Earlier this week in Naples, Chief Economist for The National Association of Realtors, Dr. Lawence Yun presented his housing and economic outlook for 2011.  Naples Meridian commentary regarding the recent political unrest in the Middle East and its economic effects follows the highlights.

Main Highlights : “Recovery to Normalcy” Presentation

Florida has historically experienced healthy migration patterns ( individuals entering the state).  In 2005 migration levels shrunk and by 2008 a migration freeze became apparent.  Yet the predicted 30 year job growth forecast stands at 101% in Florida, as compared to the US average of 43%.

Consumer confidence figures suggest that the public has a “good outlook “regarding future economic conditions.

The economic recovery remains weak though businesses are flush with cash reserves but are hesitant to spend.  Why?

Yun believes two theories exist:

  • “Washington is the problem.”  The new Health Care bill with its provisions for employee benefits is restricting employers capacity to hire.  Also, the new banking regulatory bill has not been finalized and banks are not confident that they will have enough reserves to comply with new underwriting standards to get back into the lending game.  If lenders refuse to write loans fewer people will be in a position to obtain mortgages and housing inventory levels will increase.
  • “Washington is the solution.”  The government needs to spend more in order to kick start the economy .   The increase in spending by the government will entice the private sector to begin hiring more employees which will lead to increased confidence in the market.  People will feel secure enough to purchase big ticket items such as automobiles and real estate.

Regardless of these theories, business spending is a crucial component to the economic recovery.

Baseline Outlook

  • GDP to expand 2.5% to 3% over 2 years.
  • Economy is growing, though not vigorously.  Predictions indicate 2 million additional jobs will be created by 2011.  Approximately 8 million jobs were lost in 2008.
  • Unemployment rate of 9% is expected in 2011 and will return to normal rate of 6% by 2015

Housing Outlook

  • Mortgage Rates:  Expect to rise to 5.5 % by year end 2011 and to 6% in 2012.
  • Home Values:  To remain the same on national level through 2012.  There was a correction (home value decrease) of 10%-20% in most areas.  Some believe an “over correction” occurred in South Florida, therefore there is the potential for an increase in home values in the short term.
  • Newly built home inventory is at its lowest point since 2000.  Yet balance is being made up in the form of short sales and shadow foreclosure inventory held by banks.
  • Home sales to improve in line with job growth.  5.2 million jobs predicted in 2011 ( an increase from 4.9 million in 2010).  Job levels of 5.2 million are in line with year 2000 figures.
    • Pent up housing demand exists.  27 million additional people in the US in 2011 yet existing home sale rates are at year 2000 levels.
    • Mortgage defaults rates are still very high (19.5% in Florida as compared to 8.7% for remainder of US).   Creditors are still working through past mistakes.
    • New loans written since 2009 via Fannie Mae and Freddie Mac have very low default rates (1.2%) since year 2002.  Current underwriting levels viewed as overly stringent.  Looser underwriting standards will open doors to buyers currently shut out of process.

Naples Meridian Commentary:  Watching from the sidelines.

Two storms of great concern are brewing on the horizon:


Inflationary Pressures. The volatile political situation in the Middle East has the ability to disrupt all well laid plans.  Civil un-reset in these oil rich nations threatens the price of oil which this week soared to $ 95 a barrel.   An increase in oil prices increases gasoline prices for all consumers.  Transportation costs will rise which will lead to higher food prices.   Inflation for all goods and services directly effects consumers purchasing power at home.  The price of a gallon of milk will rise given that the trucking company used to transport the milk from the farm had to pay more at the pump to fill his gasoline tank.   You will still need to buy milk though will think twice about buying all those “extras” given that you have less money !

Rising Interest Rates. One method that the federal government uses to curb inflation is to raise interest rates.   The Federal Reserve Board possesses the power to effect two types of rates.  First, it raises the rate which it lends to other banks (discount rate) this adjustment reduces a banks willingness to lend to the public.  As a result, banks that decide to lend will pass on the premium that banks were charged by the Fed in the form of a higher interest rate to consumers.

Lending guidelines have been restricted for most borrowers since the financial crisis in 2008.  Increased interest rates coupled stricter guidelines will shrink the available pool of borrowers who qualify for loans.  In turn fewer homes will be purchased, housing inventory will climb and home prices could tumble.  Inflation pressure based on the oil price levels will cause a rise in interest rates.  Inflation levels and increased interest rates will depend largely on the outcome of the political strife in the Middle East and our ability to cope with the results. Tick….Tock….


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