As with all New Year look-aheads in this space, begin with Peter Drucker: “Nobody can predict the future. Stick with a firm grasp of the present.”
Thus a focus on where we are, and things to watch, not wild swings at the blue sky.
Then note that we focus on real estate, investors and owner-occupants, mortgages and credit. The stock market does affect the economy and interest rates from time to time, but its wanderings defy grasp, firm or otherwise.
Changing my mind is a painful process. An original hypothesis may have grown obsolete, but a new one can double the chance of error. Nevertheless, the U.S. economy is on a better footing and facing lighter headwinds than any time since 2007, and maybe since 1998.
On the turn of the century we labored in the goo of a blown stock bubble, and then splattered credit and housing bubbles all over our faces. The bulk of those messes is past. The most durable and stiff breeze against us, still: Since circa 1990 global competition has capped U.S. wages.
The table set, here follows the watch list:
Incomes
Above all else, watch incomes, especially wages in the bottom two-thirds of the workforce. Stagnant income has been the primary force frustrating the Fed’s stimulus, and tripped every Fed forecast since the show stopped in 2008.
Inflation
Until incomes grow, a ramping of inflation is impossible. That was your dad’s — or granddad’s — problem.
The Fed
So long as incomes and inflation behave, the Fed can and will continue extreme stimulus. It has to pull back from QE and will, even if the economy slows.
Credit
Next to incomes the most important thing to watch. We cannot accelerate, or even get off Fed life support without it. My very smart friend, Paul Kasriel, has detected an acceleration in bank credit, one strong enough to offset the gradual end of QE. I can’t find it. I will look, early and often.
Regulation
Ow and ouch. Most folks have noticed the difficulty the administration has had with “Obamacare.” These are the same officials who have presided over implementation of Dodd-Frank. The nation has felt the chaos of “Obamacare” for two months. The same people have been rearranging the financial world for four years. It’s amazing that we make any loans at all. At banks the combined effects of new capital requirements and the Volcker Rule are incalculable, but none lead to more credit.
Mortgages
Under the heading “Everybody Gets Lucky,” the White House has at last succeeded in replacing the Fannie-Freddie regulator. The White House’s intentions (trying fitfully for three years): Find somebody who would make life easier on underwater households, specifically by forgiving loan balances, a very bad idea. Now they’ve got their guy, Mel Watt, but the foreclosure tide has receded to scattered puddles. However, he may be just the man to lift the dead hand choking mortgage credit. At the top of the we’ll-see list.
Housing
Will not lead a cyclical recovery. Not. See “incomes,” above. Also far too many households damaged by the Great Recession. Good jobs replaced by poor ones, savings exhausted, credit damaged. Hey, Mel Watt! Want to do something useful for foreclosed families and the nation? Shorten the punitive lock-out intervals for new mortgages. Housing will over time repair itself the old-fashioned way: As rents rise, a new generation will grasp the big benefit of homeownership: The monthly payment stays put, and the mortgage balance falls over time for the persistent and disciplined.
Wild cards
The whole friggin’ outside world! Which is today a lot bigger relative to us than it used to be. One major nation is in genuine recovery: the United Kingdom. Europe is a wreck with no structural political progress at all, financial and social stresses rising. Japan’s risks are internal, but we’d all get wet in the tsunami following implosion. China is an all-time black box. Makes us look well-governed. Perverse benefits: Trouble over there might help here, just as the U.K. looks safer for business than the Continent.
Rates
Oh, that. Mortgages will rise into the fives on the slope of GDP. Or not. :-)
Lou Barnes is a mortgage broker based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.
