This article comments on whether America’s future recovery from the Millennium Boom can be predicted by studying post-war recessionary and recovery cycles.
Few would question the severity of the current Great Recession which officially started December 2007, fallout from the Millennium Boom. Trillions of dollars in personal wealth evaporated along with approximately half of the very few jobs created after the 2001 recession. Though its growing severity is unanimously acknowledged, less consensus has been achieved regarding this recession’s duration and the details of the eventual recovery. But is it possible to extrapolate the details likely to surround future real estate market events – and the income of brokers and their agents – by analyzing historical recession and recovery trends?
A recent study entitled “Recession and Recovery Across the Nation: Lessons from History” written by Chad R. Wilkerson from the Federal Reserve Bank of Kansas, attempts to do just that. Wilkerson analyzes whether previous recession and expansion periods from the past 50 years can be used to anticipate when the nation and the various regions within it will rebound from the current recession, and how strong each regions’ recovery will be once it comes.
Historically, all 12 districts which comprise the United States (California being in the 12th district) tend to exit a recession with greater uniformity of timing than when they entered it. The date of each district’s entry into the current recession is widely divergent, spanning from the second quarter of 2007 (Atlanta) to the first quarter of 2009 (Dallas).
Some districts routinely experience longer and deeper recessions while other districts consistently rebound faster and stronger when compared to the national average. During deep recessions, similar to the one we’re experiencing now, each district tends to recover along a similar timeline since deep recessions are remedied with federal policy, filtering to each district at roughly the same time and triggering concurrent recovery.
However, this current recession has some unorthodox characteristics which belie the universal national recovery hypothesis. In the San Francisco district, which covers all of the west coast, a primary cause of the contraction came from the 2002-2005 hyper-explosion of the real estate market and the following bust. Traditionally, districts whose recessions are triggered primarily by real estate fluctuations take longer to rebound when compared to national recovery rates, as occurred in 1974, 1981 and 1991. As California was home to the most inflated real estate prices in the country during the Millennium Boom, it will accordingly experience a more painful, slower recovery in direct proportion to its unusual excess. The contrary has occurred in Texas where the real estate market has already largely returned to normal, from Fort Worth/Dallas to the Mexican Border.
This national recession shares multiple commonalities with other post-war recessions. As before, Chicago and Cleveland entered the recession earlier than the rest of the nation and experienced greater job loss. Similarly, the Kansas City and Dallas districts expanded for a longer period than the rest of the nation before joining in the recession.
However, some notable exceptions exist when considering the recession as felt in the California district. During this recession, the California district entered slightly earlier than the rest of the nation. Historically, it enters late. The California district is also suffering one of the highest degrees of job loss in the nation, which is uncharacteristic of previous recessions in which it was proportionally low. In California, the brunt of job losses are felt in the construction industry which ballooned during the mid-2000s then collapsed having overbuilt, leaving little need for new starts for three to four years.
Thus, the current recession in California is far deeper than any California recession felt within the last half century. Due to the unprecedented severity and depth of the current California recession, it is difficult to accurately predict the future by examining the past, as can be attempted with the national recession. California is in what is labeled “uncharted territory.” Possibly we need to look no further than the 1930s for some guidance.