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Since the fad this time of year in the blogging world seems to be making predictions of what will happen in the next year, I think I'll make some of my own.  Given that one of my primary interests is markets and economics I'll make my predictions mainly surrounding those topics.  Yes as many may know, I'm pretty bearish right now and many of these predictions may go against the grain, but I'll lay them out there anyways. 

1. The fear of inflation is misplaced, deflation is coming...

Despite many economic indicators as well as anecdotal evidence showing increasing inflation pressures, we're actually just seeing a lagging effect of 5 years of heavy inflation.  While government statistics showed inflation running 2-3% annually, real price inflation was closer to 10%, think about the increases in food, energy, housing, health insurance.  Monetary inflation was also running high due to the huge amounts of credit created through excess lending (an not just in the US).  As lending at all levels continues to contract we will experience monetary deflation and this will be very apparent by mid next year.  This, in turn will eventually lead to price deflation at the consumer level.

2. The dollar will strengthen against most currencies... 

What you say, everybody thinks the dollar will plunge against most currencies?  Trades in which everyone believes the move will be one way often end up whipsawing people.  But the simple fact is the US economy is likely to fair better than many international economies that are dependent on the US consumer.  This will spark a flight to safety into US currency reversing the trend that has taken place this year. 

3. The housing downturn will continue...

The typical housing downturn historically has lasted 5-7 years and we are somewhere around year two from the peak of this current housing market (depending on your region).  According to the Case Schiller index we saw nationwide price declines of about 6.7% during the last 12 months, and my prediction is will see a similar amount this year. Several of the top ten home builders will be forced into bankruptcy as they violate covenants on their revolving credit lines.

Graph from Calculated Risk blog comparing price declines in LA to previous cycle. 

4. It is not subprime...

The media likes to refer to the credit problems as being "sub-prime" problems, wrong.  The losses in the Alt-A and prime lending space will be even bigger than in the sub-prime, there is just a longer fuse attached to the bomb.  It's also not contained in the residential housing market either, commercial real estate may in fact will have similarly large losses, plus add in everything from credit cards to auto loans to leveraged buy outs. This in turn will lead into a fairly hard recession in the first half of the year, as the debt engine that has driven our economy dries up.

5. Real estate commissions will increase... 

The average real estate commission will increase over the next year.  This has traditionally happened as markets slow and this time will be no exception.  There's already many examples of homebuilders offering commissions to agents up to 10% in an attempt to quickly move inventory. 

6. Several large regional banks will fail...

The last half of this year we saw several bank failures including the largest one since the S&L crisis, Netbank.  This next year several large regional banks will fail and end up being seized/merged by the OTS for violating capital requirements.  There is a very significant possibility of at least one of the top ten banks in the US having a similar fate.  I won't mention any names but several candidates come to mind.

7. More bail-out schemes than you can shake a stick at will be proposed...

Yet, none of them will fundamentally do anything.  See the administrations "Sub-prime bailout" as an example. 

8. The FED substantially lowers the target rate...

The FED will follow deflation downwards, lowering their target rate to well under 3% by the end of the year.  But at the same time other lending rates from mortgages to commercial credit will increase. Despite the media hype the FED really doesn't really have the ability to add much liquidity to the system they operate more like a pawn shop for banks, their main power is jawboning to the markets to try to create an effect.  I'll write a post on this shortly...

9. ActiveRain will launch many cool new features and several new faces will join the ActiveRain team... 

Ok, I know this isn't a market or economic prediction but I had to add something in that will be a "safe bet" ;)

10. Despite all my bearish predictions we will survive and life goes on...

Update: End of the year recap is now out.

 

42 Comments on Market and economic predictions for the new year

DEC
29
2007
937,515 Points 361 Featured Posts Outside Blog Attended Rain Camp Called Shot Master
matt, I certainly didn't read anything here that I disagree with. I think you nailed it. When I hear NAR and others talk about how "the worse of it is over" I seriously don't know what they are smoking. At least in my market, central Florida, we ain't seen nothing yet!! 2008 is going to be brutal.
3:34pm • #1
171,889 Points 1 Featured Post

numbers 9 and 10 sound good to me.. :-) Although, the rest was very well written and I can't find any gaping holes. The shake out of the market and our industry will be a benefit to those who didn't fail to plan. Might be kind of tough on many of the new guys.

Happy New Year..

3:42pm • #2
120,282 Points 3 Featured Posts

Matt,

I agree with most of it - and I am excited about the new features at AR. I like number #10 - bottom line - we will survive and life will go on - we humans are pretty adaptable and we always seem find a way to make the most of the opportunities on the table. The alternative is to give up. I'm not that into that idea.

Best to you for the new year.

3:44pm • #3
208,442 Points 6 Featured Posts Outside Blog
Matt,  I have to agree with most of what you are saying.  In fact this is the best and most accurate one that I've read so far.  I'm not going to say that I like everything you've written, but hey, reality is a b__ch.  Can't believe that I actually did that and was nice.  It must be the heat - it's 86 now.  Got to love Florida.
3:54pm • #4
483,249 Points 53 Featured Posts Outside Blog Called Shot Master
Matt--I think your predictions are right on...Only time will tell but I would agree with your assessments. Here's to a great 2008 in the rain!
4:00pm • #5
220,676 Points 4 Featured Posts Outside Blog
Thanks Matt.  You have laid it out clearly, and sadly, I believe your bearish view is probably correct.
4:10pm • #6

Matt,

Interesting ... let's see what 2008 brings, it would be fun to list all the prediction blogs again at the end of the year and see who was right and wrong.

4:12pm • #7
1,091,557 Points 57 Featured Posts
Yup, we plan to highlight a ton of prediction blog posts on ActiveRain as featured posts Monday.  We can then revisit the same list at the end of the year.
4:19pm • #8
881,493 Points 210 Featured Posts Localism Sponsor Outside Blog Called Shot Master
I skipped to numbers 9 and 10 :)  Those look about to be something I want to relate to :)  If it's two things that are part of me to continue on is AR and my will to survive....no matter what :) Thanks Matt.
4:22pm • #9
1,546,334 Points 417 Featured Posts Localism Sponsor Attended Rain Camp Called Shot Master

Despite all of your bullish predictions we will survive and life goes on...

We ain't seen nothin yet. 

 

6:16pm • #10
597,371 Points 45 Featured Posts Outside Blog

Hi, Matt - good predictions.  I hope we'll see you and the Washburns in Hawaii for CRS and the Active Rain gathering that Sally and Randy have planned.  I'll post some predictions tomorrow.


7:00pm • #12
865,599 Points 50 Featured Posts Localism Sponsor Outside Blog Hit Router Attended Rain Camp

I think that in many sectors there has been consumer level deflation for years... mainly due to foreign manufacturing.  Despite the weakness of the Dollar, it buys more of many types of things.  Food and fuel are notable exceptions. 

I think that the Dollar will stage a comeback.  And, I think that the dollar coming back will actually hurt US manufacturing.   

I'm going to pile out a post with my thoughts.  Yours are probably better than mine... I don't pay enough attention.  BTW, I think your reasoning and logic stand up well.  With a lot of these issues, I think there is a coin toss (consumer confidence/market mood). 

8:26pm • #13
1,091,557 Points 57 Featured Posts

11. By the years end the term SIV will cause the same fearful reaction as the term HIV...

8:59pm • #14
1,180,557 Points 134 Featured Posts Localism Sponsor Outside Blog Attended Rain Camp Called Shot Master

1, 2, 3, 4 seem to be on the mark.  Five I could only wish for. 6, 7 & 8 are there again.  9 is a big no duh and 10 is cute :)

Wishing the whole AR team success in 2008!

11:20pm • #15
DEC
30
2007
150,993 Points 4 Featured Posts Localism Sponsor Outside Blog

Hi Matt,

Thank you for the post.  Please explain what needs to happen to get a stronger dollar?  What is your view of our national debt?

1:24pm • #16
1,091,557 Points 57 Featured Posts

My view on a stronger dollar relies is based on the economic/financial problems being worldwide.  The credit markets in Great Britain and Europe are in worse shape than ours, and we are likely to see big financial blowups overseas first.  This will cause serious stability problems for the Euro (which is a fairly new currency) and the US dollar/treasuries will be seen as a place of safety. 

The national debt is bad and certainly not getting any better.  That's what's going to restrain the ability of the US government to inflate out of this crisis.  The treasury can't start printing money, or else there will be a mass exodus from US denominated debt ramping interest rates through the roof, effectively bankrupting the government.

6:36pm • #17
1,091,557 Points 57 Featured Posts
Lenn, yeah we ain't seen nothing yet.  Given the consumer debt levels in the country if we get deflation and I think we will it is gonna be painful.        
6:40pm • #18
222,420 Points 12 Featured Posts Outside Blog
And so...where does that mean the opportunities are? Or asked another way...where are the successful agents going to focus to stay successful?
7:11pm • #19
DEC
31
2007
354,776 Points 137 Featured Posts Localism Sponsor Outside Blog

Matt, thoroughly enjoyed reading your analysis.  I'm smack in the middle of a fascinating book called Microtrends by Mark Penn which is looking at the small forces which are behind big changes.  As our economy continues to diversify, I think that these small issues will have a magnified effect. 

 I agree and disagree with some of your predictions.  With regards to inflation, I think that we will have both dynamics (inflation and deflation) occurring in the market at the same time.  It will depend on the particular sector.  Inflation will probably continue to impact rising healthcare costs and other services, but retailers of many durable goods will have to cut prices to stay competitive. 

 I'd agree that professional services (such as real estate fees) will see an upward trend with regards to fees.  We're seeing incentives to sell homes here as everyone begins to understand that selling a home successfully takes a lot of hard work.  The Internet will also make transparency about who does the job well much more obvious.  When I see half a million dollar homes marketed without pictures or worse with terrible ones...it makes me wince. 

With regards to the dollar...I don't think there will be a dramatic turn around in 2008.  For one thing a weaker dollar has made American goods more attractive.  There are too many unknowns in the US economy to predict that it will be perceived as stronger than Europe or Asia next year.  I think eventually your prediction will happen...I just don't see it next year.  JMHO. :)

1:03am • #20
I hope you are right one some and wrong on the others, but I suspect they will both be opposite of what I'm wishing for.
11:46am • #21
1 Featured Post Localism Sponsor
Matt- I like all your predictions particularly #5. I work hard enough to earn a raise. My greatest fear is that you are right about #3. We should learn from history but we don't really want it to be true.
1:08pm • #23
1,091,557 Points 57 Featured Posts

The dollar looks like it wants to get a running start on my prediction today...

From: http://quotes.ino.com/chart/?s=NYBOT_DX&v=s&w=5&t=l&a=0

 

1:51pm • #24
284,607 Points 37 Featured Posts Localism Sponsor Outside Blog
Matt, I found your predictions very interesting and agreed with the ones I know the most about...I'm not sure about the dollar or deflation.  But, my broker told me today that I focus too much on the big picture so maybe my predictions should be about when the listing down the street sell:)
2:39pm • #25
243,154 Points 25 Featured Posts Localism Sponsor Outside Blog Called Shot Master

Matt,

I appreciate all the member's on AR who keep saying we need to be positive and upbeat, but what we really need is to be realistic and your predicitions are just that.  For those that are prepared, they will still be in the game and those that aren't...well...they won't.

 

3:05pm • #26
1,091,557 Points 57 Featured Posts
Fran, good point, I'm by nature a pretty optimistic and positive person who can always see the silver-lining in things.  But it's important to be realistic and prepare yourself to take advantage of that "silver-lining"  If your an agent, a lot of competition is going to disappear in the next couple years, and that will create an opportunity to position yourself to gain market share.  But you have gotta survive the next couple years.
3:14pm • #27
462,929 Points 27 Featured Posts Outside Blog Called Shot Master
I think you have hit the nail on the head with this post. Good job!
3:32pm • #28
325,018 Points 15 Featured Posts Localism Sponsor Outside Blog
These are awfully bold predictions especially with the election year on the horizon.  We'll see.  Right now the falling dollar is causing all sorts of inflation problems for the economy.
4:58pm • #29
164,299 Points 10 Featured Posts
I'm going to be watching the dollar carefully and if it shifts, I'll be thinking of you. I just don't see it, but it will be interesting to see!
6:46pm • #30
865,599 Points 50 Featured Posts Localism Sponsor Outside Blog Hit Router Attended Rain Camp
A second on the realistic and prepared v. just being positive and upbeat.  If there is going to be a whammy, the ones that will survive are the ones that prepare... the ones that thrive are the ones that see it coming and prepare. 
7:00pm • #31
JAN
01
2008
483,220 Points 1 Featured Post Localism Sponsor Outside Blog
Matt,  Terrific mixed bag of predictions you bring us.  Whatever comes to bear... AR will be in the forefront of the learning curve.  Hope your New Year will be the best ever !
2:04pm • #32
273,842 Points 18 Featured Posts Outside Blog
Amen to #10! Here's to an outstanding 2008!
6:35pm • #33
Matt good post I enjoyed reading it.  Good food for thought.
7:21pm • #34
MAR
23
2008
345,986 Points 1 Featured Post
Great post, could not agree more.  Thanks for a look at your crystal ball.
6:16am • #35
OCT
01
2008

This piece has some very interesting points, considering the current happenings.  I keep checking the posting date!  (stumbled here from google)

onlooker
1:11am • #36
NOV
26
2008

Looks like we had some of the same ideas eventhough our markets are no where near each other! Nashville real estate predictions, and some a pretty bold too.

11:15pm • #37
DEC
27
2008
275,108 Points 6 Featured Posts Outside Blog

Matt, wow you were dead on.  I'm looking forward to seeing this years predictions. 

12:19am • #38
DEC
31
2008
237,795 Points 6 Featured Posts Outside Blog

Hi Matt, I featured this in my Active Rain predictions review. You were amazing! Got any stock tips for 2009 :) ???

Ginger

11:21am • #39

Great read on the market Matt! It'll be interesting to see your predictions and results next year. Here's to a better year 2009!

4:27pm • #40
JAN
01
2009

Dude, the target rate is already below 3% it's at 25 bps.

 

Lingonberry
1:39pm • #41
JAN
02
2009
350,647 Points 2 Featured Posts Localism Sponsor Outside Blog

Matt - It is interesting to read this from the perspective of New Years 2009 and see how you nailed so many events of 2008.

3:48pm • #42

For goodness sake man!!! Who is going to win the National Championship game in college football next week? (I'll split what I win with you Nostradamus)

6:12pm • #43

What does the graphic say?

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Matt Heaton

Bothell, WA

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Timu Corp - CEO, ActiveRain - Co-founder

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My ramblings about growing ActiveRain, the real estate industry and something I follow very closely, credit markets.  Why "The ActiveRain Addiction"?

My new project Timu, a communications and social networking platform for sports teams.

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