As you know, I have been focusing my commentary on the four primary economic drivers in the mortgage serving industry: household liquidity/debt ratio, cost of money (interest rates), and the state of the housing market. Having said that there was a common theme in the recent presidential race that was disturbing to me, today’s economy.
While I generally wont take a political stance, it was surprising to hear so much about the current administration being responsible for inflation and the cost of basic goods and services.
For this final message of 2024, I want to talk a little bit about this and why I feel positive about where we are and where we are going in 2025.
One of the primary reasons I feel this way is because I’m a student of historical economic events and cycles.
Recent inflation is the result of one factor – the COVID-19 pandemic. That’s what happens when you shut the world down.
The pandemic had an immediate and profound impact on the global economy, triggering one of the sharpest recessions in modern history. We all know the events, but the short version is lockdowns forced businesses to close or severely reduce operations, and thus unemployment rates soared.
Supply chains were disrupted, leading to a sudden contraction in economic activity, which caused a sharp decline in global GDP.
In response, the governments implemented multiple stimulus packages, which boosted inflation. Given all this (and so much more) I feel fortunate that the U.S. is where is it today. In hindsight it is pretty amazing, but let’s look at history and how the U.S. economy not only recovered from previous crisis’s but advanced each time.
The U.S. economy has always been shaped by key periods of growth, stagnation, and crisis. In the 1970s, we faced significant economic challenges, most notably high inflation and unemployment.
This was driven by several factors, including the oil crises of 1973 and 1979, which sharply increased energy prices, and the end of the Bretton Woods system of fixed exchange rates in 1971.
The Federal Reserve responded with aggressive interest rate hikes, which helped bring down inflation but also led to a deep recession in the early 1980s. Despite these challenges, the economy saw strong growth in the latter half of the 1970s.
The 1980s saw the implementation of supply-side economic policies, including tax cuts, deregulation, and a focus on reducing the size of government. This period saw strong economic growth, although income inequality began to rise.
In the early 1990s recession was followed by one of the longest periods of economic expansion in U.S. history, fueled largely by technological advancements.
The 1990s also saw the rise of the internet economy, with technological innovation. By the late 1990s, the economy was characterized by low unemployment, rising stock market values, and strong GDP growth.
However, the dot-com bubble burst in 2000, leading to a mild recession, but the economy quickly recovered by 2003.
The early 2000s saw rapid housing market growth, fueled by easy credit and rising home values. However, the 2007-2008 financial crisis, triggered by the collapse of the housing bubble and the widespread failure of mortgage-backed securities, led to the worst economic downturn since the Great Depression.
The crisis caused massive job losses, a sharp decline in household wealth, and an unprecedented government bailout of financial institutions. Sound familiar? The recovery that followed was slow, but the economy gradually improved.
Despite different causes, these events all had a very similar impact on our economy (inflation, unemployment, debt, etc.) and the nation as a whole. The other commonality is that the mitigation strategies were pretty much the same each time, which we have had in place for the last four years.
If you look at the Gross National Product, Gross Domestic Product, Dow Jones Industrial Average, and Real Estate markets (attached) we can see the significant growth stagnation during these historical events, but also the consistent recovery — and most importantly — continual growth.
All indications are that the economy will continue to grow. The differences, which will impact those of us in mortgage lending into 2025, and which we have discussed this year at length, are the current extremely high credit card debt and historically low household savings.
Add to that the extremely low housing availability, and we must accept that we have not seen these factors at this level in the past. The easiest solution in the short term are additional interest rate cuts, which will make borrowing more affordable. However, I expect housing to remain expensive for many home seekers.
History, it appears, does repeat itself, and that’s a good thing. From time to time, we need to be reminded that markets do recover. This one will as well. Best wishes for a very successful 2025.
Gross National Product
Gross Domestic Product
Home Values
Michael Harris is Managing Director and Partner of the Servicing Practice at BlackFin Group. Michael has over 20 years’ senior executive management experience in default servicing and mortgage servicing. He and his team are subject matter in all aspects of servicing strategy, investor relations, process, compliance requirements. Prior to BlackFin, Michael was the President & CEO of Jennick Asset Management and was responsible for developing the pilot outsourced management program for Fannie Mae, Freddie Mac, and HUD while working with the top 10 mortgage servicing and capital markets firms. For more information contact info@blackfin-group.com