Difference between the Great Recession and the next recession
The great recession was real estate induced. The next one will (likely) be inflation induced.
The great recession was undoubtedly caused by a collapse in real estate prices, which had financial implications that rippled through the entire global economy. The price problems were created in large part by lax mortgage qualification standards that were intended to make home buying easier for what HUD described as “underserved communities”. The community reinvestment act of 1977 required banks to extend mortgages to these communities. While CRA loans did have the intended effect of extending credit to people who did not traditionally qualify, it also opened the door for rampant speculation. I.e., if someone in an underserved community can qualify for a stated income loan, so could anyone else. So, in come the speculators – many with no experience in real estate speculation – buying up homes and simply sitting on them for a few months while prices rose precipitously. Sell at a profit without doing anything but waiting, wash, rinse, and repeat. Of course, this was unsustainable. The imminent downward spiral of prices began in 2006 and when speculators started walking away from their ill investments in mass, credit markets deteriorated and took the rest of the economy with it.
The circumstances surrounding the current economy and looming recession are incredibly different. Mortgage qualification standards are at an all-time high. So called ability to repay rules enacted by the Dodd-Frank law and the CFPB have largely prohibited Fannie and Freddie from backing any loan made to someone other than a well-documented borrower with sufficient income to cover their mortgage obligation. This is not to say that there are no parallels between the rise in home prices recently as before, but the landscape has changed for more reasons than are countable. The biggest factor though is interest rates. The lowest interest rates in history have created a predictable inflationary response which the Federal Reserve is now combating. The recent increase in rates is largely expected to lead to recession. What that recession will look like is anyone’s guess but, it’s unlikely that it while be identical to the last one.
