What Should You Expect in 2011, Part 1
Forecasts for the Economy and Employment – Their Impact on the Housing Market
The economy and housing markets have seen some rough times the last couple of years. But the good news is last year we saw some stabilization in 2010 – and 2011 should continue on the road to recovery.
To help you prepare for the coming year, YOU Magazine has put together a two-part overview of what to look for in 2011. In part one, we look at the big picture and discuss the outlook for the overall economy, the stock market, and the all-important employment market.
Then next month, we'll dig into what to look for in terms of the housing market, including home prices, the foreclosure crisis, new legislation that impacts the housing industry, and the direction of home loan rates in 2011.
Economic Outlook
Overall, the economy looks to have stabilized from the crisis situation a couple of years ago. Although there are still some global economic concerns in Europe, the U.S. economy appears positioned for continued growth and strengthening.
We see the United States' Gross Domestic Product (GDP) to finish the year up about 2.5% to 3% from where it ended 2010. This growth won't happen overnight, however, but instead will start out slow in the first half of the year and pickup steam in the second half.
Much of that growth should come from demand in other countries. Currently, the U.S. only derives about 12% of its GDP from exports. While that equates to a lot of money, it means that the U.S. relies less on exports than many other countries – and it means that there's room to grow. Already we've seen U.S. exports get back on track and they're primed for growth to countries in places like Asia and Latin America.
This is good news for the U.S. economy as a whole, as well as individuals because it sets the stage for growth while still allowing U.S. consumers to catch their breath. After all, the tough economic climate over the last couple of years has hit U.S. consumers hard and has forced many Americans to reprioritize their family budgets to focus more on their savings.
Stocks Make Their Mark
The stock market had a good year and saw some strong earnings in 2010, continuing its climb out of the financial crisis that began a couple of years ago. With the strong finish to last year, the stage is set for another good year – and we could see the S&P 500 grow another 7% to 10% over the next twelve months.
That said, the corporate earnings may look like they've slowed. That's because of the way that experts compare year-over-year earnings. For example, corporate earnings showed strong improvement coming out of the recession because they were compared to the extreme lows of the year before. However after a strong 2010, the increase in earnings won't be nearly as dramatic. So while the year-over-year increase may appear to flatten out, the important thing to focus on is that corporate earnings should show solid, steady improvement.
The segments of the market that can look for a strong showing in 2011 include energy stocks, global companies that specialize in high-tech equipment, and even steel producers which should benefit from global sales. Those segments should benefit from strong business spending around the world as the economy improves and companies start to reinvest and expand.
Labor Looks Ahead
The big economic picture is important, but millions of Americans are really focused on the labor market. Will they find a job? Will they keep their job? Those are some of the most important questions families face. And the good news is that for many families the outlook should be better in 2011.
Here's why. The good news for the overall economy and for corporate earnings in 2010 and heading into 2011 should help the labor market improve. Let's look at two of the factors that should influence employment in the coming months.
First, many companies have seen higher earnings over the last year but those earnings haven't translated into more hiring. Instead, companies have been cautiously waiting for signs that the economy was stable – after all, we heard a lot of talk in the past about the possibility of a double-dip recession. In other words, full-time employment was held back by insecurity and fears of the future. Now that most economic reports appear to be on a steady climb out of the recession and confidence is increasing, many companies will be more willing to hire.
Second, during the last couple of years, companies were trying to keep their operations lean and efficient. That means that manufacturing companies worked hard to get the highest level of production possible out of their current work forces or by only hiring temporary or part-time employees. While that may have been a good move when the economy was questionable, it means that production has hit a ceiling.
But now that many retail companies are beginning to restock their shelves, manufacturing companies are seeing higher demand for their products. In order to satisfy that demand and increase manufacturing production, companies will need more people on the factory floor to satisfy demand, which will lead to an uptick in full-time employment.
Based on those factors, watch for the labor market to continue looking better in the coming months, with more noticeable improvements coming in the latter part of the year.
Unfortunately, we're not completely out of the woods yet in terms of the overall unemployment rate. While hiring will pick up, we need to see a net growth of 200,000 jobs each month just to absorb all of the new people entering the job market – and that's just to hold steady, so we'll need to see even better numbers for the unemployment rate to actually drop. Based on that, we won't see a noticeable drop in the unemployment rate until some time in 2012…and even then it will take a handful of years to bring us back to the lower unemployment rates seen before the recession.
The point is the job market is a work in progress and will take some time, but we will see hiring improve in the coming months – and that should help ease the burden for millions of Americans.
What Does All That Mean to Housing and Home Loan Rates?
Although people tend to talk about the economy, the stock market, and employment separately in the news, the reality is they're all related. For example, an improving economy leads to better corporate earnings and increased manufacturing demand, which in turn leads to increased hiring.
In addition, all of the aspects discussed above influence the housing market and home loan rates. One of the biggest influences is employment, so improvements in employment will be good for the housing industry. After all, people who are unemployed, under-employed, or are afraid of losing their jobs are less likely to purchase a new home.
In terms of home prices, a more secure employment market can help home prices stabilize, as fewer people are at risk of losing their homes to foreclosure. In addition, as we'll discuss next month, the improvements in the labor market should open the door for more first-time homebuyers to join the ranks of homeowners.
That said, it's important to remember that all real estate markets are local…and that means that there can be enormous variations across the country. In areas where employment is struggling, the housing market will continue to struggle as well. However, in many parts of the country where the bottom has been tested and employment is improving, we'll see the housing market on the mend in 2011.
But home prices and homebuyers aren't the only aspects of the housing market impacted by the direction of the economy.
As stated above, 2011 should look better than 2010 in many respects. But, good economic news is a double-edged sword, as it can lead to higher rates. That's right, good economic news can be bad news for home loans rates.
There's actually a pretty simple explanation for this seemingly strange phenomenon. But, you first need to understand two important financial concepts:
Big money managers – who are always in search of higher returns – avoid holding onto cash. So they invest in both Stocks and Bonds.
Home loan rates are actually based on the performance of Mortgage Backed Securities (MBS), which are a type of Bond.
When we put those two facts together, we begin to understand the relationship between good economic news and higher home loan rates.
Here's why: Whenever the economy is on fire and there are good economic reports along with positive economic news, investors tend to put more money into Stocks. That's because Stocks are more risky, but they generally offer higher returns. To do this, however, investors must remove some of their money from less-risky Bonds. This decreased demand in Bonds causes Bond prices to worsen, which causes home loan rates to rise.
YOU Magazine will dig into the forecast for the housing market and home loan rates more in Part 2 of this article next month. But for now, the important thing to note is that home loan rates have gradually been rising and that trend looks to continue in 2011.
The good news is that home loan rates are still extremely attractive and are still near historic lows…for now. So, if you or someone you know has been thinking about purchasing or refinancing a home, now is the time to get started as we head into 2011.
