Watch the Trend of the GDP

The next thing to watch is the TREND of the GDP. I post the results each month as it is released by the Bureau of Labor Statistics (BSI). This is the best way to assess how the economy is doing. The problem is that the statistics are a quarter behind reality. As an example, at the end of October, BSI will release the first estimate for the 3rd quarter.

The 2nd quarter GDP was 1.3%. This is trending down from 2011.

- 2012 original estimate was between 2% - 2.5% but estimates have been moved to 1.8%

- Economy will continue to move forward although at a slow pace due to overall lack of demand

- A series of mini financial crisis will impact this number

- Fiscal Cliff – increased taxes and decreased government spending – tax increases in social security, Bush tax cuts expire and AMT patch = $330b out of the consumers pocket which equals 2% of overall GDP. This alone would put us back into recession.

- Accounting for the changes in the tax code in 2013, GDP is predicted at 1.9% Q1, 1.5% Q2, 1.6% Q3 and 1.6% Q4

- The real estate business is one of the best leading indicators - we are usually ahead of the curve in terms of what is happening in the economy – up 29% in sales and 26% in closings YTD

Although real estate has been doing better over the past 4-6 months, in my opinion, this is a false sense of a recovery. It is a supply issue – resales and new homes. For several years, it has been a buyer’s market. We are shifting very quickly to a seller’s market which may result in seller’s accepting house sale contingencies, again.

Remember, as housing goes so goes the economy. To have a thriving economy, we need to have housing starts be at the 1,200,000 level per year.

Housing Starts                          2008                      560,000

                                                2009                      581,000

                                                2010                      539,000

                                                2011                      697,000

                                                2012                      720,000 forecast

                                                2013                      850,000 forecast

Source: NAHB   This represents 6-yrs of pent-up demand. Because of the lack of supply and the increase in demand, prices will start to rise in the 4th quarter of 2012. As prices rise, it would not be out of the question for interest rates to rise. Yes, the Fed said that they would keep rates low through 2015. But moving the mortgage interest rates higher to say 4.5% --- the rates would still be at historic lows. This will of course dampen any housing recovery and your buying power will decrease.

Low inventory, high demand, increase in prices, higher cost of money, lack of a labor force and material shortages will dampen any housing recovery. Housing is still upside down but now for different reasons.