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Help the Economy, Buy a House

By Charley Blaine

Buying a home pumps money into the economy and is a big reason why the economy has held up so far this year. Here are 5 reasons why business will be strong in many markets and why buying now may be a good idea.

Think about it. You buy a house (and sell your old one). You move in. And then, for the next year or so, you spend like crazy on your house.

If not for the millions who’ve been buying houses at robust rates in the last year, the economy would be in more of a mess than it is. Technology is still soft. Telecom is in a meltdown. Many retailers report weaker sales. Manufacturers are still reporting sagging business — or at least business that’s not as strong as it used to be.

5 reasons housing will stay strong

Then, there’s the surprisingly good news from housing. The National Association of Realtors sees 5.16 million home sales in 2001. That’s nearly a record. Housing starts are running at 1.6 million units, including apartments and condos, for the year, about the same as last year. About 1.2 million single-family homes may be built this year, about even with a year ago and 10% higher than the average since 1978. I specify single-family homes because so much additional spending is generated after a sale is closed. Housing experts guess (they don’t have good numbers on it) that an average home purchase pumps an additional $25,000 into a local economy.

So, anyway you look at it, a lot of us will be following up our home purchases with long hours at Lowe’s, Home Depot, Best Buy or Sears buying fencing, paint, wood, barbecues and the odd refrigerator or two. This is not inconsiderable spending. All of the activities involved directly or indirectly in new and existing home purchases can generate 10% to 12% of gross domestic product, possibly more. (To get this number, we’re talking a broad host of activities here, from real estate commissions and closing costs to buying an extra gallon of paint, a new sofa and a barbecue.)

If a buyer you be, then it’s a good time to get out there and buy. Here are five good reasons that conditions favor you right now and why the trends are likely to continue.

Mortgage rates are lower and likely to stay that way. You can get a 30-year mortgage right now at about 6.8%. Mortgage rates generally are about one and a half percentage points lower than a year ago and are at levels not seen since 1993 and, before then, way back in the 1970s. Real estate sales generally don’t slump when rates fall. Moreover, given the manufacturing slump, interest rates aren’t likely to rise much above current levels. Mortgage rates may bump up a bit but not enough to stall the urge to buy. In fact, wrote Ed Yardeni, admittedly an optimist in the forecasting world, a lot of Americans are doing what the Federal Reserve wanted when the central bank started to cut rates this year. They’ve become homebuyers.

The universe of homebuyers is changing — and growing. Two sizeable changes are swelling the universe of buyers. One is the new wave of immigration, particularly from Asia. During the 1990s, 700,000 to 900,000 people a year legally immigrated into the United States. Immigration, in fact, is generating most of the population growth in the United States. For many of these new residents, buying a house is more important than owning the latest hot stock. The second change, according to the National Association of Realtors: single women have become a big source of new buyers, commanding an 18% share of the market, up from 10% in 1987.

Americans love owning homes. The rate of home ownership in this country hit 67% in 2000, up from 63% a decade earlier. People buy homes for shelter, for tax sheltering (the mortgage and property tax deductions) and for building wealth. Home prices have generally not fallen, even in this year’s slower economy. At worst — at the high and low ends of the market — prices are flat, the National Association of Realtors says. It’s people 60 and older who are pushing the ownership rate higher. These people either don’t want to move out of their homes or have bought homes elsewhere. Moreover, because prices remain strong, many homeowners are building up sizable equities in their homes that they can tap either to add on, buy more stuff for their homes or trade up to new homes, says William Apgar, senior scholar at the Harvard Joint Center for Housing Studies.

It’s easy to get a mortgage. Mortgage lenders want to lend money, says Glenn Crellin, director of the Real Estate Research Center at Washington State University. So, they’ve been building lending programs to satisfy just about everyone. There are even specialized programs for immigrants. Plus, thanks to all the data about you that’s available to lenders online, getting approval on loans has become really easy. (The privacy implications are another matter entirely.) Why the interest in home loans? Your home is sacred, lenders know — so sacred you’ll eat pancakes for a month rather than risk losing your home. In fact, a mortgage loan is more secure than a car loan, a credit card balance or a commercial and industrial loan, says David Givens, an economist with the Dismal Scientist Web site.

The tech slump’s effects on the economy are not uniform. God knows, the tech slump is real. Ask anyone who lives in San Jose, which lost 10,000 jobs between January and April alone and faces a lot more cutbacks in the tech slump. The tech slump has softened real estate across the entire San Francisco Bay Area, says Ken Rosen of Rosen Consulting in Berkeley. The tech crash has knocked sales volume down substantially, as many buyers see an opportunity to bargain for lower prices. Especially hard hit: homes priced at $1 million or more in the San Jose area.

Rosen, a real estate expert who projected that 80% of dot-com companies in San Francisco would disappear this year, expects the softness in the Bay Area to spread to other tech centers like Austin, Cambridge, Seattle and Portland, Ore. where Intel has a huge plant. But the slump’s effects are proving more isolated than expected, Apgar says. There’s a real boom going on in energy, which means Texas and other energy-producing states are doing just fine. There’s fairly good strength in such industries as banking, insurance and food processing. (I’m not including New York-based investment banking and finance.) That helps explain the strength of real estate in such markets like Minneapolis, Des Moines, Dallas and Houston.

What could kill real estate isn’t going to be interest rates. It would be a very big jump in joblessness, Rosen says. The U.S. rate is now 4.5% and may rise later this year, depending on how tech layoffs affect the entire economy. So, absent that or war, economists can see a pretty steady trend for the next year or so. Housing starts at 1.5 million units. Existing home sales at around 5 million units. Steady and solid, with the focus of activity continuing to shift from Northeast and Midwest to South and West. Home Depot and Lowe’s both know the trends and are putting up stores as fast as they can.

That’s good for homebuilders, cement makers, forest products companies, appliance and furniture makers, and hardware retailers.

So, let’s say you’re thinking of moving. If you’re not afraid the slump will cost you your job and you’re confident your local market will hold up, take advantage of lower interest rates. Lenders want to do business with you, and you’ll be doing the entire economy a favor.

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