Stocks are at a two-year high, commodities are rising and bond yields are still very low by historic standard—which all contributes to the consensus that rates won’t drop back down to October lows. However most economists, market strategists and money managers are tempering their optimism and predict modest economic growth and low inflation in 2011.
A trader from Cantor Fitzgerald wrote, “In order to win in 2011, you need to be right about the timing of the economy turning around. In my mind it’s still all about the jobs market. Equities and commodities are bulled up. Wall Street research analysts are calling for stocks to be up about 10% in 2011. What a shocker – has Wall St. consensus ever called for a down stock market?”
Is 2011 the year housing actually hits bottom? All real estate is local and many markets have rebounded, but some economists feel that, very broadly speaking, home prices are expected to fall another 5% in 2011. Last week the Wall Street Journal published four housing-related issues to watch in 2011, which are accurate.
#1 is jobs. “Who’s going to buy a house when they’re not certain they’ll have a job in six months and when it looks like home prices are likely to fall another 5%?”
#2 is foreclosure delays. Much of this has blown over, but still regulators and state prosecutors are in the midst of a series of reviews and investigations that could shed more light on abuses, such as misapplied or excessive fees, by servicers, their attorneys and other third-party vendors.
#3 is whatever comes out of Washington DC in terms of Freddie & Fannie, the Dodd-Frank Act implementation, what does a “qualified residential mortgage” mean in terms of the 5% risk retention, etc., etc.
#4 is underwriting guidelines. 90% of production now is related to some type of government agency – if those change, private lenders are going to have to step up lending without additional fees, government regulations, down payments, etc. It is a tall order, given the overlays already in place.
But will the US continue to attract investors to our debt if our deficit continues to grow? The Treasury has had success in funding our deficits to date although there are some signs of weakening demand as global economies struggle with their own debt problems. Congress started back up today with more than 90 new House Representatives and 12 new Senators. The Republicans take over the majority in the House of Representatives and its leadership has already turned their sights on cutting spending and announcing plans before President Obama’s State of the Union address later this month. There are a few of the fiscal issues that Congress will be tackling at the start of the year, not the least of which is President Obama’s $1.1 trillion spending bill which was voted down for having too many earmarks. A “stop-gap” bill of $250 billion, which was passed before the holiday break, will fund the government until March 4. This means that Congress will be debating a new budget soon.
Another issue is the debt ceiling. The US currently has roughly $13.9 trillion in debt, so the current debt ceiling of $14.3 trillion will be hit early this year, which means that Congress will have to vote on raising the debt ceiling. Reducing deficits, whether it is with the United States, states like California, or with a family, is rarely easy to do. And of course this month we find out the first draft of the plan for GSE (Government Sponsored Enterprise) reform. But given the current state of the housing market, many analysts feel that the government will not suggest anything major.