Looking ahead, again

 

guest commentary by Ethan Nobles writing on behalf of the Mortgage Bankers Association of Arkansas. He can be reached at [email protected]

Economists have been making predictions for the past few years about when the United States might realistically see an economic recovery.

Those who follow projections for long enough can, fortunately, pick up on bits and pieces of data that — taken together — start to paint a realistic picture. Back in July, Federal Reserve Bank of St. Louis President James Bullard talked about a concept he called the “bubble economy.”

Bullard said, in essence, there are two economies to track — the fundamental economy which grows at 1.75% of our gross domestic product (GDP) every year and a bubble economy that grows at a rate more substantial than that. Bullard said the fundamental economy is sustainable, whereas a bubble economy is not. From 2001 through 2007, the GDP grew by an average of 2.4% per year.

Bubble economies, Bullard said, eventually come crashing down and that’s exactly what took place starting in 2007. GDP falls below the fundamental growth rate of 1.75% for a time and that slow growth is correctly called a recession.

Bullard said he expects the GDP rate to return to around 1.75% by the end of this year and, at that point, we can start talking about an economic recovery.

The national Mortgage Bankers Association, in early October, released some projections that give both credibility to Bullard’s theory and point to a time when we might start seeing a legitimate economic recovery.

The Association said GDP growth should average out to 1.3% for 2011 – a year which started with a 0.4% GDP growth in the first quarter, 1.3% in the second quarter and should average 1.8% for the last six months of the year. The Association predicts GDP growth of around 1.7% next year prior to an economic recovery in 2013 where growth could reach 2.4%.

Meanwhile, the Association expects unemployment to keep growing until the second quarter of 2012 when it is projected to improve through the rest of that year and into 2013.

The Association has some good news for those watching mortgage rates. Fixed mortgages should remain low, hitting 4.5% on a 30-year mortgage by the end of this year, falling a bit to 4.4% in 2012 and climbing to 4.9% in 2013. The Association predicts home prices will improve next year and increase considerably in 2013.

Additionally, the Association predicts refinance applications will drop in 2012 and increase a bit in 2013. The group calls for more home sales next year and projects much improved housing markets in 2013.

The good news here is that groups like the Federal Reserve and the Mortgage Bankers Association are starting to see the light at the end of the tunnel. Neither group is projecting a rapid and miraculous recovery, lending credibility to their modest projections for long term growth.

Again, we should point out that interest rates are low and home prices are down – a great situation for those wanting to purchase homes. However, it’s clear that historically low interest rates and low prices won’t be with us forever.