Tuesday, October 16, 2012

Good News; Bad News for Real Estate

Finally some good news: The housing market is recovering faster than expected and according to all the “experts” the economy likely won’t fall off the much discussed “fiscal cliff.”  44 economists recently surveyed see GDP (gross domestic product – the value of all goods and services produced in the United States) rising just 1.9 percent in 2012 before reaching a 3 percent pace by the fourth quarter of 2013.

Followed by some unhappy news:  Employment growth is forecast to weaken. The panel predicts that the unemployment rate will rise to 8.1 percent by the end of the year. Remember the unemployment rate? It’s the most-watched measure of the country’s economic health, and has been a prime issue in the presidential election campaign. It fell to 7.8 percent in September. But before that report, the rate was 8 percent or higher for 43 months. September’s lowish rate is likely to be restated over the next few weeks.

The economists, who were surveyed Sept. 14-26, revised upward their previous estimate for single-family housing starts and now expect them to increase 23 percent to 750,000 units in 2012. Continued improvement is seen in 2013 with a 13 percent rise to 850,000 units. Home prices are now projected to rise by 1.5 percent in 2012 and 2.8 percent in 2013, more than the economists expected in their May forecast.

A widespread concern about the economy has been the combination of about $1.2 trillion in spending cuts and tax increases that will kick in starting next year, risking a giant fiscal shock if Republicans and Democrats don’t reach a deal on a budget. But a majority of the economists are confident that won’t occur.

"We think the recovery is for real this time around," said Rick Palacios, senior analyst with John Burns Real Estate Consulting. "If you look across the U.S. economy right now, there are only a handful of industries looking at 20-30% growth over the next 4-5 years, and housing is one of those."

Home builder stocks are up 162% in the last 12 months, led by a 250% jump at Pulte Group (PHM). Other leading builders including DR Horton (DHI), Toll Brothers (TOL), KB Home (KBH) and Lennar (LEN) have all seen their stocks more than double over that time. New orders at publicly-traded builders are up 30% since January, according to Kim Barclays Capital put out a report recently forecasting that home prices, which fell by more than a third after the housing bubble burst in 2007, could be back to peak levels as soon as 2015.

"In our view, the housing market had undergone a dramatic over-correction during the prior five years, resulting in pent-up demand for housing purchases that would spark a rapid rise in housing starts," said Stephen Kim, an analyst with Barclays, in a note to clients. In addition to what Kim sees as a big rebound in building, he's bullish on home prices, expecting rises of 5% to 7.5% a year.

Construction is expected to be even stronger, with numerous experts forecasting home construction to grow by at least 20% a year for each of the next two years. Some believe building could be back near the pre-bubble average of about 1.5 million new homes a year by 2016, about double the 750,000 homes expected this year.

The experts forecast:

• Inflation will remain low next year. The Federal Reserve’s preferred measure is seen rising 1.9 percent in 2013 while the core Consumer Price Index, which includes spending on everything except food and energy, is projected to increase 2.2 percent.

• Consumer spending will be weak. The panel revised its forecast for growth in consumer spending downward to 1.9 percent in 2012 and 2 percent in 2013, reflecting slow personal income growth and limited job gains.

• Longer-term interest rates should rise. The yield on the 10-year Treasury note, now 1.66 percent, is forecast to climb steadily to 2.3 percent during the fourth quarter of 2013 as the Fed draws nearer to reversing its policy of extraordinarily low short-term rates.

• Stocks will rise modestly. The Standard & Poor’s 500 index is predicted to be 1,450 at year-end and 1,520, or 5 percent higher at the end of 2013. The key market barometer is currently 1,429.

• Corporate profit growth will show moderate but less-than-average increases. After-tax corporate profits are projected to rise 7 percent this year and 5 percent next year, below the 10.2 percent average of the last 20 years.

Dane Hahn is a real estate professional practicing in Charlotte and Sarasota counties. You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the web at www.danesellsflorida.com.

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