Monday, September 20, 2010

The Recession Has Ended?

A report out today from the National Bureau of Economic Research states that the recession actually ended in June of 2009. According to the report, the recession actually began in December of 2007 and ended 18 months later, last June.  The committee used the Gross Domestic Product and Gross Domestic Income as indicators of the end of the recession.

The report ties in nicely to the "Recovery Summer" tour that the White House and Tim Geithner have been promoting this year.  The message is the same--the economy is improving; it is just improving slowly.

Fortunately, the National Bureau of Economic Research and the Administration are not using real estate statistics as benchmarks for the recovery.  Consider that the Mortgage Bankers Association is reporting an 8.9% decrease in mortgage applications--both purchase and refinance--for the week ending September 10, even though mortgage rates remain at record lows.  One reason for the declines is the loss of equity in homes, which makes it very difficult for borrowers to refinance unless they can get their current mortgage servicer to voluntarily reduce the principle amount owed on the house.   But another reason is that many borrowers cannot qualify under strict new financing guidelines, so lowering the interest rate and the payments is not an option for many borrowers.

August also saw bank repossessions increase 3% from the previous month to 95,364.  This figure represents a 25% increase in foreclosure activity since August of 2009.  The number of homeowners receiving a new notice of default decreased 1%--indicating that banks are concentrating on processing pending foreclosures before starting new ones.  This is not entirely bad news--homeowners who have been sitting in their homes for over 400 days without making any payments to the mortgage company probably need to go through the foreclosure process.  But it's nothing to celebrate either.  High rates of foreclosures tend to further push down property values in an already declining market.  These numbers are reflected in new statistics showing that nationwide 26% of sellers reduced their home prices as of September 1.  The average price reduction is still about 10%,  but the total dollar amount of reductions is about $29 billion in lost equity.  That is $29 billion that will never go into the economy in the form of expenditures or even taxes.

And it is not just homeowners who suffer from dropping home prices.  The National Association of Home Builders chief economist David Crowe told Realty Check today that the rising foreclosures are hurting the new home market.  "Builders report that the two leading obstacles to new home sales right now are consumer reluctance in the face of the poor job market and the large number of foreclosed properties for sale."

And then there is the study by Boston College's Center for Retirement Research which says that Americans are $6.6 trillion short of what they need to retire.  According to the Federal Reserve, household net worth fell $1.5 trillion dollars from April to June of 2010.  The biggest factor in declining net worth was the drop in stock portfolios, but loss of equity in homes also contributed to this figure.   And according to a study by Milliman, Inc, during August of 2010, the funded status of the 100 largest corporate defined benefit pension plans fell $108 billion dollars.  This news comes as the nation wrestles with the future of Social Security and the retirement age.

The National Bureau of Economic Research says that they wanted to be sure that the June 2009 date for the end of the recession was correct before releasing their findings.  As Douglas McIntyre writes in Daily Finance, "there was no need to call an end to the downturn until it was clear that a meaningful recovery had begun."  Funny--fifteen months after the recession supposedly ended,  many of us are still not experiencing a "meaningful recovery."

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