Economy on the Rebound: What Does This Mean for Florida Home Loans?

As the economy is off to a roaring start in 2006, potential home buyers and sellers must be wondering how this will affect future deals. Many economists are saying the Federal Reserve will raise interest rates in the months ahead.

The latest forecast from the National Association for Business Economics has gross domestic product growing at a robust 4.5 percent annual rate from January through March. If this proves to be accurate, it would mark the best showing since the July-through-September period in 2003, when the economy expanded at a blistering 7.2 percent pace.

The beginnings of recent economic growth

Growth slowed to a crawl over the final quarter of 2005. The 1.1 percent pace was the most sluggish in three years. Reasons for the slowdown included lingering fallout from the Gulf Coast hurricanes, along with belt tightening by consumers and businesses.

“Our forecasters expect the economy to shake off the effects of last year’s hurricanes and surging oil prices,” said the association’s president, Stuart Hoffman, chief economist at PNC Financial Services Group.

The forecasters predict this robust growth will lead the new chairman of the Federal Reserve, Ben Bernanke, and his central bank colleagues to raise interest rates at least twice more this year. Bernanke will preside over his first interest-rate meeting on March 27-28.

For nearly two years, the Fed has tightened credit to keep the economy and inflation on an even keel. The most recent rate increase came on Jan. 31, at Alan Greenspan’s last meeting as Fed chairman. A key interest rate controlled by the Fed now stands at 4.50 percent, the highest in nearly five years.

The future of interest/mortgage rates

Economists, including some who had been uncertain about the future direction of rates, now say this rate will climb to at least 5 percent this year. After that, analysts say, the Fed probably will take a break and leave rates alone for a while.

In 2007, however, the forecasters predict the Fed gradually will start lowering this rate.

For all of 2006, the forecasters expect the economic growth to be around 3.3 percent. That would be a solid performance, but slightly below the 3.5 percent increase in GDP in 2005. Economic growth in the first half of this year is expected to be better than the second half.

The economy should expand by a respectable but slower 3.1 percent in 2007 as the toll of higher borrowing costs, a slowing housing market and elevated energy prices is felt, according to the association.

In terms of risks to the economy, forecasters rank rising energy prices as the biggest potential wrench. Increasing interest rates and falling home prices were other potential risks. Long-term interest rates, such as mortgages, have stayed at relatively low levels in the United States even as the Fed has boosted short-term rates.

If these long-term rates were to jump sharply or if housing prices, which have risen rapidly, were to fall, it could spell trouble for the housing market, overextended homeowners and the overall economy.

For now, however, individuals/families seeking a Florida home loan have every reason to believe that 2006 will be a stellar year in the real estate market.