Macroeconomic Forecast Paper

Macroeconomic Forecast Paper

Economics for Managerial Decision Making -- ECO 533

Table of Contents

Macroeconomic Forecast Paper 1

Company Background 3

Industry Background 3

Purpose of Paper 4

Macroeconomic Forecasts 4

Mortgage Bankers Association 4

MBA: Long-Term Economic Forecast 5

Federal Reserve 6

Federal Reserve: Monetary Policy and the Economic Outlook 7

Bureau of Economic Analysis 8

Housing and Urban Development 9

"Why Not in Our Community" Removing Barriers to Affordable Housing 9

Variables to be Forecasted 10

Gross Domestic Product 11

Income Levels 13

Employment Growth 13

Interest Rates 13

Housing Starts 14

Economic Reasoning for Forecast Differences 15

Implications of Forecasts on Planning & Operations 15

Recommendations 19

References 21

Company Background

RE/MAX is one of the fastest expanding real estate franchise operations in the United States and is an independently owned and operated network of offices and member sales associates. Dave and Gail Liniger of Denver, Colorado founded RE/MAX, in 1975. Their dissatisfaction of the real estate business pushed them to start the business since, "regardless of an operation's size, most real estate offices used the commission-split system, requiring sales professionals to forfeit half of their commissions to their brokers in exchange for an office environment and company services" (Official RE/MAX Web Site, 2005a, para. 2). What transpired was an industry hampered by high turnover with staff that did not have the experience or level of professionalism to make organizations profitable. RE/MAX used high commissions, advanced support services and national advertising to attract and retain the best associates. The associates paid the broker a fixed management fee, which gave them the freedom to succeed and prosper. "In an industry rife with mergers and acquisitions, RE/MAX is the only major real estate network still owned and directed by its original founders" (Official RE/MAX Web Site, 2005b, para. 9). As of 2004, RE/MAX had posted another record year, not only in revenue but also in new agents recruited.

Industry Background

The United States has an economy that supports private and commercial real estate ventures and this market is growing. A recent article by Robert Schiller "argues that housing in many cities is undergoing the same irrational exuberance as stocks did in their bubble days" (Schiller, 2005, p.74). What is driving this activity and will it continue, into the foreseeable future? With increasing housing prices, as witnessed across the U.S., is this a time to invest in real estate? "The fact is, according to many industry experts, a major national housing boom may be brewing over the next decade" (Earl, 2005, p.1).

Purpose of Paper

For RE/MAX, this macroeconomic forecast paper performs the following:

* Assess the accuracy of macroeconomic forecasts from various forecasting groups

* Identify economic indicators are important to RE/MAX's future

* Determine reasons for differing economic forecasts

* Quantify the implications of the forecasts on planning and operations

* Provide recommendations, including risks and opportunities

Macroeconomic Forecasts

This section analyzes and assesses the forecasts provided by three recognized macroeconomic forecasting groups. The accuracy of their forecasts is analyzed to determine the accuracy of their forecasts, based on their past performance. These forecast groups include the Mortgage Bankers Association (MBA), the Federal Reserve, the U.S. Department of Commerce's Bureau of Economic Analysis (BEA), and the U.S. Department of Housing and Urban Development (HUD).

Mortgage Bankers Association

The Mortgage Bankers Association is a forecasting group used to assess macroeconomic factors such as mortgage data, interest rates and housing activity that serve as a direct input to the strategic plan for RE/MAX Corporation. The MBA is an industry leader in the aggregation of microeconomic factors into macroeconomic forecast as illustrated in their recently published "Long Term Economic Forecast "(Mortgage Bankers Association Web Site, 2005).

Key attributes of the MBA are the following:

* National association representing the real estate finance industry, headquartered in Washington, D.C

* Ensures the continued strength of the nation's residential and commercial real estate markets by expanding homeownership prospects through increased affordability

Membership includes 2,900 companies including mortgage companies, mortgage brokers, commercial banks, thrifts, life insurance companies (2005)" (Mortgage Bankers Association Web Site, 2005).

MBA: Long-Term Economic Forecast

In April of 2004 the MBA released its' long term forecast for the US Economy and Housing Finance market that spanned 2004 - 2006. The MBA forecasted strong GDP growth rates for this period that would be near or in excess of 4%. Key points of this forecast as they relate to 2004 in particular have been extracted for assessment to determine the overall confidence level in the long term forecast for REMAXs' strategic planning.

 MBA Forecast: Real GDP growth would average