Little effect on housing seen from brief gulf crisis

October 14, 1990

Although the Iraqi invasion of Kuwait caused sharp increases in short-term interest rates, experts predict that the crisis will not affect the housing industry negatively in the long run if it winds down soon, according to L. Keat Foong, associate editor at Multi-Housing News, a New York trade magazine for the building industry.

"Within three weeks of the invasion, fixed-rate mortgages increased from 10.11 percent to 10.60 percent," Mr. Foong noted. "This increase paralleled the surge in long-term bond rates as long-term bonds became less attractive to investors in the face of mounting inflation fears."

Other rates also increased, including the 30-year Treasury bonds, which jumped from 8.35 percent to 8.93 percent in the same period.

The increases in fixed-rate mortgage interest might hurt home buying in the immediate term, according to Multi-Housing News. If the conflict is not resolved within a year, the housing recovery will be delayed or slowed, according to the National Association of Home Builders.

This result assumes that the Federal Reserve will raise interest ratesin response to higher inflation and a ballooning budget deficit aggravated by military outlays.

"Adjustable-rate mortgages, which reflect short-term rates and actions of the Federal Reserve, have so far been unaffected by the Middle East crisis and have held steady," Mr. Foong said.

If the Middle East crisis is resolved quickly, according to the home builders association, the home industry stands to benefit. Elevated oil prices are expected to linger in the economy, prompting an inflation-wary Federal Reserve to ease interest rates.

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