting in reduced property values, increased foreclosures, and decreased real estate market activity.
Examples
- Example 1: The Rust Belt’s Economic Downturn: A general business recession led to high unemployment in the Rust Belt, coupled with low national interest rates. However, this did not significantly impact the Sun Belt, where low interest rates fueled a housing boom.
- Example 2: The Great Recession (2007-2009): Initiated by the U.S. housing market crash, it caused a global financial crisis characterized by severe housing foreclosures and significantly reduced real estate values.
Frequently Asked Questions (FAQs)
Q: What triggers a recession? A: Recessions can be triggered by various events, including major government policy changes, external shocks like oil price spikes, financial crises, or a dramatic drop in consumer spending.
Q: How does a recession impact the real estate market? A: During a recession, the real estate market may see a decrease in property prices, reduced sales volumes, increased foreclosures, and a general slowdown in new construction activities.
Q: Can recovery from a recession be quick? A: Recovery speed varies. Some recessions, known as V-shaped recessions, see a rapid recovery, while others, such as L-shaped recessions, result in a prolonged period of stagnation.
Q: How does unemployment affect the housing market during a recession? A: High unemployment reduces individual incomes, making it difficult for people to afford mortgages or rent, leading to decreased demand for housing and potentially an increase in foreclosures.
Q: Are interest rates usually low during a recession? A: Yes, central banks often reduce interest rates during a recession to stimulate borrowing and investment.
Related Terms
- Gross Domestic Product (GDP): The total monetary or market value of all finished goods and services produced within a country’s borders in a specific time period.
- Unemployment Rate: The percentage of the total workforce that is unemployed but actively seeking employment and willing to work.
- Foreclosure: The process by which a homeowner or property owner loses their rights to the property due to failure to make mortgage payments.
- Economic Indicators: These are statistics about economic activities that provide information on the state of the economy.
Online Resources
- Investopedia - Recession https://www.investopedia.com/terms/r/recession.asp
- Federal Reserve - An Economic Recession: What Is It and How Does It Happen? https://www.federalreserve.gov/faqs/economy_14419.htm
- The Balance - Recession Definition https://www.thebalance.com/recession-definition-terms-what-happens-during-one-3306011
References
- Bureau of Economic Analysis (BEA)
- National Bureau of Economic Research (NBER)
- Federal Reserve
Suggested Books for Further Studies
- “The Recession and Recovery Guide” by Jason Schenker
- “House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again” by Atif Mian and Amir Sufi
- “Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics” by Henry Hazlitt
- “The Return of Depression Economics and the Crisis of 2008” by Paul Krugman
