Although no two business cycles are alike, most share some common characteristics. The interest-rate-sensitive sectors of the economy — housing and manufacturing — tend to lead on the way up and the way down, for obvious reasons. Inflation ebbs during the recession and in the early stages of the recovery. Credit creation drives the upswing.
The recovery from the 2007-2009 financial crisis has been different all around, just as Harvard economists Carmen Reinhart and Kenneth Rogoff predicted in their 2009 book, “This Time Is Different: Eight Centuries of Financial Folly.” It has been a “protracted affair,” featuring extended declines in asset markets, large contractions in output and employment, and an explosion of government debt: three characteristics common to the aftermath of financial crises.
Yet even in the context of the typical post-financial-crisis recovery described by Reinhart and Rogoff, this one has some peculiarities of its own.
Let’s start with housing, whose rise and fall and associated debt were the proximate cause of the crisis. Residential real estate pretty much sat out the first 2 1/2 years of the recovery before getting traction in 2012, with a lot of outside help. The Federal Reserve drove down rock-bottom mortgage rates even more with its purchases of Treasuries and mortgage-backed securities, a program that continues to this day.
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