FRONT LINES: Economy

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Put economy in perspective

BY DAVID LEREAH

With our country at war, now’s a good time to take stock of where we are—both as a country whose economy continues to struggle and as a people who must make investment decisions while world events rage outside our immediate control.

Although we face crucial economic issues in the months ahead, we need to remind ourselves of our position compared to that of many people in the world. More than 500 million people living in the world today reportedly have experienced war on a firsthand basis, have been imprisoned, or have known torture or starvation as a result of war.

That’s a sobering statistic, but it helps us keep our business environment in perspective as we turn our attention to setting our business and investment priorities in the days ahead.

War and its uncertainties plague the U.S. economy. Both the equity and bond markets are exhibiting extraordinary volatility as valuations sway with the pendulum of war activity.

In this environment, it’s no surprise that economic releases paint a picture of a weak economy: Retail sales and consumer confidence are sagging as of the early months of this year. The labor market virtually dropped off a cliff in February, losing more than 300,000 jobs in that one month. And the manufacturing sector has stalled, showing no growth in the first quarter of 2003.

Although mortgage rates hover near historical lows, housing activity is cooling from its record run. Existing-home sales and new-home sales have fallen off their recent highs. Housing construction activity is off.

The prospects for the economy and the housing sector depend to a large extent on the length and costs of war with Iraq.

If the war is short-lived, the economy is poised for a recovery in the second half of the year, likely sending interest rates upward. That could dampen housing demand.

But if the war is prolonged, economic weakness could continue, spurring the Federal Reserve to push interest rates down. This would benefit the housing market.

But it’s also important to keep our economic concerns in perspective as the drama of the Iraqi war unfolds.

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

2003

Commercial real estate occupancyrates should improve in 2003, thanks to increased business spending, among other factors. The retail sector could see the biggest occupancy improvement, as spending spurs tenancy growth. NAR’s 2003 vacancy forecast:

	Actual 2002	Forecast 2003
Office	16.8%	16.5%
Warehouse	10.4	10.1
Retail	12.6	12.1
Multifamily	6.8	6.8

BUSINESS CONFIDENCE

Moderating expectations Practitioners’ confidence in the residential real estate market eased in March, with current and future business expectations dropping slightly. Optimism is cooling most dramatically on the business outlook for the next six months, suggesting that practitioners foresee declining activity into the fall.

	February	March
Current conditions	71.6	70.3
Expectations for the next six months	76.7	71.3
Buyer traffic	69.8	67.8
Seller traffic	56.3	54.9

EXISTING-HOME SALES

Record pace eases Existing single-family home sales continued at the strong pace of 5.84 million units in February, the fourth highest on record. The sales rate represents a cooling of 4.3 percent from the record-setting pace of 6.1 million units* in January. “It’s no surprise to see a cooling after the unprecedented January level,” says NAR Chief Economist David Lereah.

Seasonally adjusted annual rate†