Isaac Newton Saves Real Estate Market

In 1687 Isaac Newton published his first Law of Motion which – “states that that once something is in motion it will remain in motion unless disrupted by a force of equal or greater force.

Recently, I had the pleasure of hearing Dr. Bob Bauer, who is a nationally recognized global economist; speak on the state of the market, the prospects for recovery and what he sees ahead for the United States.  Here are the highlights:

Recession and Recovery

The recovery is over – we are actually in an economic expansion. The Expansion is in motion and  it very likely will continue for an extended time! The fundamentals that make this so include:

o   Corporate profits at record levels – companies have a lot of cash

o   Consumer demand has been falling and savings increasing

o   The private sector job market is slowing improving

o   Government Spending is coming down

o   Commercial building is recovering

o   International economies are doing very well led by Germany &  France, even Italy and Greece have seen  growth this year.

o   Austerity measures being forced into place are going to help private growth throughout Europe despite the headline desperation about Greece and defaults.

o   China is still booming with 8.5% growth annually.

o   The drags on the economy since 2008 are therefore almost gone

Summary: All this adds up to some very powerful global forces that should ensure United States growth as we continue to participate in the world market. Once we look beyond the stories of lost jobs, foreclosures and tough times, we realize that the US is still a global leader (maybe being challenged by others – and isn’t that a good thing).  Global and local Growth leads to profits which creates jobs as companies invest.  This leads to purchases of consumer items and hard assets like residential real estate. Folks continue to get married, have babies and want to work, and look for opportunities to live a better life than those before – it is in our DNA –we cannot deny that force, especially once in motion!

Risks (What could be that opposite Force)

o   A massive earthquake in the US – (can’t control that so let’s move on)

o   Oil rising again to a price that chokes off consumer spending again

o   Euro Debt Default – Could happen in Greece or other countries but likely to be contained – the short term impact could be that rates rise suddenly

o   Inflation – Yes, we have a long term problem here due to the large deficit our government runs, however we have time to get it solved, especially since we see the impact in smaller nations

Interest Rates

o   Are likely to climb .750% by end of 2011 and 1.5% in 2012

Residential Housing

  • Bob likes real estate in general – prices are back to levels where investments make sense again so only a matter of time
  • Investors with cash getting great deals
  • Foreclosures –there are a bunch still to hit the market and those are selling at a discount to the non-distressed market on average. However, if you are selling a non-distressed home you are able to fetch a considerably higher price from the marketplace from buyers looking to avoid all the difficulty in buying a distressed home.
  • The housing correction should be over by late 2012.

There are some headwinds holding back a faster improvement.  In normal economic times 1.5 million new households are formed annually that need housing (college graduates, couples getting married, divorces, immigration etc.).  Household formation is down due to the recession.  Recent college graduates come home when they cannot find a job or when then lose a job. After a foreclosure or short sale many families move back with parents or other family members and some couples have delayed divorces or just stayed living together to save money.

We all know that this will not last – demand is building and the real estate market is sure to experience strong “First Law of Motion” as inventory gets absorbed.

Takeaway – Expansion has started and what kept us in recession is gone.  The forces that create economic growth have already taken hold and will only get stronger over time.  Many economists feel that we could see an expansion over the next decade or two to rival the growth in the US seen in the 80’s and 90’s  - so let’s learn from our mistakes and not repeat them.  Keep your thoughts and plans in line with Isaac Newton’s 1st Law of Motion and make yourself an unstoppable force.

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