Will war kill housing?

March 4, 2003

Short-term pain may worsen if fighting becomes costly

By Susan Romero
Inman News Freatures

If the bombs start falling on Baghdad, home buyers could retreat en masse from the housing market while they wait to see whether the United States scores a quick victory or becomes mired in a prolonged conflict.

A war likely would be discomforting for the housing market and the level of pain could grow intense if the battle were to turn costly. Government borrowing, higher oil prices and rising interest rates could result and all that would be negative news for housing.

David Lereah, chief economist of the National Association of Realtors, said housing could weather a short-term conflict like the early '90s Gulf War, but a longer war could cause higher interest rates.

"If it's a prolonged war, all bets are off because I do worry about the ($300 billion) Federal deficit. The government is going to have to borrow money to finance the war and (if the war is) prolonged, you're talking about a lot of money," he said.

How much a war against Iraq would cost seems to be a matter of guesswork. Estimates run from $40 billion to as much as $300 billion.

Such expenditures would trigger deficit spending and that would translate into government borrowing and higher interest rates not only for home mortgages, but also for all other types of individual, corporate and government debt. Government borrowing would compete against private-sector borrowing and that would lower bond prices and raise interest rates.

"I do see the 30-year mortgage interest rate gradually increasing over the next two years if we have a prolonged war," Lereah said.

It's not a useful exercise to extrapolate an analysis for today based on the decade-ago experience of Desert Storm, Lereah warned, because at that time mortgage interest rates were 10 percent and the nation was in a recession that affected the entire economy, including the housing market.

Today's housing market has solid fundamentals. Interest rates remain at 40-year lows, demand for housing outstrips supply, people view real estate as a sound investment and there is no housing price bubble, he said.

"Today's housing market is very healthy....if there's any problem we have in housing today, it's a (lean) supply of homes," he said.

A more instructive parallel might be the pattern that developed after the Sept. 11, 2001, terrorist attack on New York City. Lereah recalled that home sales then slowed for several weeks but that momentarily post-Sept. 11 softness was followed by an extended period of record home sales.

If anything is certain, it is that consumer confidence already has turned sour, judging by The Conference Board's monthly survey of consumer sentiment.

The nonprofit research and business group's consumer confidence index declined for the third consecutive month in February. The last time the reading was lower was in October 1993.

Lynn Franco, director of The Conference Board's Consumer Research Center, said the February findings painted a gloomy picture.

"Lackluster job and financial markets, rising fuel costs and the increasing threat of war and terrorism appear to have taken a toll on consumers," Franco said last week.

Christopher Cagan, director of research and analytics at First American Real Estate Solutions, said war would affect housing just as it would affect the stock market or any other market. Simply stated: "When bad things happen that's bad and when good things happen that's good," he said.

"If there is a war, whether it be short or long, in the immediate sense you're going to see a temporary hold (on the housing market) for a month or so. (People) tend to hold off on large (financial) commitments for a month or two while they wait to see what's going to happen," he said.

Cagan pointed to the Vietnam War as a possibly illustrative event. He said that conflict affected people's psychology, but home prices rose in the '60s and early '70s.

Yet Vietnam isn't a direct parallel today because no one at that time thought the United States faced any danger on its own land, he said.

Cagan suggested no war or a quick victory would be positive for the economy and housing.

"If somehow this were resolved without a war, that (would have) a good psychological impact. You'd see people buying more. (Home) prices would go up. There would be great relief, and you'd also see something favorable in the stock market," he said.

Copyright: Inman News Service

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