Market News December 22, 2010

Thoughts for 2011

As we approach the end of 2010, I like to pause and reflect on the events of the year relative to both the economy as a whole, and the real estate markets in particular.

Of course, the year is not quite over but, as this will be my last post in 2010 I thought it would be good to look back at the year that is rapidly disappearing in the rear view mirror, and also to ponder what 2011 may bring.

The U.S. economy has a very big influence on a great number of things; from jobs, housing, savings and general sense of well being. .  There is no question the last few years have been tough on many people. The economy has been improving over the past few months, and we should see continued improvement over the next year.    If you are considering selling your home or making a purchase, you may find the following economic indicators  helpful to your planning.

  1. GDP – The Gross Domestic Product represents the value of goods and services that are created inside the U.S.  The third quarter of this year saw our economy expand by 2.5 percent annually – below the 3 percent that is indicative of solid expansion. I anticipate that, firstly, we will not drop back into recession in 2011, but that growth will remain under par for the first half of the year.  However, the quantitative easing that is currently underway will start to have an effect in the second half of the year, and we will likely end 2011 at an expansion rate of 2.8 percent. The GDP is an indicator of standard of living.  As this increases, people will generally have more money to spend and enhanced peace of mind.
  2. Employment – From peak employment of 137.9 million in December 2007, to a trough of 129.6 million two years later, this country lost 8.4 million non agricultural jobs.  Since that time, we have recovered somewhat but are still shy by 7.4 million positions.  Unemployment remains stubbornly high (9.8 percent in November) and finding work is far from easy.  I believe that next year will see the overall unemployment rate drop, but the improvement will be slow; if we end the year at around 8.5 percent I will be happy.  Businesses are still wary of hiring until they see tangible signs of improvement and, even when they do, I don’t anticipate they will head off on a big hiring spree.  Layoffs will continue to decline and virtually peter out by the end of 2011.    As unemployment rates slowly drop, homeowners will be more solvent, easing fears of foreclosure and increasing confidence in the market place.
  3. Real Estate – The real estate market has certainly showed that not all markets are created equal.  Modeling price changes across the country is no easy task – forecasting the effects of loan modifications alone throws calculations into a tailspin – but I expect that the hardest hit markets (Phoenix, Las Vegas, etc. have likely bottomed.  Other markets (such as Houston) have some way to go yet.  I am looking for an additional 5 percent decline across the U.S. before I will call a bottom for home prices. We will likely see this by the third quarter of 2011.
  4. Consumer Confidence – There has been a marked improvement in consumer confidence in recent months.  A better 2011 is clearly showing up in the numbers. With a better outlook on the horizon and incremental improvements all around, we are all starting to feel better about the recovery and we will see this reflected in the market place.
  5. Inflation – There are two things that are required to be in place for inflation to take foot– wage growth and a stable employment situation– and we have neither.  I am not concerned at all over inflation in the short-term and believe that core inflation will stay below 1 percent in 2011.  With inflation and interest rates closely tied, minimal inflation will be beneficial to home buyers and will keep the cost of home improvements from becoming prohibitive.  That said, it is likely that the Fed’s asset purchase program will expire in June.
  6. Interest Rates – This has been a bit of a touchy subject in recent weeks as rates have been rising despite the Federal Reserve’s decision to continue to buy treasuries – which should have allowed rates to remain very low.  Why is this?  Believe it or not, it’s because investors are seeing too many positive signs in the economy and are leaving the relative safety of treasuries for the greater yields found in the equity markets. I think that we will see some stability in rates early in the year and that they will not head drastically higher.  That being said, rates will trend higher in 2011.  This will play into the housing markets for the obvious reasons.

So there we have it!  I believe that the light at the end of the tunnel is, in fact, the end of the tunnel and not a train heading my direction!  Economic recoveries, and certainly recoveries in real estate, are not all created equal and our current situation is certainly not as dire as it has been, but neither are we out of the woods yet.  I am, as ever, hopeful that the U.S. will show resilience and that better days are, indeed, ahead.

What are your reflections on 2010? What are you most looking forward to in 2011?

Best wishes for the holidays and here’s looking forward to a healthy and happy 2011!

By Matthew Gardner