Housing expert projects setbacks.

THE U.S. ECONOMY was flirting with recession prior to the terrorist attacks on Sept. 11, arid the housing sector was losing some momentum as well. Shock waves from the attacks certainly will put additional downward pressure on the economy and the housing market, at least over the balance of this year. But the chances for a substantial rebound in 2002 and 2003 are quite good, particularly for the housing sector where transactions that are lost in the short term generally are regained down the line.

The seriousness of the near-term economic situation will depend partly upon steps taken by economic policymakers at home and abroad. But developments on the political, military and security fronts are even more important to both the short-term and long run vitality of the U.S. economy. The shocks to the economy probably can be shaken off quickly if the country remains united behind our political leaders, if our military initiatives appear to be productive and if homeland security is restored.

The National Association of Home Builders forecasts assume that major terrorist attacks in the U.S. are behind us, that forthcoming military initiatives yield some success, and that popular support is maintained for the administration's efforts to combat terrorism around the globe. These conditions are essential to restoration of consumer and business confidence and revival of the industries that took the most direct hits from the terrorists -- particularly the airline and travel-related industries. Restoration of confidence also is critical to recovery of the decimated stock market and large parts of the financial services industries.

Rescuing the Economy

Economic policymakers have already rushed to the plate. The Federal Reserve immediately flooded the financial system with liquidity and cut its short-term interest rate target on the morning of Sept. 17 and again on the afternoon of Oct. 2. The Fed also led a coordinated effort of foreign central banks to stimulate the flagging world economy. There's no doubt that further shifts in monetary policy will be forthcoming in the near future.

On the fiscal policy front, Congress quickly authorized $40 billion of new federal spending for disaster recovery, new security measures and counter-terrorism activities, and an additional $15 billion in cash and loan guarantees is slated to go to the airline industry.

Additional appropriations are bound to follow, including $18.4 billion in defense appropriations for FY 2002 that had already been requested by the administration. This is all on top of the previously enacted tax cut, and a new round of tax cuts is also being discussed on Capitol Hill despite growing concerns at the Federal Reserve and in the financial markets about dissolution of our federal budget surpluses.

NAHB is assuming that the Federal Reserve's drop of its target for the federal funds rate by another 50 basis points (to 2.5%) at the Oct. 2 meeting of the Federal Open Market Committee, is the last interest rate cut that we will see for awhile. We expect that the central bank will go on hold as it monitors the progress of the economy. We're also assuming that concerns about the federal surplus will be put on the back burner for the time being, allowing more fiscal stimulus to be put in place.

Although such an aggressive fiscal policy response can put some upward pressure on long-term interest rates, primarily because of concerns about the surplus, we are assuming that the mix of monetary and fiscal policy, along with reduced credit demands from the private sector, will foster some decline in interest rates across the maturity spectrum. We expect the fixed-rate home mortgage to average 6.6% in the fourth quarter, and 1-year adjustable rate mortgages should be available at less than 5% percent.

NAHB's forecast for the overall economy shows small declines in real GDP in both the third and fourth quarters of this year, and that could qualify as an official recession. Even so, this should be a brief and mild setback, and all the fiscal and monetary policy stimulus in the pipeline should help propel economic growth above 4% by late next year. In this scenario, the nation's unemployment rate gets up to 5.7% by the second quarter of next year before receding later in the year. inflation remains benign throughout the forecast period.

Housing to Slide Then Rebound

An NAHB poll taken shortly after the terrorist attacks (Sept. 19-20) provided both reassurance and caution about the housing outlook. We found that home sales had held up well and that cancellations of previous sales contracts had not spiked upward. However, traffic of prospective buyers fell off by 10% to 20%, speculative building was being scrutinized closely, and options to buy land were being extended by 4 to 8 weeks. In terms of key economic data since the attacks, mortgage interest rates have moved down by about 15 basis points, but measures of consumer confidence showed significant erosion in September (before and after the attacks).

Everything considered, some weakening of housing market activity is inevitable in the wake of the terrorist attacks, particularly in late 2001 and early 2002. The heaviest impact should be in the fourth quarter of this year, when our post-attack forecast for total housing starts is 13 percent below our pre-attack forecast. The two forecasts converge as 2002 goes along and are virtually the same by late next year.

By then, 137,000 housing starts have been "lost," but most of these presumably will be made up in 2003 or beyond. In recognition of the durable demographic foundations of the housing sector, we've raised our forecast of housing starts for 2003 by 50,000 units (above the pre-attack forecast) to a hefty 1.684 million units. The solid investment aspects of housing should also bolster demand and production in the years ahead as memories of the 2000-2001 stock market debacle linger on.

It must be recognized that we are in uncharted waters, and current forecasts for the economy and housing have unusually wide "confidence" bands around them. Barring any additional disasters, the resillence of the U.S. economy, aided by our policymakers, should carry us through.

David Seiders is chief economist of the National Association of Home Builders, Washington, DC.

NEW HOUSING FORECAST

(000)

                          1999   2000   2001   2002   2003

Total New Housing Units   1,995  1,825  1,732  1,771  1,926
Single Family             1,306  1,233  1,227  1,240  1,324
Multifamily                341    342    327    334    360
Mobile Homes               348    250    178    197    243

Source: National Association of Home Builders