Housing market may be declining

WASHINGTON -- While business has cooled, real estate agent Myra Zollinger says house hunters are still scoping out properties and sales are humming.

"There has been a slowdown, but we are nowhere near dead by a long shot," says Zollinger, owner of a residential real estate company in Chapel Hill, N.C. "Things are still pretty strong."

Stoked by low mortgage rates, the housing market boomed through the 2001 recession and a three-year stock market slide. Now the housing industry, one of the economy's few bright spots, may be losing some of its shine.

Uncertainties about the war in Iraq, a worsening job market and bad winter weather cut into home sales in February. The number of new housing projects that builders broke ground on during that month fell by 11 percent, the sharpest decline in nearly a decade.

The reports raise questions about whether the housing market -- while still in good shape -- will continue to support the struggling economy, analysts said.

'Some signs of strain'

"The housing market is showing some signs of strain. There is no question," said David Seiders, chief economist at the National Association of Home Builders.

The outlook is clouded by the war and its impact on mortgage rates and consumer psyche. Some economists believe the housing sector will add to economic growth this year, though perhaps not as much as last year. Others believe it could turn into a slight drag.

"The thrust to the economy from housing now seems to have peaked," said Lynn Reaser, chief economist at Banc of America Capital Management.

With the unemployment rate expected to rise from its 5.8 percent level in coming months, house hunters could turn more cautious, economists said.

Still, economists said 2003 could turn out to be the second- or third-strongest year ever for home sales, assuming there are not dramatic jolts to the economy. Sales of both new homes and previously owned ones were at record highs in 2002.

Historically low mortgage rates have beckoned buyers and spurred a mortgage refinancing boom that has left people with extra cash. Along with rising home values, these have been crucial to supporting consumer spending, which has kept the economy going.

"Housing has taken on the role of the major stabilizer for the economy," said Susan Wachter, a real estate professor at the University of Pennsylvania's Wharton School. That is a reversal from the past, when housing often tanked during recessions, she said.

She said the speed and ease of refinancing has enabled consumers to take advantage of low interest rates and tap the equity in their homes.

Federal Reserve Chairman Alan Greenspan said this month that this is likely to "simmer down" in 2003 and make for more cautious consumers.

Home values increased at an annual rate of 3.9 percent in the final quarter of 2002 -- still solid -- but down from a 5.3 percent pace in the third quarter, according to Freddie Mac, the mortgage company.

'Seems most unlikely'

Greenspan said he is not overly worried about a dramatic or disruptive drop in housing prices. "A sharp decline, the consequences of a bursting bubble, however, seems most unlikely," he said.

If the war is over quickly, there could be a modest rise in mortgages rate, something that would further cool -- but not crush -- the housing market, economists said.

Mortgage rates have risen in the past two weeks. Rates on 30-year mortgages climbed to 5.91 percent for the week ending March 28, compared with 5.79 percent the week before, according to Freddie Mac.

Under the quick-war scenario, rates on 30-year mortgages could increase to 6.5 to 6.6 percent during the second half of this year, predicted David Lereah, chief economist at the National Association of Realtors.

But if a war were prolonged, the Federal Reserve might opt to cut interest rates several times this year, which would send mortgage rates down and probably boost home sales, at least initially, economists said.

"There is a lot of room for mortgage rates to come down further if the economy is really struggling," said Carl Tannenbaum, chief economist at LaSalle Bank.

A drawn-out war, with rising casualties and sharply higher energy prices, would make people less inclined to buy a home, even if mortgage rates are super low, economists said.

If financial markets worry about a steady stream of federal budget deficits, mortgage rates would move higher, economists said.

Some economists sketched out another, though less likely, scenario: The war is over quickly and the economy immediately revives. The Fed raises interest rates and mortgage rates begin to go up steadily, causing a sharp slowdown in housing.

In this case, though, the economy would be back to full throttle and would not need to depend on the housing market to be its engine.

Zollinger, a 25-year real-estate veteran who remembers when mortgage rates were in the double digits, stands ready for whatever the outcome. "If people get the itch to move, they will buy," she says.