So here it is - another chance to forecast the future…and maybe get it very wrong. You'd think after the past three years of darn good predictions, I'd leave well enough alone. But nooooo, I am going to stick my neck out again with the forecast for 2006.

Everybody in our business wants to know if rates will go up, down or stay the same in '06. And more than ever, they want to know about the housing market. Both numbers depend on economic factors, so we will start there. I know you are tempted, but don't skip ahead.

It's been said that money makes the world go around…
And it's sure easier to have some money if you have a job. The story here is that if you want to work, do so responsibly and are reasonably skilled, your chances of finding work are very good. Expect the rate of unemployment to remain near present low levels of 5% around the US. And as was the story in 2005, look for more than 2 million new jobs to be created. Overall, expect a good healthy outlook for the employment market.

Corporate America has been ringing up more than double-digit profits for the past few years, which has been good for employee's earnings. And with labor markets tight in some areas, expect higher offers to attract talent.

Technology is making it easier than ever to unleash the entrepreneurial spirit in many individuals. This provides wealth creation opportunities for self-employed and start up companies.

It came easy, and it went just as fast…
With a negative savings rate in the US, we are a nation of spenders. That's good for the economy, but can come back to haunt those who don't have enough put away for retirement.

97% of American's don't have a college savings plan for their children. If that weren't scary enough, less than a third of workers think they will have enough to retire in a way that sustains their accustomed lifestyle. So what does this tell you? Great opportunities lie ahead for those mortgage professionals who are fiscally literate and can coach their clients. It also tells us that we must be aligned with other financial professionals who can best assist our customers. Clients need and are thirsting for assistance in this area, and originators who provide it will be handsomely rewarded.

Cutting into the budget of the American household is the rising cost of oil. Don't expect it to let up much. Oil should be over $60 to under $80 for most of 2006. Gasoline should ride between $2.50 and $3.00 a gallon. That's quite a bit higher than what we have been used to, but still a lot less than most of the world pays.

Some well-known brokerage firms are calling for $100 per barrel oil prices…but I just don't see that. The good thing about higher prices is that it creates opportunities. People get more creative when the rewards for doing so increase. At $10 - $15 a barrel, there isn't a lot of incentive to find other energy sources or to pull oil from more difficult areas. But as prices rise, other sources become much more viable as potential alternatives.

It costs a little more…
Inflation made an entrance to center stage in 2005, after hiding like a "turtle head" for quite some time. Just two and a half years ago, the hot topic was deflation. But the revival of inflation caused interest rates to finally move higher in 2005 because inflation is the arch enemy of bonds and interest rates.

Inflation will still be around, but expect it to be a bit tamer due to the series of Fed rate hikes.

The recent 25-year high reached in Gold prices can signal more inflation ahead. And this had been a good barometer in the past. But the move higher this time may have more to do with supply than inflation, so I am putting a little less weight on this as an indicator.

Good-bye "Maestro", hello "Big Swinging Ben"…
After 18 _ years, the baton will finally be passed from Alan Greenspan to Ben Bernanke as the new Fed Chair. Look for another hike of 25bp at the January 31st meeting, which will be last with Greenspan at the helm. The subsequent Fed meeting will be held in March. I think that Big Swinging Ben will need to flex some muscle and show that he is just as vigilant against inflation as Greenspan, so figure on another 25bp hike. After that, market conditions will dictate whether another hike is needed before the long string of hikes that began in June of 2004 will come to an end.

The Fed Funds Rate affects both Home Equity Loans and Adjustable Rate Mortgages, so it is very important to follow. Yet it is interesting to note that the Fed Funds Rate does not carry much weight when it comes to fixed mortgage rates, which are much more concerned with inflation. Knowing that the Fed Funds Rate will move higher tells us that HELOC loans, as well as ARM loans will continue to move higher in 2006.

HELOC rates will climb to an average of 8.5% as the Fed grinds rates higher. This gives us a great opportunity to refinance those with large balances on their HELOC, even if the rate on their current first mortgage is lower.

LIBOR (London Inter-Bank Offered Rate) loans move with our Fed Funds Rate, so they will pop up early in the year. MTA (Monthly Treasury Average) based loans will continue to creep higher, but stay well below LIBOR.

And speaking of ARM loans, Greenspan expressed a concern about the possible overuse of "exotic" ARM products, such as interest only loans or option ARM's. Yet when these loans are originated responsibly by an educated originator, they certainly can be a good fit for some clients...determining "suitability" of products for your clients is key. Understanding how these products work and explaining them properly remains very important this year as regulators may begin to analyze these loans much more carefully. Additionally, remember that 40% of all originations in the past several years have been ARM loans. Many hybrid ARM loans may be coming due soon, and LIBOR-based loans are seeing their rates moving higher as well. This provides a great opportunity for us to congratulate our clients on how much money has been saved using that strategy over the past several years, but help them consider if a new strategy may make sense for them now.

Bottom line on the Fed: The Fed Funds Rate hikes should end in 2006, with a possible turn towards rate cuts by year end or in early 2007.

Bubble talk…
We will enter the fifth year of the anticipated housing bubble. Yes, for the past four years the media has beat the drum on a looming housing bubble. But all the media bubble hype has only served to hurt those buyers who were scared off from purchasing a home earlier and now see how much more those homes cost.

So is there a bubble? The simple answer is no. But some areas may cool a bit after a torrid run up, especially in the top tier of their price category.

However, a healthy jobs market and low mortgage rates will sustain a solid overall Real Estate market. Don't look for a bust in prices…just a slower rate of appreciation. I expect most of the country to see home prices appreciate by 4% to 7%.

But remember, unlike stocks, home prices do not have specialists or market makers. So many people pay or ask too much for their home. It is funny to see someone buy a home for tens of thousands over the asking price and then wonder why their home has not appreciated. Moreover, some purchase their home for say $300k and then try to sell it a year later for $400k. When no one bites, they say the market is soft. Bottom line, buy your home smart or sell your home reasonably.

A Stock Market?

I think it is better to consider it a Market of Stocks. And in 2006 the selection of those stocks will be very important. Don't look for a "dartboard" year, meaning you can throw a dart and pick a stock because they will all go higher. Corporate profits will simmer down, so picking winners will be tougher.

Look for the high tech sector to shine. A flood of computers were bought before the famous Y2K craze, and they are about ready to be overhauled. Energy stocks will still do well, but be cautious of Natural Gas companies as Natural Gas prices will decline from their spiked up levels. I also like biotech and healthcare. An aging population and technological advances in medicine make this area ripe for a move up. Watch for the scheduled spring release of a new drug called Acomplia from Sanofi (SNY), which has shown huge results in weight loss and drops in cholesterol…anyone interested in that?

Rate outlook
Rates will rise a bit due to some inflationary pressure, but not too bad. Keeping rates at good levels will be continued foreign demand and asset reallocation. Our bonds look pretty good to foreigners, who are offered lower returns in their home country. And the Dollar has been stronger and may offer some bonus returns as the greenback makes further gains against most major foreign currencies. In fact, foreign buying accounts for almost half of bond purchases in the US.

As our population ages, more assets will be reallocated from riskier stocks that provide growth to safer bonds, which provide preservation. These factors should keep fixed rates between 6% and 7%, with an average of 6.5% for the year.