Economic Forecast for 2011

As you know, Congress has extended the Bush tax cuts of 2001 – that’s big news for the financial markets because the extension is expected to stimulate the economy. Aside from extending the tax cuts, Congress also kept the same low capital tax gain rates and gave businesses a tax credit for investments in R&D. In addition, most workers will receive a small payroll tax break. These items all add up to one thing: STIMULUS – the kind of stimulus that supports job creation.

Because of those factors, this year’s GDP should be higher than last year’s 2.2%. Experts are predicting GDP of between 2.5% and 3% in 2011.

Unemployment is expected to drop from the current 9.8% to somewhere between 9% and 9.5%, then drop further in 2012.

Inflation is not a threat right now – it’s still below 1%.

The Fed’s policy this year will carry over from last’s year’s decision to implement quantitative easing. Accordingly, the Fed will continue to buy up to $75 billion of Treasure notes each month.

Still, the Fed can only do so much to influence long-term, (i.e., mortgage) rates, which are always affected by the overall economy, or, in this case the overall economic recovery. Most experts expect rates to rise by about .75% this year. For example, conforming rates are expected to rise from 4.5% to about 5.25%. High balance loans (up to $729,750) are expected to rise from 4.75% to 5.5% in 2011.

As an example of the rate increase, a home purchased for $850,000 with 20% down would have a higher monthly payment by $288. Another way of looking at this: purchasing power would decrease by about $60,000 with this same scenario. (If you could afford a home of $850k at 4.75%, you can only afford a home of $790k at 5.5%.)

The Mortgage Banker’s association is expecting home sales to improve by about 30% this year, as distressed sales clear the pipeline, prices start to stabilize and employment numbers improve. The National Association of REALTORS (NAR) believes higher rates will stimulate a higher volume of home sales, as any rapid rise in rates introduces a feeling of urgency (which tends to be contagious!). That said, it will be the creation of new jobs that will have the largest affect on housing sales. Expect more sales activity as new jobs are created.

Article courtesy of Natasha Lovas of Guarantee Mortgage.