2010 Major Issues

By George Thurtle

Well here goes the post where I put my foot in my mouth and make some predictions. All of the comments are purely my own speculation and are based on events that I see on the ground or are from my own personal antidotal experience.  So beware, this is a little off the wall.  

1. This is not a Cycle it is a Shift – The United States will be dealing with shifting from the post WWII consumer economy to a new model in the future. I see our economy going to an innovative knowledge based economy in which we obtain our prosperity in the next 50 years by supplying the information and technical¬†infrastructure to the developing countries; in particular China, Brazil and India. These countries in turn will begin developing their own consumer economies. Brazil is well on its way and China is resisting the trend but has no choice since we can’t be the consumers¬†anymore and India has many problems to overcome but in the last decade has started the process.¬† Personally I¬†see this in play in our local market. Many sellers are those who have been laid off or were part of the consumer economy; real estate agents, laid off financial service workers and executives, down sized retail workers and executives. The buyers are from those economies that are doing well. The cell phone companies, Google, Microsoft, Amazon, etc. There is no reason to see this trend stop. The question is how do we redeploy these workers that were based on the consumer economy? I am not sure and the big story will be what happens to these folks as they have tied a knot and hung on. Their resources are dwindling and the job opportunities for them are non-existent. At some point this situation needs to get resolved so the issue will be for 2010 how does this effect inventory and pricing. The story for 2008 was subprime, 2009 was the prime borrower going into foreclosure because of job loss and 2010 will be what happens to that sector of the economy based on consumer goods such as autos and houses redeploy workers. If it can’t be turned around the foreclosure rate will remain high but instead of the massive wave it will be a slow water torture¬†as folks who have had the resources to hang on deplete them. Personally I think you will see the auto and housing industries return domestically to volume levels of only two thirds of their 2006¬†and 2007 highs. ¬†This has profound long term implications.

2. There is a “Shift” in individual values – I see this all of the time. The “new economy”, buyer has a choice and that is to save and invest or to buy. A house is a top priority for many of these thirty somethings and they will buy what they need and will spend the money only if they can get a home at a price that is “obvious” value and serves their family needs. There are two hits here to the market overall. The first is that this buyer views a home as a some what discretionary item. Unless they get the deal they want they will sit tight and rent or remodel what they have. The second hit is that these buyers are “lifestyle buyers”. They are buying a home for a particular cycle in their life. Again many of these thirty somethings are looking at the home as a place to raise their family and do not consider moving even when they are upwardly mobile in their organizations. In addition most of these buyers are buying the home in anticipation of living in it till the mortgage is paid off. Again this trend has profound implications for home volumes overall and will be one of the key factors holding down long term demand for new homes. The big story here for 2010 is that sellers and home builders will be stymied because the normal cycle of inventory reduction¬†and then increased demand goes out the window when you have the buyer demand being discretionary and hard to predict.¬†

3. There will be “alternate” unit creation – Again I see this antidotally. Some of the first time buyers, particularly those that are single, look at taking in room renters as a form of extra income; particularly in urban condominiums. This is a trend not seen since the Thirties. In general this can be a way of dealing with the declining salaries and wages in the consumer sector but also is more of a long term trend. You even see shows on HGTV that directly address this trend and the economics of a quicker pay down on your mortgage. Again profound implications for both new housing and apartment units.

4. Growth will stay stuck at 2 to 3 percent GDP and unemployment will be stuck at 10%.¬† In most recoveries things snap back much more quickly as credit becomes available and companies rehire but this time things will be different for the reasons discussed above because of the “shift” occurring in the economy and the consumer segment of the economy remaining in a semi-depression. These trends will be offset by the high growth rates of the “new economy‚ÄĚ.

5.¬†The Eastside¬†will make the national news for its prosperity.¬†¬† While condominiums will have a tough time selling all of the office space is leased. Thanks mainly to Microsoft and its subcontractors. The phone companies on the I-90 corridor are expanding and adding new jobs as well as other companies such as Google and Amazon. While they may be consolidating operations overall from other locations and the press overall will not be that great the implications for the Eastside will be significant but for the reasons discussed above these employment gains won’t necessarily translate into the usual rebound associated with other cycles. However it will mean that distressed inventory will be picked up in a timely manner and inventories should remain stable or shrink somewhat. It will also mean most of the “deals” will be gone by the end of 2010.

6. The Government will be withdrawing the stimulus money. The fed has about $300 billion left to buy mortgages and it will also be looking for TARP pay back by those banks such as CITI, Bank of America and GMAC. In order to replace this money rates will need to rise to attract other sources of funds. There is no long term plans for either direct stimulus or tax cuts to assist the overall economy. The only initiatives being proposed are those which tax jobs and will further encourage offshore outsourcing and promote disincentives to domestic employment. This is again another reason the unemployment rate will remain high and the economic growth sluggish.

7. Locally foreclosures will rise the first half of the year. There are three factors which I see are contributing to this speculation. The first is that lenders have been floating foreclosures as they come to terms with the new requirements having to do with requiring the lenders to contact the borrower to see if there is an alternative to foreclosure. Statutorily this means 30 days has been added to the process but in reality it is a whole new layer of complication for the servicers who actually do the foreclosures. However they are getting their processes in place and you will see volumes rise. In July of 2009 prior to the enactment of the law there was a spike in foreclosures to avoid having to deal with this requirement. Now they are getting geared up for that back log which will be coming to the market. The second factor effecting foreclosures is that locally you will see some major state charted banks taken over or merged. This has two implications of forcing more product on the market but also for the Eastside many of these workers and executives live here and it will force distressed inventory on the market.  The third factor will be those who folks who have been hanging on may come to face reality as they find slim to no employment opportunities in the old consumer economy. In addition there are resets on a bunch of option arms occurring for the next two years which will contribute to the problem.

8. The inflation bogey will stay at bay for 2010. In order to have inflation you need to have money circulating, ie. being spent. That is not happening. The inflation now is occurring through a debased dollar and some rising commodity prices.  This trend of corrosive inflation will continue but wholesale inflation at the domestic level should be subdued. If you see spending increasing and banks extending easy credit again then the trend may reverse but for inflation money needs to be available.  

9. Rates will rise but not as much as everyone thinks.¬†The effects of a rising dollar will cause the stock market to unwind and be very detrimental for those sectors of the “new economy‚ÄĚ that are functioning from exports. It will make earnings go down. The effect of raising rates will make our dollar shoot up since¬†other economies are in worse shape and dependent on ours. The Europeans do not want to see this since they already have very high debts and¬†unemployment and floating their bonds will cost more. ¬†The Chinese will have no choice other than to keep buying our bonds unless they want to burst their own bubble. In addition the 2010 elections will be coming up and I doubt any Democrat wants a slowing economy as they go into the med-terms.

10. Locally inventories will rise in the spring and prices will rise in the fall.  For the reasons discussed inventories will rise in the spring but will be reduced as prices stay soft and buyers stay opportunistic. Prices will firm up and maybe even rise somewhat in fall as distressed inventories finally start to show a significant decline and new construction inventory is fully depleted. Non-distressed sellers will refuse to bring homes to the market until prices rise and 2010 will end in a stand off as buyers demand the values of the past and the sellers refuse to participate at those values.

So there you have it. Very soft overall economic fundamentals coupled with a strong local economy and just for interest throw in a “values shift” and I will most likely be guaranteed to eat my words.

3 Responses to “2010 Major Issues”

  1. jim Tosti

    I think you are generally “spot-on”. I don’t know where I would deviate from your position by more than a few percentage points.
    Good job.
    JT

    #99
  2. Thanks Jim. We will see what happens but it looks like a long “slog”.

    #100
  3. Sunil

    Is it time yet to check how well your predictions fared? Pretty impressive with some of them being spot on.

    #663

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