Can a hot housing market save the economy from the deep freeze?
msnbc.com
June 11 issue — Carl Statham isn’t sticking to the script. In a sputtering economy, consumers are supposed to rein in their spending, particularly on big-ticket items. Yet even with the faltering stock market and headlines about mass layoffs, Statham and his wife, Gloria, recently moved into a new $1 million home near Chicago—complete with an indoor driving range and putting green to lower his 12 handicap. It’s not that the Stathams are immune from the ups and downs of the economy. They own an auto dealership, and sales have softened as shoppers downshift to buying cars based more on need than want. But as Statham lines up a practice drive in his 6,000-square-foot home, he seems confident that his new house is a better bet than Tiger Woods’s sinking a six-inch putt. “A home is the safest investment to make right now,” he says.
STATHAM’S UNSHAKABLE FAITH in real estate goes a long way to explaining one of the most surprising aspects of the current economic slowdown: the remarkable strength of the housing market. While key measures of economic health—car sales, productivity and capital spending—are slipping, home sales have been strikingly resilient. In the first three months of the year, sales of existing homes and condos were the highest ever, and sales of newly built houses also set a record for the first quarter. Even after a slight drop in April, sales are still near record levels. And that’s good news, because housing sales play a crucial role in the nation’s overall economic health. By some estimates, every dollar spent on home purchases creates a ripple effect, generating an additional 20 to 50 cents in spending on things like washing machines, couches and landscaping. On average, consumers spend about 40 percent of their income on housing and related costs. Overall, the housing sector accounts for about 14 percent of the nation’s economy. “It’s incredibly surprising that the housing market hasn’t faltered,” says Joel Naroff, who runs an economic-consulting firm. “But as long as people continue to buy homes, the economy is going to stay out of recession.”
The real-estate boom is a coast-to-coast phenomenon, with strong sales in most price ranges and regions. The National Association of Realtors says that sales of homes to first-time buyers in the $100,000 to $120,000 price range jumped 46 percent in the first quarter. Homes at the high end—$500,000 and up—are also popular, with sales up 5.5 percent. “If someone prices their house well, it will sell the day it comes on the market with multiple offers,” says Elaine Young, a Beverly Hills Realtor who specializes in multimillion-dollar mansions. “Nothing has cooled off.” The South and West were the busiest regions for home sales, followed by the Midwest and Northeast.
The strong demand has been a blessing for sellers, driving up prices across the country. The Realtors’ association reported that 32 metro areas posted double-digit annual increases in selling prices in the first quarter. The biggest winner? Sacramento, Calif., where the typical selling price was $163,400, an impressive 23 percent jump from a year earlier. In Memphis, Tenn., prices rose 17 percent. Even in the San Francisco Bay Area, which has been hit hard by dot-com implosions, prices increased 15.5 percent to $483,300.
“If you breathe, you can get a mortgage these days.”
— KARL CASE
a Wellesley economics professor So what explains this passion for moving on up? Economists and real-estate experts, at first perplexed by the unrelenting stampede of home buyers, have concluded that a rare alignment of financial and demographic trends are driving the market. Among them:
Low interest rates. Interest rates have rarely fallen over the last 30 years to current levels of about 7 percent and stayed there for any length of time. Home sales are tied directly to interest rates—a percentage-point drop typically results in an additional 250,000 home sales, says David Lereah, chief economist for the National Association of Realtors. Low rates also prompt many homeowners to refinance their mortgages, freeing up cash to spend on remodeling and appliances that help keep the economy moving. What’s unusual is to have such low interest rates after the economy has overheated. Such feverish growth typically leads to inflation and higher interest rates, which in turn choke off the housing market and further weaken the economy.
Demographics. The most recent Census also showed that the nation’s population jumped unexpectedly by 32.7 million, and many of the new Americans are immigrants who are eager to buy homes. The population of Hispanics, for example, jumped 58 percent in the decade to 35.3 million. Nicholas Retsinas, director of the Joint Center for Housing Studies of Harvard University, estimates that in some housing markets, recent immigrants account for 15 to 20 percent of sales. The sharp jump in single-parent families also boosts demand for housing.
The baby-boom generation—those roughly 80 million Americans born between 1946 and 1964—also deserve credit for helping boost the housing sales. Many of them are still buying first, if not second, homes. And the boomers will prop up the market for years to come. Research shows that people still buy homes well into their 60s (82.9 percent of people 65 to 69 owned homes in 1999, compared with the 67 percent national average).
Low unemployment. For all the news of corporate layoffs, the current 4.4 percent unemployment rate is still low by historical standards. If people have jobs, they generally feel confident enough to buy homes. Luis and Emily Gamarra certainly felt optimistic enough to trade up to a new $330,000 home in the San Fernando Valley, Calif. Luis, a teacher, and Emily, a human-resources manager at Warner Bros. Studios, say they weren’t deterred by signs of a shaky economy. “We both have college degrees,” says Luis. “No matter what happens, we’ll always have good jobs.”
Easier credit. Bankers have developed new credit-scoring techniques and new options—like no-money-down loans and higher-interest loans for those with poor credit—to bring homeownership within reach for many Americans. “If you breathe, you can get a mortgage these days,” says Karl Case, a Wellesley economics professor. Also, to a lot of people, a mortgage looks like a great investment, particularly after recent stock-market drops lopped off trillions of dollars in wealth and reminded investors that stocks can fall. Now people are more comfortable investing in tangible assets. “If the economy goes down, it seems values will plateau, but I don’t think they’ll go down,” says Susan Witz, who, with her husband, James, recently bought a $600,000 home in Wilmette, Ill. Housing is where most of Americans’ wealth is tied up. Real estate makes up about 40 percent of assets of a typical American household, while stocks and bonds account for less than 15 percent, according to a 1998 government survey of consumer finances.
As solid as the housing market appears for now, economists caution that it could soften if unemployment or interest rates jump significantly. “Don’t confuse resiliency with immunity” from economic downturns, warns Retsinas of Harvard. But it’s unlikely to crack the foundation of the housing market. There are simply too many people with an unwavering drive to own a home. For now, the American Dream is creating a dream scenario for the nation’s economy. |
