Amazing housing market bound to help the economy

February 27, 2002|By Jay Hancock

THE stock market seems dicey; the bull bond market is history; and banks pay less than 2 percent even on some long-term deposits. Where are Americans putting their money?

The answer came Monday in another in a series of extraordinary economic dispatches that have arrived since the Sept. 11 terrorist attacks. People are plunging in a big way into real estate - the kind with kitchens, bedrooms and picket fences.

Last month was January, typically the slowest period for home-sale closures, thanks to cold weather and holiday distractions. But that didn't stop 336,000 families and individuals from buying a used house.

It was the biggest January on record for sales of existing single-family homes. It followed record-setting home sales in 2001, and it set the pace for another all-time high in 2002.

The economy is supposed to be going backward or limping ahead at best, but it's hard to tell from the way Americans are acting. They rescued Christmas from recession, made fibbers of the airline doomsayers and are now piling up work for mortgage processors who ought to be sipping umbrella drinks in Nassau.

Last month's homebuyers were pushed to the closing table in part by low interest rates and warm weather. But they were also driven by a confidence that contradicts the terrible events of the past six months just as surely as the 70-degree weather challenged the calendar.

Economist John Maynard Keynes called this the "animal spirits" of the economy, the unfathomable, "spontaneous optimism" that prompts people to spend and take risks even in the teeth of uncertain circumstances.

The Conference Board's consumer confidence poll tries to measure animal spirits. It's a crude tool for a subtle job, like whittling with a chainsaw, but it's good for charting large swings in the shopper psyche.

In February consumer confidence dipped slightly after rising the previous two months, according to results issued yesterday.

Even so, the Consumer Confidence Index still stands at a relatively healthy 94.1 this month, far above the 84.9 touched after the Sept. 11 terrorist attacks and roughly where it stood in 1994 as the economy was recovering from the previous recession. The index, which is calculated from a base of 100 in 1985, was 114.3 in August.

But for a better indication of how Americans feel, watch what they do, not what they tell pollsters.

If people keep buying homes at January's pace, more than 6 million existing homes will change hands this year - a 13 percent increase over last year's record. Sales and construction of new homes are also up substantially.

At the moment 68 percent of Americans own their own dwellings - the highest percentage in history. The homeownership rate was 64 percent in 1990, 62 percent in 1960 and 44 percent in 1940.

Minorities, immigrants and the poor are sharing in the gains. A study by the Census Bureau a few years ago showed that immigrants who have achieved U.S. citizenship are just as likely to own a home as are native-born citizens.

It is possible, after the events of last year, to get carried away in analyzing the causes of the homeownership spurt, especially the psychological ones. "Shelter," "nesting" and "security" are the terms to throw around if you want to join in.

But the surge isn't happening in a vacuum, and there are some plausible factors besides the obvious, such as interest rates, that help explain what's going on.

Given what happened to stocks last year, it is logical to suppose that investors have gained renewed interest in real estate, as opposed to the unreal estate of Enron, Lucent and Webvan. Your front stoop looks a lot more solid these days than Global Crossing's revenue.

This column suggested last week that the extra trillion dollars the Federal Reserve injected into the faltering economy last year would wind up in the stock market, with a proportional effect on prices.

I still think stocks will recover nicely once accounting paranoia passes. But the homebuying results of the past few months show that the Fed's extra liquidity is also being stuffed, not into mattresses, but into the roofs and windows and floors surrounding them.

This investment is substantially driving up home prices, which is almost unheard of in a recession. The national median price for an existing home at the end of last year was $148,000, up 6.2 percent from a year previously. Home prices rose at double that rate in the Baltimore area.

Like soaring stocks in the 1990s, today's rising home values inspire people to spend more in stores instead of saving for possible bad times ahead.

Call it consumer confidence. As is often the case with optimism, pessimism and other moods, it creates its own reality.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.