Quotes of the Day

For the housing market, it's the same old lonely story that it's been for two years:  propping up consumers' spirits — and spending — while the rest of the economy lies exhausted on the floor, still trying to struggle to its feet. Standing proud amid the glum procession of economic indicators and Wall Street selloffs in the past week have been stellar year-end numbers from the Commerce Department in housing starts (up 5 percent to a 1.835 million-unit annual rate in December, the highest since 1978), new home sales (up 3.5 percent to an annualized 1.08 million, a new record) and existing home sales (up 5 percent to 5.56 million for 2002, another new record). And according to the National Association of Realtors, the national median existing-home price ended the year at $164,000, up 7.1 percent from 2001. That's the strongest annual increase since 1980; clearly, homes are being built, sold and resold at a pace not seen in decades.

For that fallen-and-I-can't-get-up economy, that's a big "whew." Although residential real estate activity makes up less than 8 percent of total U.S. GDP, with the country's GDP as a whole going nowhere fast, a housing market like this one can make the difference between positive and negative growth (and likely did in the fourth quarter). It also provides the 68.3 percent of American households which own their home (also a new record, according to the Census Bureau) with a sense that there's somewhere they can put their money without some analyst, CEO or Middle Eastern despot making it disappear. Most significantly, consumer spending is 66 percent of GDP, and the purchase of a new home tends to have an "umbrella effect" on the homeowner's spending as he heads back out to stock it with a washer/dryer, a new big-screen TV, and maybe a swing set for the yard.

They're certainly not stocking it with stocks. Indeed, the main factor in housing's continued strength is a classic economic example of zero-sum boom: the persistent weakness everywhere else. As the 2003 recovery continues to be more forecast than reality and Wall Street continues to wobble, mortgage rates are below 6 percent and falling, and borrowing on one's ever-more valuable home is about the cheapest money around.

"Market concerns over weak economic indicators and an increased risk of war in the Middle East pushed mortgage rates lower," said Frank Nothaft, chief economist at mortgage-finance company Freddie Mac (which, unsurprisingly, posted a 25 percent increase in net income in Q4). "That and falling stock prices raised investor appeal for U.S. Treasury Bonds, which in turn, allowed most interest rates to drift even lower."

"Last month, mortgage rates averaged the lowest on record in Freddie Mac's survey, which spurred a flood of new housing construction, the most since June 1986," Nothaft added. "If mortgage rates continue to be this low, 2003 should be a remarkable year for housing."

Though probably not as remarkable as 2002. The Mortgage Bankers Association of America's report last week of a 6.1 percent dropoff in their index of mortgage and refinancing activity for the week ended Jan. 17, even as mortgage rates continued to fall, suggests that last year's "refi" boom — credited with keeping the country from the economic abyss in a year that could have been much worse — may have peaked.

But neither are there many signs that there's a bubble ready to burst. December's new record in housing starts, for example, was nicely matched by the new record in new-home sales — If you build it, they will buy — and even if an economic pickup starts to reduce housing's relative attractiveness, there's no reason why modest economic growth and improved consumer mood can't help sustain housing's strength.

"The momentum gained from low mortgage interest rates will carry strong home sales into 2003, with an improving economy offsetting modestly higher mortgage interest rates as the year progresses," said David Lereah, chief economist at the National Association of Realtors. Lereah forecasts GDP growth of between 2.7 percent and 3.1 percent (depending on whether Bush gets his stimulus package) and still expects the housing market to log its second-best year ever — behind, of course, 2002. Even the prospect of a big war-and-a-tax-cut budget deficit shouldn't nudge interest rates prohibitively high, as long as the war doesn't take much longer (or cost much more) than the bond markets have already anticipated.

Which brings us to the big caveat: Just as housing has taken up much of the economic slack for the past two years, both as a comforting investment for fretting consumers and a driver of consumer spending itself, a big bump elsewhere in the economy in 2003 could be housing's downfall. If stocks roar back this spring, capital inflows could steal from the bond market, pushing up long-term interest rates. Or Alan Greenspan and the Fed could do the same to short-term rates, as a way to hit the brakes on a recovery that is heating up too fast.

    In other words, if everything possible goes wrong for housing, homeowners should have plenty to compensate them in terms of job security and income hikes. Either that, or things will have gone so wrong — like if Iraq turns into some grisly combination of 9/11 and Vietnam — that the resale price of homes will be the least of our worries.

• Frank Pellegrini
• The 2002 boom year ends with a slew of records and maybe a high-water mark, but 2003 should be at least good enough for second-best