Marshall's 2011 Economic Forecast

By Dr. Marshall Reddick

On December 3, 2010, Federal Reserve Chairman Ben Bernanke went on 60 Minutes to say he was dramatically increasing the money supply so as to stimulate the economy. He also felt that the employment rate would be very slow to improve, taking years to get back where it needs to be.

Personally, I think it was counterproductive of Chairman Bernanke to put out such a negative message. What America is waiting for—and must have in order to boost confidence and initiate change—is some positive information.


Areas of Greatest Decline                     Peak loss of Avg. Property Values                               Up From 2 Years Ago
California                                                                     40%                                                                              14%
Phoenix                                                                        65%                                                                              20%
Las Vegas                                                                    60%                                                                              20%
Florida                                                                          65%                                                                              15%

The Opportunity

                             “I have never seen a better time to purchase real estate.”—  Donald Trump

Sources of the next wave of foreclosures.  
1.    These are already in the pipeline:

  • Subprime (cheap to inexpensive homes)
  • Homeowners who have lost their jobs
  • People who purchased expensive homes (from $500K and up), hoping to flip
  • People with good jobs who are way upside-down on their mortgage
  • Entrepreneurs who have lost their businesses

2.   Commercial foreclosures on the rise:  A huge number of office buildings, retail stores, and hotels are going under because of the poor economy.  Commercial buildings will experience an even greater foreclosure rate than residential housing, and commercial lenders may be the next to request tarp funds.

Housing: good news for investors.  Several million more foreclosures await in the pipeline.

  • The economic collapse in the housing market has caused real estate to drop by 35%-65%, providing the most incredible investment opportunities in 70 years.
  • There will continue to be several million more foreclosures over the next few years, however, lenders will likely put them on the market gradually, allowing prices to rise a bit by another 1-2% in the harder hit areas of Arizona, Las Vegas, Florida and California.
  • This is the first time in at least 70 years that housing prices and interest rates have been low at the same time, resulting in the best investment opportunities in at least 70 years.
  • Interest rates are likely to stay low until the housing market takes off in several years.  First-time home buyers and investors will start buying when they see interest rates rising.


The Importance to Our Economy of the Housing Market’s Return

  • The subprime problem led to the collapses of the housing market and the overall economy.  The housing market constitutes about 30%-40% of the economy and over 50% when you include the equity in homes and equity lines as a source of credit.
  • The average consumer’s net worth lies mostly in real estate.  For the economy to rebound, the housing market must lead the way.
  • The housing market will not return by just having owner-occupants buy.  Investors and flippers will be the ones to bring back the housing market. The problem is, investors and flippers cannot get financing.  Banks must be convinced to loosen their loan restrictions for investors.

A huge, pent-up demand for housing.  Once the economy and housing market stabilize, a huge demand for housing will return:

  • Just due to natural population growth in America, there is a demand for 1.2 million additional homes every year. Another 300,000 homes are destroyed by fire, weather or natural disasters, or simply deteriorate and must be replaced. Therefore, approximately 1.5 million additional homes are needed every year.

  • Due to the recession, only 600,000 new homes have been built during each of the past three years, resulting in a shortage of 900,000 houses per year. Within three years about 2.7 million families will need a new home.

Need for rentals.  With millions of people out of work, many already are (or are close to getting) behind on their payments and losing their homes.  Then they must find a place to rent. Some are moving in with friends or family, but this population group still comprises a huge rental market.  We are having no problems renting out the properties we sell, even in the harder-hit areas of Phoenix, Las Vegas, and Florida.

Worries and Concerns

1.   Large companies are doing well, in large part because they have been forced to reduce their overhead and become   more efficient.   As a result, many workers were laid off.  Some feel they will not hire back as many workers as they had before the recession. Many of the unemployed may need to acquire new job skills.

2.   Large banks are once again showing profits, but not because they are lending. Banks are making money from credit cards and currency trading of tarp money.  Banks need to wake up to the needs for capital by investors and small businesses.  They need to rally to improve the overall welfare of the country.

3.   Small companies that do not have the reserves that larger companies have and cannot get financing from commercial banks are failing at record levels.  Small business accounts for more than half of the nation’s new jobs.  It will be a while until small business growth returns to a healthy level, and unfortunately, many will be gone, never to return.

4.   Americans are now saving.  We have always been small savers.  Compared to Europe, we would rather buy goods and services. The good thing about saving is we consumers have a reserve. The downside is that the economy will not flourish until we start spending again.

Positive Signs That the Economy is Improving

  • Large companies are doing well with profits returning to pre-recession levels.
  • The automobile manufacturers are all making money again.
  • The banks are making their highest profits in years.
  • Consumer confidence is good.
  • Retail sales over Thanksgiving and Christmas were up from last year, hopefully showing that consumers are starting to purchase again.
  • The effect of the elections.  The results of the latest election have encouraged entrepreneurs and the upper middle class who were concerned about their portion of the Bush tax cut going away.  

2011 Forecast

Consumer confidence, the most important indicator, will return.  Consumers will start to purchase goods and services again,
especially higher ticket items they have been putting off like cars, refrigerators, washing machines, and other durable goods.  Consumer spending (70 percent of GDP) rose 2.8 percent in 2010, the highest since 2006. Projections are that they will be about 25 percent in 2011.  Moody’s Economy is optimistic that GDP will accelerate from its sluggish two percent this year to a robust 2.75 percent by the first half of 2011 and to 3.5 percent during the second half. They believe that it should be back in its full swing of 4.5 percent by 2012.

If this holds true, companies--especially small businesses--should begin to expand and cautiously start hiring again. Unemployment should begin to fall, but gradually. It will remain stubbornly high for awhile because businesses have learned to be more efficient and they will be reluctant at first to do much additional hiring. Kiplinger magazine estimates that one million new jobs were added in 2010 and 1.5 million projected for 2011, causing unemployment to hover at about nine percent.

The stock market will continue to show early signs of recovery.

Because of the weak dollar, exports should remain good, but the poor economy in Europe and a weakening economy in China will hamper world economic growth.

Inflation is projected to stay low in 2011. Therefore, interest rates will remain low as well.

Loans for investors will start becoming more readily available in 2011, with lower down payments required.

Appreciation should improve to an overall two to four percent nationwide, with California at about seven to 12 percent and Phoenix, Las Vegas, and Florida trending upward from three to six percent.

Conclusion

“There will be a huge transfer of wealth,” says Donald Trump.

Not since the Great Depression of the 1930s have we experienced such a devastating economic downturn.  As investors who just survived this Great Recession, we have a choice:  to become stuck over our losses or to move forward.  We can lament the loss of equity (and in some cases, the loss of properties), or we can take advantage of the best time in 80 years to purchase real estate.

Now is the best time to purchase.  We know that prices have been rising in some markets and interest rates will follow in the future.  One cannot get hurt now by tying up these fabulous prices and taking advantage of incredible interest rates because the rental properties we feature already have a positive cash flow.  Don’t miss this opportunity.  Call us today to get started!


Contact:

Phone: (949) 885-8180
Email: info@mrren.com