Five Star Real Estate

1. Dr. Gregg Dimkoff
Seidman College of Business
January 17, 2012
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2. Gross Domestic Product
 GDP is the most common way to measure
how the economy is performing.
 It usually is reported as REAL GDP.
 Real GDP removes inflation from its
measure of growth.
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3. GDP Definition
The sales value of all final goods and services in
the US.
 Excludes sales outside the USA by US
companies
 Includes sales in the US by foreign businesses
 Measured indirectly – Based on estimates of
wages and salaries received, dividends,
personal consumption, etc.
 The best overall measure of economic growth
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4. Historical GDP Growth Rates
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5. Why is GDP Growth Important?
The higher the growth,
The higher the standard of
living
The lower the unemployment
rate
Higher stock prices
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6. 2012 GDP Forecasts
 The Conference Board 1.8%
 Kiplinger 2.3
 Org. for Economic Cooperation
 and Development – OECD 2.0
 Congressional Budget Office 3.1
 Wall Street Journal Survey of
Economists 2.4
 Federal Reserve 2.4 – 2.9
 2011 Growth 1.8%
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7. Conclusions about GDP in 2012
 Consensus average is about 2.3%, about
1/3 more than in 2011
 2.5 – 3.5% growth is considered to be
strong
 Economic growth in 2012 will be
moderate.
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8. The Outlook for Interest Rates
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9. Current Interest Rates – National Averages
91-day Treasury bills 0.01%
1-year CDs 0.34
5-year CDs 1.17
30-year fixed mortgage 4.18
15-year fixed mortgage 3.38
10-year Treasury 1.87
30-year Treasury 3.03
10-year Munis 1.78
30-year Munis 3.66%
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10. What will happen in 2012?
 No significant increases in interest rates.
 Why not? Two reasons:
Economy is still soft – Policymakers will keep
the spigots open to keep rates low.
The Federal Reserve has a “hands off” policy as
presidential elections approach.
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11. A Warning
 Interest rates are at, or near, lows for the past 60
or more years.
 They have one way to change – up.
 Once they begin rising, the prices of existing
bonds will fall.
 The more rates rise, the great the decline in bond
prices.
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12. US Unemployment Rate
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13. Unemployment
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14. Unemployment Rate Forecasts –
End of 2012
 Currently 8.5%
 Kiplinger 8.5
 Indiana U economists 8.4
 Congressional Budget Office 8.2
 Moody’s Analytics 8.7
 Federal Reserve 8.5 – 8.7
 Wells Fargo Securities 9.2
 Bloomberg News Survey 8.3%
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15. Unemployment Rates in MI –
November 2011
Michigan 9.8%
Ann Arbor 5.2
Grand Rapids – Wyoming 6.5
Holland – Grand Haven 6.5
Kalamazoo – Portage 6.9
Muskegon – Norton Shores 8.4
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16. Conclusions about the 2012
Unemployment Rate
 Most forecasters don’t think the rate
will fall much.
 If it doesn’t, economic growth – GDP –
will grow slowly.
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17. Federal Debt
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18. Ratio of Publicly Held Debt to GDP
Greece 144%
US 100
Ireland 94
Portugal 83
Hungary 80
Germany 79
A ratio over 90% constrains economic growth.
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19. US Debt is Getting Bigger
 On 1/1/12,
2011 US GDP was $15,064,816,000,000
US debt was: $15,170,600,000,000
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20. When Interest Rates Rise
 A 1% rise in US Treasury interest rates will
add this amount to the national debt:
 1% times $15 trillion = $150 billion per year
 That’s $1.5 trillion over 10 years.
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21. What’s the Answer?
 Higher economic growth
 A cap on spending increases
 Changes to Social Security and Medicare
 No new expensive social programs
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22. Stock Market Returns
2011 2010 2009
 West Michigan -5.7% 41.4% 32.5%
 Dow Jones Industrial 5.4 10.1 18.8
 S&P 500 - 0.5 11.8 23.5
 NASDAQ Composite - 1.9 16.8 43.9
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23. The Stock Market
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24. Dow Jones Industrial Index
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25. S&P 500 Index
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26. NASDAQ Composite
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27. Dow Jones Precious Metals Index
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28. Concerns for 2012
 European recession will affect the US
economy
 China’s growth appears to be slowing,
affecting world-wide demand (GDP)
 Gridlock in Washington, D.C. prevents the US
from dealing with its problems
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29. Positives for 2012
 Economy will continue to strengthen during the
year, with GDP growth stronger than in 2011.
 Unemployment rate will continue to fall modestly
 Stock prices will be volatile
 Manufacturing will continue to be strong
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30. Final Comments
 The economy is recovering moderately.
 The unemployment rate will continue to fall
slowly.
 2012 looks like a good year, and even the real
estate industry will recover.
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