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0:00 - Intro
0:38 - What is an economic recession?
1:18 - What happens during a recession?
1:35 - What role does the real estate market play in an economic recession?
2:00 - How do banks and financial institutions respond to a recession?
2:49 - Is there any upside to an economic recession?
3:30 - How does the Federal Reserve respond to an economic recession?
3:48 - What causes an economic recession?
4:55 - Psychological factors that contribute to a recession.
5:20 - Learn more about how recessions work!

What Is a Recession?
A recession is a notable and widespread decline in economic performance that persists for over a few months. It is generally a time when the economy experiences at least two successive quarters of reduction in the gross domestic product (GDP).

The National Bureau of Economic Research (NBER), a private, non-profit organization that determines the start and end dates of U.S. recessions, offers a more flexible way to define recession-—“a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

During a recession, business owners often face a decline in their sales, which could lead to layoffs and even a declaration of bankruptcy. As businesses struggle and fail, employers are forced to cut costs and lay off their employees, which leads to a rise in unemployment. Although some employees can keep their jobs, they may have to deal with wage and benefit cuts, and negotiating salary increases may be a struggle. These circumstances may affect an individual’s ability to pay bills and settle debt, such as mortgage loans.

The real estate industry typically suffers from a drop in property values during a recession because houses listed for sale tend to stay on the market for a longer period before selling.

When a recession causes rising unemployment and stagnant household incomes, banks and lending institutions become more cautious and restrictive in the amounts of financing and loan approval standards. They may tighten their lending rules and criteria by requiring higher minimum credit scores or a larger down payment. Additionally, paying off mortgages during a recession becomes even more challenging, so short sales and foreclosures usually increase during this time.

Although these scenarios are generally bad news for real estate professionals and the industry, they can create buying opportunities. Recessions tend to make the market less competitive since fewer investors and homebuyers can purchase real estate during an economic downturn. This means potential buyers will have time to look at other properties and will not be pressured to immediately pounce on their desired property for fear it will be off the market before they can submit an offer.

With fewer buyers in the market, a seller may be willing to accept offers below their asking price or take the initiative to lower their selling price to make their properties more appealing. With falling house prices[2], buyers can also take advantage of lower interest rates. During a recession, the Federal Reserve often lowers benchmark interest rates to encourage investments. Banks will, in turn, charge reduced interest on loans, including mortgages.

Many economists agree that an economic depression and recession have similar causes. However, depression results in a much more devastating economic impact than a recession. Depressions cause far greater job losses and sharper GDP declines. It also lasts much longer than a recession; for example, the Great Depression of the 1930s lasted 10 years. More often than not, the time it takes for an economy to recover is a major differentiator between a recession and a depression.

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