SAN FRANCISCO - "We are currently in a recession, but it will be brief," James K. Smith told roughly 300 attendees at PCBC 2007: The Premier Building Show. Smith is a chief economist for Parsec Financial Management. Although declaring the U.S. was in a recession, Smith is also predicting a housing market turnaround in October and November.
Smith explained to a packed room at San Francisco's Moscone Center that history has shown that a recession typically follows an inverted yield curve in the economy (an inverted yield curve occurs when long-term yields fall below short-term yields). Since 1901, an inverted yield curve has occurred in the U.S. economy 17 times, and 17 times a recession has occurred. Other signs of a recession, Smith explained, are a decline in payroll employment, a drop in housing demands, slow auto sales, and plunging retail sales.
"The recession started about 10 days ago," Smith says. "The recession will be very mild with a strong rebound in the 4th quarter and in 2008.
"And how do you cure a recession? Cut interest rates, cut interest rates, and cut interest rates. And if that doesn't work, you cut them more. This will be a short, mild recession followed by a huge rebound."
Smith cites that higher wages, declining interest rates, and a drop in housing prices will ignite the turnaround. In addition, excess inventory will burn off by the fall.
"But I might be a little overly optimistic," Smith admitted.
Smith also discussed the notion of a housing market bubble, a market condition created through excessive home buying and an unfounded run-up in prices resulting in overpriced homes for first-time buyers. Eventually the bubble pops and housing prices fall. Smith says he dismisses the notion that a bubble has occurred, saying that baby boomers and recent immigrants will continue to buy homes for some years to come.
"Over the next 30 years, 40 million homes will need to be built," to accommodate these buyers, he concluded.
Learn more about markets featured in this article: San Francisco, CA.