Weekly Observation for January 1, 2011 The Housing Market Forecast For Springfield Illinois 2011, Part I
January 1st, 2011Full disclosure, I am not an economist, however I am a licensed real estate broker serving this market for 24 years, beginning my 25th year of service on March 1.
Today is the 15th anniversary for my radio program Let’s Talk Real Estate, and the beginning of my 16th season. As a result of tracking this housing market by price, week by week for 777 weeks, I can lay claim to not only being the biggest Springfield housing stats nerd, but probably the agent that knows the housing market trends in Springfield better than any agent or economist.
Here’s the truth folks; the economy won’t recover until the housing market recovers, and the housing market won’t recover until the economy recovers. The key to recovery for both is jobs. The reason the actions governments take have such an impact upon the Springfield housing market and your home, is the policy or agenda impact upon jobs.
The 2011 forecast has been the most difficult to formulate in all my years. The once historically stable and predictable Springfield housing market has changed. The influences of government policies that caused the financial meltdown, Great Recession, and housing market decline are having an impact on the Springfield housing market. The year 2011 will be no exception. The following factors are the basis for my 2011 housing market forecast.
Let’s look at the three levels of government impacting the Springfield housing market in 2011; Federal, State, and City.
First the economic impact of the federal government. In 2010 economic uncertainty for businesses regarding costs for massive pieces of legislation, new rules, regulations, and income tax rates prevented businesses from hiring. The unemployment rate ranged from over 9% to over 10% throughout the year with the real unemployment rate above 16%. This resulted in fewer buyers entering the market. Sales of homes across the nation are forecast to be the fewest since 1997 in spite of tax credits to buy a home and interest rates the lowest since Eisenhower was president.
The extension of tax rates, which were not tax cuts, are merely an extension of the status quo. Due to the irresponsible lack of action on the impending expiration of the current tax rates until the lame duck congress, businesses did not hire. A textbook example of government preventing job growth.
When tax rates were extended for two years government created only temporary certainty which does not allow for long term business planning and therefore significant hiring. As a result of this band aid on tax rates, the number of jobs that could have been created was wasted when tax rates were not made permanent.
Economists predict two million jobs will be created in 2011. Better than the 900,000 plus jobs in 2010, but not enough to dent the unemployment rate. It takes one million new jobs just to meet the demand of population growth. So two million jobs being created, although welcomed, is painfully weak when there are 15 million Americans out of work.
America will need 300,000 new jobs monthly on average for five years to return unemployment to normal levels. 2010 job growth was the slowest compared to all other recoveries since WWII, and extended a record with 17 consecutive months of over 9% unemployment. Massive Stimulus spending failed to create jobs while adding to the national debt.
The next obstacle to job creation is federal energy policy. This fall President Obama placed a seven year drilling moratorium on the east & west coasts, the eastern basin of the gulf, and placed millions of acres off limits for drilling. This shows the world America is not serious about controlling its energy independence by ignoring their own resources says commodity brokers. This has opened the door for speculators to drive up oil prices again as in 2008.
This has resulted in the price of oil rising above $90 a barrel, the highest in two years, causing gas to go above $3 a gallon. The CEO of Shell corporation predicts oil going above $100 a barrel by spring and a 25% chance of $150 a barrel by summer, that could result in $5 a gallon gas. If that happens consumer spending will plummet, risking another downward spiral.
Next up the EPA announced on December 23 they will unilaterally impose greenhouse gas emission controls on industry January 2. This too, if allowed to stand, could cost millions of jobs said new Energy Committee Chairman Upton. Power plants, refineries, and manufacturing plants will pass along bureaucratically mandated expenses. Until these regulations are released and analyzed the cost will be unknown for thousands of businesses further impeding hiring.
Next impediment to job growth, Obamacare. Insurance premiums rose modestly in 2010, however insurance industry analysts are predicting 11% to 27% increases in each of the next three years to cover the added costs mandated in Obamacare when fully implemented in 2014. Additional costs to businesses that provide insurance will impede hiring.
Another federal impediment to job growth is the recently passed financial reform bill. Another bill thousands of pages long placing more rules, regulations, and costs upon financial institutions, will make it more difficult and expensive for consumers and small businesses to obtain loans. Ironically this reform bill ignored Fannie Mae and Freddie Mac who were at the heart of the financial meltdown and continued to rack up hundreds of billions in losses, adding to the national debt in 2010.
Here is the current federal policy impact upon potential home buyers, and the middle class in 2011. EPA emission regulations will drive up the cost to heat and cool homes. Energy policy will drive up the cost of gas. The price of food will rise with the price of gas. The cost for health insurance will go up. Combined, these federally imposed expenses will diminish disposable income, financially eliminating many buyers from purchasing a home, and making loans more expensive and harder to obtain.
At the state level Governor Quinn just announced a plan to sell bonds to pay for the estimated $15 billion deficit, and to raise the income tax 1%. The borrowing plan will have the same impact upon the state as does the family that puts their house payment on their VISA card. The day of reckoning has arrived, with thousands of vendors near bankruptcy resulting from lack of state payments. This costs jobs and home buyers.
A state income tax increase will accelerate out migration. Illinois ranks number two in the nation behind only New York in people leaving their state. Expect no help on the job front from the state as a result. In fact state government economic policy will continue to be a reason for more job losses.
The city of Springfield’s finances aren’t as clear, however it is reported there is a possible $13 million deficit for 2011. It is possible that up to seventy city workers could be laid off, and there may be a push for increased city taxes. Both will produce counter-productive results, the same as with the state.
Interest rates will become another factor in 2011. Top economists such as Noriel Roubini, and Alan Greenspan warn of an impending bond crisis. The result will be inflation followed by unaffordable interest rates. This will eliminate massive numbers of home buyers from qualifying for home loans. Roubini projects this to occur when the European debt crisis has stabilized in one to two years. Hopefully the bond crisis doesn’t happen in 2011.
Another potential force that could trigger higher interest rates is Federal Reserve Chairman Ben Bernanke’s QEII initiative. NAR Chief Economist Lawrence Yun said this may backfire. The money supply has already been increased 200% since the financial meltdown without any corresponding increase in production or productivity. A perfect recipe for inflation. This is the intentional devaluing of the dollar to induce inflation to reduce debt obligations, and to make our exports cheaper for foreign buyers. Bond investors and trade partners are not happy with Bernanke’s QEII.
Next up foreclosures. Realty Trac reports there are now more home owners delinquent on their house payments or in foreclosure than there are homes for sale in America, over four million. 2010 will set a record with about one million foreclosures. This shadow inventory of homes will add to the inventory of homes for sale, at discounted prices.
That’s good news for home buyers. In 2009 23% of all home sales in the Midwest were foreclosures, we won’t know about 2010 for several months. Realty Trac reported on December 28 there were 230 foreclosed homes in banks inventory, and 391 in pre-foreclosure in Springfield. Foreclosures will continue to be a drag on the housing market by holding down prices, and increasing the inventory.
This week it was reported that consumer confidence fell to 52.5 in December from 54.3 in November in spite of an increase in consumer spending, up 3.5% over the Christmas shopping season. This was followed by the Case-Shiller report that home prices fell in all 20 major metropolitan housing markets.
These are the results of government policies upon the housing market, and economy. You may or may not choose to see this as gloom and doom, but that won’t change the fact these are the results of government policy impacting the private sector. The big unknown variables are the final costs for Obamacare, FinReg, EPA regulations, price increases for food, gas, and the ominous debt bubble that will burst should there be a bond crisis.
Stay tuned, after grinding up and processing all this information, making calculations inclusive of the known and unknown variables, up next my prediction for the housing market for Springfield Illinois 2011. In one year we’ll see if these predictions come to pass as did my predictions for 2010.
The opinions expressed here are solely those of Fritz Pfister or identified sources, and not necessarily those of RE/MAX Professionals of Springfield, or RE/MAX International.
