FRONT LINES: Economy

BY DAVID LEREAH

Growth and its challenges

The economy is growing, mortgage rates remain low, and demographic trends continue to be favorable as baby boomers and immigrants purchase homes in strong numbers. So look for housing to remain solid for 2004. But let’s be prudent planners and keep our eyes on four economic trends.

1. Rapid growth. U.S. gross domestic product (GDP) growth was 8.2 percent in the third quarter of 2003, and we’re seeing a broad pickup of economic activity, fueled by expansionary fiscal and monetary policies. The Bush administration is driving fiscal policy with its tax relief package, and the Federal Reserve is driving monetary policy with 45-year low interest rates. This combination is the economic equivalent of flooring the accelerator. Eventually, you exceed the speed for which the road was designed and could spur inflation and higher interest rates.

2. Swelling federal deficit. Increased government spending, led by defense, and recent tax cuts are pushing the federal budget deficit to a projected $480 billion this year. The deficit could shrink as the growing economy increases government revenue. But such gains won’t offset spending so long as terrorism remains a threat, so we could soon see government competing with business for borrowed funds. That would place upward pressure on interest rates, as we saw in the 1970s.

3. Heightened terrorism concern. The uncertainty of more terrorist acts in the United States is now part of our national psyche, affecting our confidence and coloring our purchasing decisions, particularly on expensive items such as homes and cars. Should we see more terrorism here, confidence could plummet, threatening economic activity.

4. Dwindling foreign capital. The federal budget deficit, combined with our trade deficit with other countries (an estimated $38 billion in November, the latest figure available), is fuel for higher interest rates, as it becomes harder for the United States to attract foreign capital to fund its budget deficit. The falloff in the dollar against the Euro early this year might help, but import growth continues to outpace export growth.

And yet, against these negatives are continuing strong U.S. fundamentals—favorable demographic trends, productivity gains, robust business investment—that should lead to continued economic growth and thus healthy home sales, particularly in the near term.

Lereah is senior vice president and chief economist for the NATIONAL ASSOCIATION OF REALTORS®.

Factoid

Did recent stock troubles jolt Americans into more conservative savings practices? No. In 2000, the year the stock bubble burst, Americans saved an average of 2.3 percent of their annual income compared with 8 percent in the years following World War II. And there’s no sign that the savings level is rising.

Saving as % of disposable income

2002
Q4: 1.8

2003
Q1: 1.9
Q2: 2.3
Q3: 2.3
Q4: 1.5

Source: Economic Commentary, January 2004, Mortgage Bankers Association, and Gross Domestic Product and Corporate Profits, Dec. 23, 2003, U.S. Bureau of Economic Analysis

Business Confidence

Busy days ahead Practitioners say  they're seeing solid sales and expect  that to continue in the months ahead. Expectations of future activity are on the rise, led by confidence that buyer traffic will stay strong.

Results are based on 426 responses to 4,500 surveys sent to large and small real estate offices. The survey asks practitioners to indicate whether conditions are strong (100 points), moderate (50), or weak (0). Responses are averaged to derive results. Source: NAR Research

Existing-home Sales

2003 sales shatter record Existing single-family home sales grew 6.9 percent from November to December 2003, reaching a seasonally adjusted rate of 6.47 million for the month. That jump pushed sales for the year to 6.1 million units, 9.6 percent over the previous record of 5.6 million units, set in 2002. "The rebound in December shows there's still a lot of life in this market," says NAR Chief Economist David Lereah.