Ask the Expert

0
1857

Recovery’s Downside: We’ll Take It

 

We have been accused of being too optimistic in our projections.

For example, last year, when economists were calling for a double-dip recession, we downplayed this threat. When analysts have pointed towards a housing market that will not recover for years, we pointed out the economic factors that could turn things around quickly. These factors include projected population growth, increased household formulation in a recovery and continued governmental aid for the sector.

Certainly, the stock market is displaying strength, which can be seen as the market’s belief in the economy’s growth potential. The fact that Europe has approved the Greek bailout package is another positive sign.

But today, we are going to look at the other side of the coin. Economic growth is what everyone has been rooting for. But it does not come without risks. What are these risks?

We will cite two: the risk of inflation and the risk of higher interest rates.

The Federal Reserve Board has seemed to discount the risk of inflation, but if there is no risk then why has the price of gold continued to be so strong? Gas prices are now topping $4 per gallon, a price that will affect consumer purchasing power.

The Fed also has told us that rates will stay low for at least two years. We need to point out that the Fed does not really “control” rates. If the economy keeps recovering, rates will rise and the Fed will have no choice but to renege on its forecast.

Actually, the Fed would love to do that because it would mean the economy, and especially the housing market, is on the road to recovery.

Everyone has been hoping for a stronger recovery. We just need to point out that if this recovery becomes stronger, there are negative factors we will have to deal with. If the result is more jobs and a healthy economy, it is a price worth paying. For consumers who have been waiting to purchase a home or a car – remember that you will get no warning that rates are about to rise and the sales are over.

***

Housing affordability rose to a record high during the fourth quarter of 2011, which means a home buyer’s purchasing power is greater than it ever has been before, according to the National Association of Home Builders Housing Opportunity Index.

The index showed that 75.9 percent of all new and existing homes sold in the fourth quarter were affordable to families earning the national median income of $64,200. That marks the highest percentage recorded in the index’s 20-year history.

“Today’s report indicates that home ownership is within reach of more households than it has been for more than two decades,” says Barry Rutenberg, chairman of the National Association of Home Builders.

Source: National Association of Home Builders