Maybe the Recession Never Really Ended

Tuesday, we'll get the July report on existing home sales from that National Association of Realtors. They're expected to be way down -- around 14% compared to June. The real estate market has been painfully slow since the home buyer credit expired. And now some worry that the housing, an aspect of the economy that has helped pull the U.S. out of a number of recessions, could instead push GDP in the wrong direction and thrust the nation back into contraction. But if that occurs, would it really be a double dip, or a signal that the recession never really ended?

Bloomberg reports on the fear of a real estate-driven double dip:

Home sales collapsed after a federal tax credit for buyers expired in April. Since then, the manufacturing-led expansion, which began in the second half of 2009, has been waning, with jobless claims rising and factory orders falling.

"If foreclosures continue to mount and depress home prices, that could send the economy back into a recession," said Celia Chen, an economist who tracks the industry for Moody's Analytics Inc. "The housing market and the broader economy are closely intertwined."

Certainly, it will be hard for the broader economy to recover if housing falls further. But let's reflect on all of the measures taken to prop up the residential real estate market:

  • Banks were slow to realize losses, so have been slowly releasing foreclosures into the market, in the hopes that prices would stabilize.
  • The foreclosure prevention programs (like the government's HAMP) delayed eviction for many, but only avoided it for a small portion of homeowners. For those that managed to get a modification, there will still be many re-defaults.
  • The home buyer credit didn't create much new demand, but mostly pulled future demand forward.
  • The Federal Reserve purchased mortgage securities and continues to purchase longer-term debt, temporarily driving down mortgage interest rates to record lows, encouraging home sales.

If you add these significant effects together, you quickly realize that it's impossible to know if the housing market hit the bottom -- or even came close. Banks, Congress, and the central bank have all taken significant measures to prop it up. But such actions are not sustainable. At best, they could slow the housing market's decent to its natural bottom. At worst, it created a false bottom, which will damage sentiment even more if home prices plummet again.

But if the housing market was never allowed to hit bottom -- and all those tactics to prop it up certainly point to that possibility -- it's possible that any economic stimulus the temporarily improving real estate market provided was just a blip, and not a trend. Without that bump from these efforts, the recession might have lingered on longer. If the U.S. returns to economic contraction now that the housing is racing to the bottom again, then it's plausible that we never would have exited recession in the first place.

The important question here is whether the economic recovery might have ultimately been stronger without these tactics to prop up housing. If hitting a deeper bottom was inevitable, then doing so more quickly would have been better for sentiment in the medium-term. Presently, people get the feeling that things are worsening again, but if housing had been allowed to fully reset a few quarters ago, we might be in the midst of a more enduring recovery by now.

Of course, we can never know how the economy would look now if housing was allowed to bottom-out sooner. But if it does collapse further, then we'll know the techniques to stimulate it weren't truly effective. Then, instead of alleviating the suffering, it's likely those efforts just prolonged the agony.