Housing and Economic Predictions for 2013 and Beyond

As we near the end of 2012—after surviving the Mayan Apocalypse and teetering on the edge of the “fiscal cliff”—it’s time to review my housing and economic predictions for 2013 and beyond. And I believe serious analysis and planning will be in order as we enter yet another year of economic and political turmoil due to the inaction and partisan bickering now common in DC. Uncertainty seems to have become one of the few certainties we can expect.

 

Before I begin, I’ll do a quick review of some of my 2012 PREDICTIONS:

 

Last year I pointed out how renting would grow ever-popular due both to an unstable economic climate as well as the lack of significant jobs growth; and while the housing market has certainly improved, we have a long way to go before it returns to normal . . . however “normal” may be interpreted. One of the structural problems that I predicted would continue to plague housing during 2012 was the huge number of foreclosures and distress sales that would overshadow much of the normal market. As the year comes to a close, some areas have seen moderate declines in such distress sales, but there are still several million in that category that must be processed during the next few years.

 

I also predicted that mortgage rates would remain very attractive; in fact, they became even more attractive than I anticipated. And during the year the Fed confirmed their commitment to maintaining low rates well into the future.

 

As we close the book on 2012, let’s look to what we can expect in 2013:

 

HOUSING: Those who interpret the recent improvements in home sales and rising prices as a return to the boom times of a few years ago will be disappointed. However, a recovery in housing is taking place; it’s just that it’s taking place in selected areas. Overall, most areas should see some improvement in 2013, but until Congress is able to work out a meaningful and permanent resolution to avoiding the “fiscal cliff,” caution will be the key for many buyers. Of course should partisan politics continue to rule—as most anticipate—a sluggish recovery might be the most optimistic projection.

 

While Zillow has predicted home values to rise 1.1 percent in the coming year, the Fed has a target inflation rate of 2 percent. We may feel good about improvements in home prices, but we must keep in mind that the value of dollars received from a sale will be less than when the home was purchased. Also, due to rising prices, buying will become less affordable for some, but the impact will be negligible. Shrewd buyers will still be able to find attractive deals on desirable homes.

 

FORECLOSURES: 2013 will end with an inventory of approximately 1.3 million foreclosures, with close to 750,000 foreclosures completed. And while that number has declined since 2011, it’s still almost three times the average prior to the housing bust. Additionally, there may be fewer foreclosures, but short sales have increased dramatically, now outnumbering foreclosures on a national basis. As the number of distress sales slowly decreases, traditional sellers will benefit, but housing hasn’t experienced the abrupt turn-around which has commonly followed previous recessions. The housing slump has now been with us for almost five years; by the time we see a meaningful recovery, the odds of another recession occurring grow larger.

MORTGAGES AND INTEREST RATES: Projecting future mortgage rates has become much easier now that the Fed has openly announced their intention to maintain rates near zero until unemployment falls below 6.5 percent, which most believe will be well into 2015 or beyond. And while the promise of low rates may help those wishing to purchase a home, it also removes the pressure of quick action, as buyers are aware that mortgage rates are likely to remain flat for the foreseeable future.

 

TAXES: As Congress and the Administration battle over the tax issue, the only question is how much taxes will increase during the coming years. And while the current fight is focused upon those at higher income levels, practically everyone will pay more as the bills for healthcare and other government programs come due. Increased taxes are the only solution visible to myopic politicians who find it impossible to reduce spending.

 

MORTGAGE INTEREST DEDUCTION: To begin with, it’s not going away; but the MID will likely be modified. Strangely, those in the lower home price ranges—those who need assistance the most—receive little or no benefit from the MID. Most in that group take the standard deduction, and even those who do itemize, receive only a modest reduction in their taxes. Whatever action our political leaders take, the truth is that changes in the MID will probably only impact those at higher income and home price levels; and such action would unlikely have a meaningful impact upon housing.  

 

EMPLOYMENT: Sadly, structurally high unemployment has become the norm and will probably remain so throughout the decade. Should we have another recession, past rates of employment may remain forever out of reach. While a casual reading of the unemployment rate indicates far better conditions than actually exist, the sluggish economy continues to reflect the high numbers of unemployed and underemployed. 

 

POLITICS: I’ve given up on Washington. Partisan politics has now become the accepted practice; and because of media prodding, the electorate has grown more partisan than ever. I doubt this will change during the current or succeeding administrations. Therefore, it seems unlikely that anything of significance will be accomplished by our elected leaders during the coming year. And instead of improvement, I see this condition worsening during the remainder of the current administration.   

 

WORLD EVENTS: Three years have passed since Europe entered its monetary crisis, and little meaningful action has been taken that would lead to a possible solution. With recession spreading across the continent, hopes for a resolution have grown dim. I can’t imagine a scenario where the European Union can remain strong and its various economies return to stabilization. Much of Europe is struggling to deal with past mistakes and overspending—problems we in the U.S. share, yet fail to address—and it seems unlikely that the diversities of history, culture, and development will allow a workable solution.

 

However, while the situation in Europe could put additional strain on the U.S. economy, I’m much more concerned with events in the Middle East. The growing tide of anti-American sentiment and general social unrest will likely lead to worsened relations with Middle Eastern countries, continuing the problem of spiking oil prices and general uncertainty.    

 

OIL PRICES: While recent discoveries and improvements in refining methods have catapulted the U.S. to prominence as a world oil producer, I doubt we’ll see gasoline prices fall much below $3 per gallon. (It’s also likely that, should prices fall, the Feds and local governments will use the opportunity to increase gasoline taxes, offsetting any drop in prices)  As a nation, our thirst for oil has decreased during our economic slump due both to the economy and more efficient automobiles, but the growing economies of other countries such as China, India, and Russia, will likely consume increases in production. My long-term view of gas prices is that they will slowly increase as a consequence of inflation and world-wide consumption.

 

Last year I felt there was a fifty percent chance that the U.S. would fall into recession before the end of 2012, and while that didn’t happen, the anemic growth we experienced can hardly be interpreted as a decisive recovery. Those who are encouraged by our lackluster progress conveniently overlook the very real fact that jobs growth must average 200,000 per month—growth we have yet to see following our recent recession—in order to significantly reduce the number of unemployed; and even at that pace, it will take several years to return to “full employment.” Until the number of jobs created consistently exceeds the number of new entrants in the workforce, uncertainty and a struggling economy will continue.  

 

We must also consider that 2012 was an election year, aware that politicians always take extreme measures to ensure their re-election. I’m concerned that if the economic conditions experienced in 2012 were the best they could create, 2013 may turn out to be a major disappointment, with growth far below what is required to significantly improve unemployment. Current conditions would suggest net GDP growth of little more than 2%. If that’s the case, we’ll add yet another year building toward our very own “lost decade.”

 

SYNOPSIS: Housing will continue plodding its way out of the crisis that began five years ago, but there will be no sharp rebound. The market we experienced in 2012—which varied widely around the country—will probably be the norm for several years to come. There is no easy or quick solution to restoring housing to its glory days; and most now realize that a return to the boom times is neither possible nor desirable. The days of quick returns are gone, except in certain select areas; and while few now view housing as an investment, it retains its inherent appeal for millions who view homeownership as in integral part of the American Dream.

 

In many ways, 2013 will reflect similar conditions to those of 2012, with slow growth, high unemployment, political turmoil, and world-wide instability. What makes many of us more confident is that we’re adjusting to the changes as if they were normal, and in some cases, they will be. It’s certainly not the “worst of times,” but the heady days of a decade ago, are unlikely to return . . . perhaps forever. 

 

The greatest danger we face is that our elected leaders are failing to lead. Their pathetic pandering to their political bases has made it impossible to accomplish the simplest of tasks; and our nation’s problems, such as our growing debt crisis, are anything but simple. The next test for the American electorate will be the mid-term election of 2014, for the message sent at that time will determine whether or not the country is finally willing to acknowledge and address problems that have been festering for decades. I’d like to say I’m confident that the reaction will be positive, but my level of confidence is far from comforting. The events and actions of 2013 should be a good indication of the path we’ll choose, but our individual fate remains in our own hands. Those willing to assume responsibility for their success will continue to find it.  

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"Housing and Economic Predictions for 2013 and Beyond" - Originally posted at: www.TheHousingGuruBlog.com