A Summary of Factors Influencing the Housing & Finance Industry

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2011 FORECAST CONTINUED…

Last month I started working through my thoughts on this years forecast, my core belief is that all progress and improvement in all things should be mankind’s goal. Some step forward every year with some steps bigger than others. Whether dancing, child-rearing or making science, mankind – if not every individual – should strive to push forward to be smarter, stronger, better, free-will makes progress variable, not automatic. So, my hope springs eternal for 2011.

My forecast can be grouped into three servings: economic, social and political. There can be and sometimes is considerable correlation and overlap among the three categories, economic conditions can spillover into social and political realms. The protest and unrest in North Africa and the Middle East are evidence of the connections. The recent turnover in the House of Representatives is another example.

As regular readers know, I believe in cycles, meaning seasons, figuratively, and that these turn along, against and aside history. My understanding of this became clearer after discovering the book, “The Fourth Turning”, by William Strauss and Neil Howe. (Not long ago, I wrote a review of the book for CBN). It offered for me a window to the passage of time, convincing me further that time moves in cycles: and most fundamentally, these cycles are keyed to the passing from one generation to another. Time, in other words, isn’t linear; there is a repletion and rhythm if not also a rhyme to history. These cycles are admittedly sometimes difficult to discern since they are but backdrop to where and when they occur in history.

My readers know too that we’re in the “crisis” stage of the cycle – not my term but Strauss’ and Howe’s, which I find an apt and descriptive characterization. We passed into the “turning” sometime during the President G.W Bush years, transiting out from the tail end of an “unraveling”. Once the crisis period passes and it will of course, the turning will be to the “awakening.” In all there are four turnings, each lasting 20-25 years, essentially one generation. History flows in generations, that I’ll leave Strauss and Howe to convince you of since they are our economic-historians, and have for decades examined this theory, and have plugged all this cycle-research into European and American history in an effort to support their theory. You really need to read the book.

Anyway, let’s return to my recitation of expectations with the year already piercing its second twelfth. I see the economic recession, a growth recession for sure, continuing. It should produce quarterly GDP growth readings of 2-4 percent, but little improvement in employment conditions. Official jobless figures will hover around double-digit levels; say 10 percent plus or minus. However, GDP strength will largely reflect monetary and fiscal stimulation.

Interest rates with maturities from two years out to the end of the yield curve are expected to drift higher as the year passes. The principal reason for this rise is the volume of debt issuance and the prices of goods and services. Indebtedness is our country’s biggest challenge. In a single generation, the U.S. has shifted from the world’s largest creditor nation to its biggest debtor. But we are not alone among nations, as the events in Europe in 2010 have clearly demonstrated. However long it takes to clear up this imbalance, its accomplishment will provide a sharper focus on the duration of the crisis period.

 
Meanwhile, key prices like food, energy, health care and insurance are on the ascent for many reasons, including more mouths to feed worldwide, supply disruptions in various places for varied reasons (from weather to labor conditions), demand and supply imbalances and speculation. All the money the Federal Reserve and other central banks are printing needs to go somewhere, and commodities and stock markets serve the purpose of providing liquidity and return.

This economic environment and interest rate scenario suggests a sluggish housing market immediately ahead. I foresee little improvement in home sales, whether new or previously occupied, until deep into 2011, and then only in response to improved affordability thanks to more supply pushed against flat demand. Buyers expect lower prices and are waiting for their arrival. Central Oregon is one of those places that I believe had reached the bottom of the U in this U shaped recovery, now we just have to wait for the other arm to start up!

 
However, much of our nation is still about 20 percent over their long-cycle trend line. When they return to trend, affordability will be enhanced and demand should continue to accelerate. The need to act quickly is
not substantial.

As for the U.S. dollar, I think it weakens a bit, looking more and more tarnished as the world’s reserve currency. Our trade deficit remains troublesome. For the moment and the year, it will be propped up by the weakness of the euro and the yen. European and Japanese debt troubles are supporting the “greenback” and likely will for the foreseeable future. Still, the world’s creditors, notably China, Asia and the OPEC countries are diversifying their currency bets by favoring currency baskets and hard assets, including firms, farms, and factories over U.S. Treasuries.

 
As for the global scene, I expect (for now anyway) no new wars, as individual countries dig deeper into their own internal conditions and problems. The U.S. and Europe will spend 2011 and beyond addressing their debt crises. Many developing countries will deal with their political problems, wrestling power from the elites that have for a generation robbed their countries and deprived their citizens of liberty and livelihood. China will pass 2011 dealing with its growing inflation problem, while simultaneously addressing festering environmental and infrastructure problems and near daily citizen protest. Never in history has there been such a stampede from rural to urban as one sees in Asia, especially China.

 
Here at home the focus will be on solutions to the employment situation. Modestly less partisanship should result from government being pushed further into a corner, making progress more likely. Progress is sorely needed on an already aged agenda-issues that include slashing dependency on foreign oil, addressing dilapidated infrastructure, reindustrializing, streamlining government while making room for more citizen input into decisions and laws, campaign finance reform, reversal of the Citizen United decision, reduce income inequality, damping down if not replacing entirely the elite structure that bought on the financial crisis and recession, and ending American hegemony.

 
None are tasks accomplished in a single calendar, but that expectation of one step forward beacons. How large or tiny the step is will likely be determined by the interplay with the forces pushing back from each of these progressive needs. We need to divorce wealth from power over the political environment and peoples’ lives. Praise to wealth but not at all costs. The social cost-benefit equation requires better BALANCE.

I expect corporate earnings to remain strong but to show little growth year after year in 2011. Fed policy and management efforts to cut expenses are largely responsible for the earnings strength, not demand. Chairman Bernanke and Fed governors recognize the precarious state of global economies and are doing everything in their power to ameliorate conditions without causing widespread alarm. Yet, monetary policy needs help from fiscal policy if a two-prong assault on the deficit is to be launched. And of necessity, it will be done, federal expenditures need to be SLASHED.

 
The social, societal and political implications of the “crisis generation” will be great. Thrift will resurface as a movement, a downsizing of expectations about the future. Ben Franklin’s principles will excite more people. Greater simplicity reduced movement, tighter, stronger families and households, less crime, more spirituality-all incremental but observable and measurable are likely trends ahead. Political parties will further fracture and new coalitions and agreements between liberals and conservatives will be hammered out.

So that’s what I see coming toward us in the windshield as the highway of time rolls on by. What do you see? Do we overlap not at all, somewhat or broadly? Only you can answer those questions.

Be well…
Philip Hamilton is a long time contributing writer for CBN. You may contact him by writing: phamilton@bendcable.com, cell: 541-480-7580, new PNC MORTGAGE office: 235 SE Yew Lane, Suite 210, Bend, OR 97702

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