Saturday, December 16, 2006

Predictions for 2007

I have thought about this for some time now. Overall, the housing market has not behaved like I thought it would. It didn't "implode" like a lot of super bears predicted it might. Certainly, the market became tighter with the supply demand dynamic shifting slightly more in the buyers favor. However, prices are still very high and interest rates are still very low, though not rock bottom. Bill Gross of PIMCO recently said that he believes that the Fed will lower rates by 1% next year to soften the blow of the slowing real estate market. It's hard to argue with Mr. Gross. Furthermore, if England real estate market is any indication (it is supposed to be 6-12 month ahead of our market), then the US market is in for a rebound of some sorts. We have obviously reached a limit in terms of prices at these interest rates and incomes. But, the "animal spirits" could still be further released by interest rates cuts. So my predictions are as follows: The Fed will lower interest rates by about 0.5% in 2007. Prices will stabilize, as will inventories, and all the bulls will come out of hiding again. Price averages for 2007 will be about neutral to slightly positive compared to 2006. All this assumes that there won't be the "fat tail" rare event that will completely destablize capital markets. Then, all bets are off! It is obvious that high real estate prices are of national security intertest, because if prices colapse, the whole deck of cards that is the U.S. economy will go down with it. Therefore, it is logical to conclude that the government will do everything in it's power to keep prices relatively stable, even if this screws millions of people. Because, they would argue, it's in our national best interests. Time will tell.