Fritz Pfister

Last week I shared with you the predictions of Arthur Laffer economist, and inventor of the Laffer Curve. Laffer predicts we are headed into a double dip recession due to the impact numerous tax increases will have upon our fragile economy. Laffer said of the coming tax hikes, coupled with the prospect of rising prices, rising interest rates and more regulations next year, are causing businesses to shift production and income from 2011 to 2010.

As a result income this year has already been inflated above where it otherwise should be and next year 2011, income will be lower than it otherwise should be. Laffer continued, my best guess is the train goes off the tracks and we get our worst nightmare of a severe double dip recession.

Last week I shared that Harry Truman said there’s no such thing as the future only history that hasn’t happened yet. This week I was introduced to a different view, history does not repeat itself, but the forces that shape history do. That is from the book Aftershock by Wiedemer, Wiedemer, and Spitzer. I highly recommend anyone concerned about the economic future of America, and their personal financial future read this book.

What if Laffer is correct in his prediction of a double dip recession? How will Springfield react, respond, and perform in an even more severe national recession?

First let’s examine where we are today. The local housing market will finish the first half of the year up by about 20% in closed home sales over the first half of last year due to the tax credits that expired on April 30th, and record low interest rates.

Going forward that party is over. Don’t be mistaken, the local association of Realtors will report next week how closed sales were up in May, and a month later will tell you sales were up in June too. That’s good news, but what you probably won’t hear is that sales pending, the determining factor for future closed sales, is down. Way down, an over 50% decline in May compared to April, and 32% from last May.

The month of June closed sales are up over 20% however sales pending are down 32% from last June. The seven weeks since the tax credits expired sales pending are down 41%. Who knows for certain where the market is headed, but this is an establishing trend with closed home sales falling the second half of the year by 30% compared to the second half of 2009.

What could change that trend? Job creation adding buyers to a depleted buyer pool. That doesn’t appear to be a realistic expectation with the government reporting yesterday;

In the week ending June 12, the advance figure for seasonally adjusted initial claims was 472,000, an increase of 12,000 from the previous week’s revised figure of 460,000. The 4-week moving average was 463,500, a decrease of 500 from the previous week’s revised average of 464,000.

Folks there is no economic recovery when at a time of year jobs naturally increase they fall. In the SJR today headlines say; Unemployment rates down in 37 states in May. Sounds great right. Read the article; quote: The widespread declines were mainly because people gave up looking for work and were no longer counted.

The TARP bailout of Wall Street and banks stabilized the financial markets. That’s not a recovery. The Stimulus has failed to spark economic growth in spite of administration claims, there’s only evidence to the contrary. The one accomplishment of the Stimulus is a nearly trillion dollars in deficit spending. There isn’t any meaningful job creation in the private sector.

Reported this week new home sales fell by 10% in May to the lowest level since December. The construction industry with 28% unemployment, is vital for an economic recovery and it doesn’t appear realistic to expect construction to rebound. Why? Excessive inventory, record foreclosures, and weak demand due to unemployment.

I hope I am wrong, but Laffer seems to be right on target.

What will happen to our housing market? We’ll be one of the lucky markets that not only survives, but will perform better than most. We’ll see the number of home sales run 25% to 35% below the record years when local Realtors sold over 4000 homes four straight years, to between 3000 and 3400 home sales.

Why are we so fortunate? Affordability. While the median sale price went nuts across the country exceeding $220,000 only to fall back to below $170,000 our market went from around a median sale price of about $90,000 skyrocketing to a whopping $109,000.

Where we will be impacted, if predictions that prices are going to continue to fall across the nation, is when a family transfers into Springfield after losing money on the sale of their home, they should be wary, and probably will be wary what they spend on their new Springfield home.

This will affect primarily our upper bracket. There’s currently 80 homes listed for sale at $400,000 and higher with only 24 sold and closed in the first half of the year. High income earners will be the class most impacted by the various tax increases next year leaving them with less disposable income which affects the price they will be willing to pay for a home. If a proposed elimination for the mortgage interest deduction is implemented then the upper bracket will suffer even more.

So while the rest of the state, excepting Bloomington and maybe Champaign, and the nation suffers falling home prices, and the number of home sales, Springfield will not be as dramatically impacted. The challenge locally will be for home owners that must sell. There will be 4 to 5 home sellers for every buyer.

The wild card that could depress the local housing market would be if Laffer is correct about rising prices for other products, and rising interest rates. This would mean less disposable income and more expensive mortgage payments for prospective buyers. Then local Realtors and homeowners will have their work cut out for them. Here’s to hoping interest rates remain low well into next year, that is the rare silver lining in this very uncertain economy.

Make it a great week from Fritz & Kristie Pfister and The Pfister Success Team Inc. at RE/MAX Professionals of Springfield. If you need to sell give us a call at 652-7653. This isn’t our first rodeo as we have closed over 2100 real estate sales since 1987. Few know the market, and what to do during a turbulent economy, as well as The Pfister team. In this case experience does matter. Call 652-7653.

The opinions expressed here are solely those of Fritz Pfister, or identified sources,  and not those of RE/MAX Professionals of Springfield, or RE/MAX International.