RECESSIONS and MORTGAGES IN UTAH

The other day I received an email asking me if we were in a recession, and if so how that would affect mortgages and interest rates. Let me first say that I am not an economist. I took two economics classes in college and struggled mightily to survive. That being said, I have spent the better part of the past decade studying those economic factors which affect home ownership and mortgage lending. To that end, allow me to respond to the question of our current “recession” as well as its potential effects on mortgages.

A Recession is most commonly defined as an extended period of time, typically at least two consecutive quarters during which period the Gross Domestic Product (GDP) has been in a state of decline. In other words, we are in a recession when to total market value of a nations output has been slowing for 6 months or more.

Periods of recession are marked by decreased consumer confidence, which leads to limited spending. More significant, corporate spending is also curtailed, as business leaders become more cautious and less willing to take risks or extend debts. During a recession savings rates decline while wage increases slow. Typically, a recession is accompanied by an increase in Government Spending.

How does that relate to the Mortgage Market today? Well, while consumer spending slowed in September and October of this year, the GDP grew 4% in the third quarter. That tells us that while we may not exactly be in a recession currently, we are most likely teetering on the edge. The Federal Reserve seems somewhat consigned to the fact that periodic decreases to the Fed Rate will hopefully generate increases in consumer credit that will offset some of those factors that seem to be leading to a recession.

So what am I looking for? Housing prices have been in decline throughout most of the country, though not in yet in Utah (except in certain markets in the state). This decline has created an opportunity for home sales to increase. An increase in Home Sales will most likely offset many of the factors leading to Recession. If, however, consumer confidence remains low—as many potential buyers fear values decreasing more—and home sales continue to slow, we can expect a recession to follow.

Luckily, it appears that employment rates continue to increase, which typically offsets recession forces; however, with so many Americans in the habit of relying on debt, including home equity for basic spending, I don’t expect increases in employment to do too much to help our housing market.

During the recessions of the early 70’s and the early 90’s low interest rates were able to spur growth which helped greatly. Unfortunately, in 2001 and 2002, with a recession looming, rates were dropped to unprecedented lows, creating the housing explosion that most of the country has been enjoying for the past several years. Now, we find ourselves in a situation where interest rates are already so low that there isn’t much room to go. In other words, I don’t expect drastic drops in interest rates.

If we are in a recession, or about to be in a recession, I would anticipate fear preventing many people from purchasing new homes, which means that unless some other sector (services, for example, such as healthcare) provides a sudden growth spurt for the economy, then we are in for a bit longer wait than anticipated. I wouldn’t be surprised if the housing market remains cold for at least the first 6 months of 2008. Which actually means that if you are hoping for large increases to your home values you may be waiting until the spring of 2009.

THEN AGAIN, I AM NO ECONOMIST. I am a Mortgage Expert. I only know what I read and what people much smarter than I have taught me.

Those members of my Inner Circle Email List will remember a similar report which I sent out well over a year ago. As always, if you are not a part of my Inner Circle, and would like to receive periodic emails with additional information, just email me at jayhart@cottonwoodmtg.com and let me know. Also, if you would like to receive a copy of the full report regarding RECESSIONS, drop me a line and I will email it to you.