What If There Is A Recession In 2008?

Question: Will there be a recession in 2008? Consumer confidence in the near-term health of the American economy appears to be weak. Last month, America's Research Group in Chicago released a survey that found six out of 10 Americans believing a recession would arrive within the next three to six months.

However, economic experts are divided on whether a recession is on the horizon – and what impact it could have on the mortgage industry.

For Bill Bradway, founder and managing director of Bradway Research LLC in Framingham, Mass., the less-than-robust state of the economy does not necessarily mean it is veering towards a recession.

‘The technical definition of a recession is having two successive quarters of negative growth where the national economy shrinks,’ he says. ‘We will not meet that test next year. There may be one quarter of shrinkage, but two quarters in a row is unlikely.’

Douglas G. Duncan, senior vice president and chief economist with the Mortgage Bankers Association (MBA), agrees with Bradway's view. ‘Our current forecast does not include recession,’ he says. ‘It does include significantly slower growth.’

Duncan acknowledges the national economy has four key elements that are wreaking havoc on consumer confidence. ‘When you have a significant housing recession, a credit crunch, $100-a-barrel oil and a declining dollar, it creates pretty strong downdrafts,’ he says.

However, other economic forecasters are less optimistic.

‘I think we have about a 30-percent chance of a recession,’ says Paul Merski, chief economist with the Independent Community Bankers Association (ICBA). ‘The economy is in a very fragile state. Any type of adverse shock to the economy can tip it into a recession.’

‘The economy is slowing down,’ adds Dr. William E. Spriggs, chairman of the economics department at Howard University in Washington, D.C. ‘One would have to see there is a decent chance there will be a recession.’

And there is also a third school of thought that finds the Economy in such a precarious balancing act that it is too difficult to predict where 2008 will lead. For Dr. Tun Wai, chief economist with the National Association of Federal Credit Unions (NAFCU), the country is in the middle of a make-or-break environment.

‘We may or may not be into a recession,’ he says. ‘This quarter or the next quarter has the highest probability of whether it will go there or not.’

If a recession comes, one industry will probably be singled out as a culprit. ‘Most people thinking about a recession are thinking about housing leading the way,’ says Alan Reynolds, senior fellow with the Cato Institute in Washington, D.C.

‘Certain cities and sections of the country are already in a recession that is likely to deepen in the months ahead,’ notes David Oser, chief economist with ShoreBank in Chicago. ‘These sectional recessions have been housing-led, so obviously any further economic deterioration won't be good for the industry.’

{openx:13}But that leads to another concern: What happens to the mortgage industry and the housing market if the economy is either veering towards a recession or is, at the very least, leaning too close to the proverbial edge?

‘There will be fewer mortgage lenders 12 months from today,’ predicts Charles R. Geisst, professor of finance at Manhattan College in the Bronx, N.Y., and author of ‘Deals of the Century: Wall Street, Mergers, and the Making of Modern America.’ ‘Maybe even in six months. Those that remain will be going back to saner lending practices.’

‘The housing slump is going to deepen,’ adds Desmond Lachman, senior fellow with the American Enterprise Institute in Washington, D.C. ‘The industry was in deep trouble before the economy starting going into the direction of a recession. And that difficult situation is going to become a whole lot worse if we have a recession.’

Bradway concurs the new year will not be rung in with cheery news. ‘One-third of the mortgage production of 2005 and 2006 has been eliminated,’ he says. ‘That will not come back anytime soon.’

For Howard University's Spriggs, problems in the credit markets can potentially reverberate back to the troubled mortgage industry. ‘This will further weaken the housing market, and people will be less likely to buy homes,’ he says.

The oversupply of homes on the market may also be alleviated if rough economic times persist in 2008. ‘If housing prices continue to fall, people may not put their homes on the market,’ observes Reynolds at the Cato Institute. ‘That reduces supplies, which is good since supply is heavy.’

{OPENADS=banner=15}The MBA's Duncan points out that 2008 may have positive opportunities along with adversity. ‘Recession always creates unemployment,’ he explains. ‘Unemployment leads to delinquencies in the housing market. But for people with mortgages and who are employed, there is the opportunity to refinance. So you would get mixed components to that.’

In 2008, it would appear all eyes – from within mortgage banking and the economy as a whole – will be on the Federal Reserve and how deeply it will cut interest rates to keep the economic engine running.

‘Anytime you have the Fed recognizing the housing market is in a deep slump and that slump is persistent, I think it bodes the likelihood of the Fed reducing interest rates into the future,’ says Wai at the NAFCU.

‘Lowering interest rates is good for the mortgage industry,’ says Scott Stern, chairman of the National Alliance of Independent Mortgage Bankers and CEO of Lenders One in St. Louis. ‘It creates opportunities for refinancing and for purchasing homes. And lower interest rates are good for spending, which is good for the economy – and good for reducing the impact of a potential recession.’

But for many sectors of the industry that are facing acute financial pains, the hypothetical concern of a recession would barely rise above the level of distraction.

‘I think many mortgage lenders are already within recession conditions,’ says Merski at the ICBA. ‘The larger economy going into a recession wouldn't mean that much to them.’


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