Gary Watts’ forecast for 2008 marks the 34th year of bringing to the real estate industry his outlook for the resale housing market. More than just forecasting appreciation numbers such as those below, Gary looks into the various factors that effect real estate values and growth. These detailed searches point to various trends in housing. From those trends, he forecasts what is most likely to happen. Although the past two years have left a lot of people wondering about the future of real estate values, Gary sees a pattern (although this one was a little different) and is confident that real estate will once again make a rebound in the very near future.
For the record, here are his appreciation numbers compared to actual numbers since 2000:
2000 2001 2002 2003 2004 2005 2006 2007 Totals:
Forecast: 12.5% 12.0% 10.0% 15.0% 25.0% 15.0% 15.0% 7.0% 109.5%
Actual: 13.0% 10.1% 16.8% 19.1% 24.8% 16.5% 3.4% - 1.5% 102.6%
Factors Effecting and Affecting Housing
The Economy:
Over the past 12 months, our economy grew at a very healthy rate of 2.8% and created a $11.52 trillion dollar economy. Since 2003, the U.S. has created over 5 million new businesses and almost 8.3 million new salaried jobs – employing 1.3 million more people over the past year. Add the 16 million self-employed and the 25 million part-time workers, and you can see why the government has received a lot of extra tax revenue this last year. Last year our government projected a deficit of $177 billion dollars. That would have been a 28.7% reduction from the previous year’s budget. As the government’s fiscal year came to an end, the deficit was only $162.7 billion dollars.
Since 1980, the Gross Domestic Product has risen 70% and helped to shrink our federal deficit. Today, our national debt is less than
1.2% of the GDP, compared with 6.0% in the 1980s and 4.7% in the 1990s. This current percentage level of 1.2% is below the 40
year average.
Forecast: GDP growth should be between 2% and 2.5% for 2008. This means the U.S. economy
will not see a recession this year.
Corporate Profits:
The 3rd quarter numbers showed that U.S. corporations are still doing very well. They now have 21 straight
quarters of double digit earnings, and corporate profits are running at an annual rate of $1.62 trillion dollars.
These profits have almost doubled during the past 5 years.
Forecast: Corporate profits will continue throughout the year. Corporations have very strong
balance sheets which will help them through an economic slowdown. This strength will
help to prevent a recession. In the past 6 recessions, corporations had weak balance sheets.
Financial Corporations:
The media only talks about their huge write-downs due to the sub-prime crisis, and fails to mention that the majority of these financial companies still have surprisingly strong cash flows, and continue to pay big dividends. Since the market has already driven down their share prices, they have very little to lose by writing off any potentially bad loan. These write-offs include bad: business loans, credit cards, leasing contracts, currency fluctuations, bond devaluations, collateralized debt obligations, structured investment vehicles, mortgages, and failed mergers. If they hold these securities to maturity, they will likely get 98 cents on the dollar.
During the 3rd Qtr. of this year, banks took write-downs of $43 billion dollars, yet they still made a net profit of $28.7 billion dollars – even after putting aside reserves (a 20 year high) for more potential loan losses. Here is a look as some of the larger banks’ profit positions (in billions) from the 3rd Quarter: $3.7; Morgan Stanley: $1.54; and Goldman Saks: $2.85 billion dollars. Banks reporting in the 4th Quarter: Citigroup: $ -9.8 billion; Wells Fargo: $1.3 billion; JP Morgan: $2.97 billion and Bank of America made $12.67 billion for the year.
Forecast: Banks will have more write-downs in 2008 but at a much smaller rate, and will begin
showing some really big profits once again! Financial asset write-downs can easily
become gains if conditions reverse.
Source: Bureau of Labor Statistics, Bloomberg, Bureau of Economic Analysis, Federal Reserve
Income Growth:
In 2006, the IRS reported that wage earners in the U.S. had their highest income growth in 5 years, and that personal income grew more rapidly than spending in 2007. Since the housing slowdown began two years ago, personal income has risen 7%, leading to a $1.35 trillion dollar rise in the nation’s income.
Forecast: With 4 million new jobs created since the housing downturn, the pent-up demand for
housing will fuel the next housing turn-around supported by growing personal incomes.
Employment:
December marked the 52nd consecutive month of job growth – this is the longest period of uninterrupted job growth on record. Over the past year, 1.3 million new jobs were created and the current unemployment rate is at 5.0%. Since 3% of the population won’t work, even if you give them a job, we are near full employment. For 2007, the unemployment rate averaged 4.6%, the same as 2006.
Forecast: Even with a slowing economy, the unemployment rate should remain below 5.5% - a very
healthy number for an economy as large as ours.
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