2010 Forecasts

A good friend of mine who does bond commentary for Fox, MSNBC, Bloomberg and others has just released his predictions for 2010. As someone mainly involved with predicting interest rates he has to stay on top of anything that affects the Mortgage Backed Securities (MBS) market which includes most economic reports but particularly Fed policy and unemployment trends. Here is a summary of his forecast:

Home prices began to stabilize during 2009, and homes sales showed some signs of encouragement. We expect more of the same in 2010, although there will be some additional headwinds: higher rates and expiring tax incentives will likely create a lull during the summer months. After a modestly good start to the year, home prices could actually decline in some areas by 5% to 7% once the temporary stimulus expires. In the end, however, home prices should eventually and slowly begin to firm up toward the end of the year. I think this is basically what most of us were expecting except for maybe the decline in values.

Now for the big question… where will home loan rates go during 2010 and why? We’ve been forecasting rates for a long time, and this is by far the easiest call we have ever had. Rates are going higher in 2010. We do not think that the low rates seen during 2009 will be seen again. There will be more supply coming to the market in the first quarter, while the Fed’s purchases will be winding down. The overall trend for rates during this period will be higher, but as usual, this will never happen in a straight line. There will be waves and cycles moving up and down – but the trend is clearly up for rates. I think those of us in the business know 6.5% is still a bargain rate, but consumers get spoiled and think rates are “so high” compared to the historic lows we have been experiencing.

In the job market, we’re not nearly out of the woods yet. Even in the waning months of 2009, we still saw unemployment rates at 10% and nearly 500,000 new jobless claims coming in each week. The fact is…we need to see Initial Claims drop beneath 400,000 before we see stabilization in the labor market and unemployment rate.

There are about 154M people in the US labor force. And the size of the labor force rises on average by 125,000 per month, due to population growth. That means we will need to create very close to 125,000 new jobs each month to simply keep the unemployment rate stable. In order to get the unemployment rate to decline – significantly more jobs will need to be created. For example – if we would like to see the unemployment rate get back down to the 6% level that had been the norm in recent years, an additional 6 Million jobs would need to be created. If this were going to happen over a five-year period, that’s an additional 100,000 jobs per month over and above the 125,000 per month needed to keep up with the population. That means we’d need to see positive job growth of at least 225,000 jobs created per month, just to reach that 6% level within five years. Is this easy to do? Well, in the entire history of the United States, it has only happened one year – during 2006. This leads us to believe that the new normal will be higher unemployment rates for quite some time.

And consider the almost 800,000 workers who are not even categorized as unemployed, but simply as “discouraged”, as they have not actively searched for a job in the past four weeks. There’s a lot that can be assumed here, but it’s hard to imagine that these people would not reenter the ranks of those seeking employment if conditions improved a bit. That means that these people would need to be absorbed into the system before the actual unemployment rate could decline.

Additionally – perhaps the largest category that could skew the numbers are those individuals who are accepting part-time work but would prefer full-time employment. A whopping 10 Million people are in this category. You have to think that many employers would take these current part timers and give them full-time work, before hiring someone new. Again, this will make it very hard to see the rate of unemployment make any meaningful decline this year.

I find it inconceivable that our economy can generate 225,000+ new jobs a month for 5 years, so it looks like high unemployment numbers will be with us for a long while.

If Barry’s predictions are accurate as they usually are 2010 will be an interesting year. While not all the news is great even if these predictions are correct those of us who have a business paln and work it hard we can still have a banner year.

Here’s wishing everyone a profitable 2010.

Where Has Personal Responsibility Gone??

The lack of individuals willing to take personal responsibility for their actions is getting more blatant everyday. Here you have a company named www.youwalkaway.com putting out a video that almost glamourizes intentional mortgage default. The worst part is they have been exposed to the public by every major media outlet. While the video is cute and funny it still says something about the personal values of many homeowners.

Am I overreacting…I don’t think so?