The Real Estate Blog

Some particular words and concepts petrify every generation. While the bogeyman and fear of the dark work for children, recession and inflation creep adults out. Common in these fears is the agency of the unknown that can harm us all. If we look closer and analyze how they work, we might comprehend that there’s nothing to fear but fear itself.

Picturing a recession, everybody thinks of people standing in endless lines waiting for food for those in need, living on the streets, or desperately watching how they become evicted. These are one of the saddest, gut-punching moments in humankind’s history. 

Let’s discover what triggers the appearance of this global economic decline and what are the significant differences between various instances!

What are the first signs of a recession?

Economic analysts agree that prolonged inflation usually is a precursor to a recession. Suppose your newsfeed starts to revolve around financial newspaper headlines making a fuss about a downturn in industrial production, wholesale, retail trade, and the fall of real income suddenly. In that case, the country is heading toward another tremendous economic recession. 

Which economic factors cause the appearance of the recession?

You can’t single out one cause because a recession culminates in various damaging factors. Typically, a financial crisis (often causing havoc in the housing market) upsets the supply chain, or a global event such as the recent pandemic can contribute to the emergence of a recession.

Growing prices play an essential role in a recession. Central banks worldwide will raise interest rates to stop the devaluation of the national currency and control inflationary tendencies. However, high-interest rates will give birth to downsizing the working staff and rising unemployment. People and companies will consume and spend less. Then, corporates will minimize their production. These events create a whirlwind of economic restrictions and a significant drop in the gross domestic product. 

The stock market crash contributed to the Great Depression of 1929

The events of the economic downturn are still considered the most intense in US history. It was triggered by a sharp decline in the stock market, which will still make you think twice about where to invest your money during a recession. Beforehand, you must know that the prices of stocks had increased spectacularly before 1929. Everyone, from industrial magnates to Average Joe, had seen an extraordinary opportunity to invest their life savings in securities and high-yield bonds on the stock market.

Countless success stories were born, featuring people making fortunes overnight because everyone could sell their securities at a high price. Large amounts of money were transferred from banks to Wall Street to keep the business afloat. Many mortgaged their homes or borrowed money to invest in Wall Street inflated bonds. However, on the 18th of October 1929, the stock market went into a freefalling spiral. The stock bubble burst wide open on Black Thursday (the 24th of October.) as stocks devalued, and everyone wanted to sell their shares to avoid a greater catastrophe.

To sum it up, the Great Depression was caused by speculation. Many investors bet on purchasing stocks on margin but soon lost their investment’s value and life savings. Moreover, they were also heavily indebted to banks and brokers. In addition, the Federal Reserve also raised the interest rate to six percent. As a result, countless people became bankrupt, homeless, unemployed, and struggling for survival.

The subprime mortgage crisis led to the housing bubble burst.

The recession between 2007 and 2009 was the worst economic decline in American history since the 1929 Great Depression. Like in 1929, the Great Recession of 2007 was caused by households’ excessive borrowing and, most notably, the subprime mortgage crisis. A subprime mortgage is given to borrowers who don’t have a high credit rating.

In the early 21st century, the US real estate market was booming. For this reason, creditors were more lenient with homebuyers with bad credit. They handed out subprime mortgages (at high-interest rates) to clients who likely could never repay the loan. Borrowers counted on their homes will increase in value.

Yet, in 2007, the demand for homes decreased, and prices dropped. Real estate proved to be less profitable now. Countless homeowners found paying back mortgages impossible, and selling their assets took a lot of work at the right price. Consequently, banks had to intervene and foreclose the debtors’ homes. Still, foreclosed properties depreciated, and banks also lost money.

Soon the US housing market crumbled, and banks collapsed, hammering the entire economy. Approximately eight million US workers lost their jobs, and about four million properties got foreclosed yearly. The government bailed out banks as a countermeasure, resulting in a growing national deficit. 

The Covid-19 pandemic contributed to the 2020 recession or COVID-19 recession.

Opposed to the 2008 recession, which built up over time, the 2020 recession erupted suddenly. The pandemic resulted in stay-at-home orders that brought the economy to a screeching halt. Economic growth stagnated during the public health crisis, and consumer activity dropped considerably. The first sign of the COVID-19 recession was the 2020 stock market crash, followed by a rapid rise in unemployment (over 10 million unemployment cases were reported by October 2020.) Soon, the recession came full circle with a drop in oil prices, the energy industry decline, and tourism and the hospitality industry taking a giant economic blow worldwide.

To make things worse, international corporates had amassed huge debts (about $51 trillion by 2019) that could not reimburse the interest payments. According to Reuters, during the Covid-19 recession, the American economy contracted 19.2 percent. The US economy received a breath of fresh air thanks to the government’s swift intervention of approximately six trillion USD in pandemic relief. Secondly, the Fed reduced the interest rate to zero. And lastly, the government pumped money into the economy through bond purchases. As a result, the recession was officially declared to be terminated by April 2020.

Final thoughts: are we nearing another recession?

Two successive quarters of negative GDP signal the advent of a recession. If we take into account this fundamental definition of recession, then the US economy entered a stage of economic downturn during the summer of 2022. What goes against this presumption are the facts that the labor market is going strong, plus companies register growth. The Fed proved determined to address inflationary tendencies by keeping the interest rates as high as necessary.

Despite all preventive measures, the US economy is believed to have a real chance of facing another recession. Before the recession, we have other things to fear, such as steadily growing product and service prices. However, you can take matters into your own hands and still make money despite the inflation.
Suppose you’re concerned about the adverse effects of the recession. In that case, you can consider investing in recession-proof commodities like real estate, government-backed bonds, and securities instead of unproductive assets like cash.