2007 - Predictions & Discussions

Posted by urbandigs

Tue Jan 2nd, 2007 10:26 AM

A: I thought it might be fun to lay a few predictions down, being the first business day of 2007, so that at the end of the year we can all look back and see how wrong I really was! Well, hopefully not too wrong but who is ever right on the money all the time right! So, here are some of my thoughts on everything economic, including NYC housing predictions. Would love to hear your thoughts!

NOTE - This is really just for the sake of discussions and nothing I mention here should be used to place investments on unless you discuss first with your financial advisor. Please take what I say here as my opinion based on data that I currently see. The real point is to provoke discussions to hear others' thoughts on what 2007 might bring.

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Will The Economy Have A Soft-Landing in 2007 - Lets start out with the toughest call; the US economy. With the stock market predicting a soft landing and the bond market predicting a coming recession, who is right? For now, I'm going with the stock market.

My Prediction - The US economy will prove its resilience once again as corporate profits continue to be strong, but NOT as strong as previously predicted by the equity markets. I expect wages and jobs to come under a bit of pressure; especially in housing related industry's where job losses will skew the overall national jobs numbers downward. Wages will stabilize but for the most part remain strong as 2007 proves to be another good year for stocks; just not as good as 2006. I would think 8-10% gains in major indexes for the full year as long as nothing crazy happens with energy prices or unexpected unnatural disasters. The end of the year might prove worst for the US economy as housing related consumer spending cutbacks may prove real.

The Wild Card - Housing & Energy. If housing is worse than expected or energy prices shoot higher expect stocks to come under pressure.

Will Energy Prices Soar & Hurt Economic Growth in 2007 - No, I dont think so. I actually think the price of energy will fall a bit over the course of the year as a warmer than expected winter ends and a less than expected hurricane season occurs. This is all just a guess of course, but why not make a stab at it.

My Prediction - Oil will be trading closer to $50/barrel by the end of 2007 and possibly lower. Geopolitical tensions prove to be better than expected and Iraq continues to get more pipeline on-line throughout the year, adding to the global supply. OPEC's planned oil production cuts prove very hard to enforce. If this proves true, its one less inflationary pressure to worry about giving stocks and the economy a bit more upside.

The Wild Card - Geo-political tensions & Weather. Should Iran, Nigeria, or Iraq have more issues the price of oil will likely shoot higher. Also, if weather gets much colder or we have a very active hurricane season, oil prices will stay at higher levels.

NYC Housing Market in 2007 - Which is why you are all here right.

My Prediction - I expect a slight increase in activity in the months of JAN - MARCH which is proven mid year by lagging housing data reports on deals during this timeframe. Remember that housing data is lagging. I wouldn't be surprised if housing shows some price gains during these months as well as an uptick in sales volume.

During the course of the summer I worry that economic jobs data might come in lower than expected, putting some pressure on housing as this industry still searches for a bottom. Activity will again slow during the summer months and desperate sellers will once again have to negotiate more than expected to move a property. Overall, by the end of 2007, I expect NYC housing to experience a decline of about 3-5% or so as fundamentals continue to correct for longer term sustainable growth. If the first few months prove to show gains of 1-2% in prices, then the summer months and remaining months of 2007 will show a wipe-out of these gains plus a few more percentage points.

Should economic data come in weaker than expected in jobs and wages, I would expect housing to suffer for a bit longer than expected with sharper movements.

Keep close eyes on lenders during this time to see if banks tighten the noose of easy credit! Should this occur, as a result of a slowing economy (job losses and downward wage pressure), housing could be in for a bigger slump than previously expected and might last for a few years longer until an outside force (such as monetary policy) stimulates buyer demand again.

All in all, I expect a slightly down year for NYC housing prices with activity staying stable as lower prices and deals attract more buyers. Put simply, the fundamental of 'negotiability' as experienced in buyers' markets, will show itself in data during the course of 2007. You can't have a market where there is widespread negotiating and still show solid gains in pricing at the same time! That would be a paradox.

The Wild Card - JOBS & LENDERS. In my mind the two biggest threats to housing's continued mission to find a bottom! If job losses are higher than expected or banks tighten lending requirements (making borrowing harder to lock in), housing will suffer more than expected and could see a very volatile year in price declines and inventory levels.

What The Fed Will Do in 2007 - For the most part, stay where they are! I keep swinging my thoughts on whether the fed will hike or cut rates during the course of the year because it really is data dependent. Fact is, I dont know what the inflation data will be nor do I know what the stock market will do or what might affect oil prices during the course of the year. All of these things play a role in whether or not the fed will hike or ease.

My Prediction - Im going to play it conservatively and say that at the end of 2007 the fed funds futures will be either the same or at 5%; down 1/4 point from where we are today. I'm going to bet that inflation pressures continue to ease with the correction of energy prices allowing the fed to focus on economic expansion issues that may arise. If jobs and wages show weaker than expected numbers, partly as a result of weaker housing, than the fed might ease a bit to psycholgically stimulate the economy. But this can very quickly change if inflation data comes in higher than expected. I'll certainly continue my anaylsis of this here on UrbanDigs.com.

The Wild Card - Inflation & US Dollar. If core PCE or PPI shows more inflation pressure than expected, and the US dollar continues its downard slide, the fed could RAISE rates putting more pressure on holders of debt and making it more expensive to borrow! As we all know, the more expensive it is to borrow, the less affordable housing becomes and the result is lower buyer demand both in the size of the buyer pool, speculative investors, and what buyers can ultimately afford. Very important to keep your eyes on these things!


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