Sold! Can a Hot Housing Market Save the Economy from the Deep Freeze?

Newsweek, June 11, 2001 | Go to article overview

Sold! Can a Hot Housing Market Save the Economy from the Deep Freeze?


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.

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. …

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Sold! Can a Hot Housing Market Save the Economy from the Deep Freeze?
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