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Economic trends.

The 1990-1991 recession and the current extremely sluggish recovery have played havoc with the housing market. Although the recession per se will likely be viewed by future students of the business cycle as one of the mildest and shortest of the post-World War II period, the early phase of the recovery will be viewed as one of the most anemic on record. Typically, output growth, job growth and consumer and business optimism reflect nearboom conditions when first coming out of a recession. This time, things are very stagnant and consumers and businesses are anything but optimistic.

All of this has been a big drag on the housing market. Nonetheless, things are improving, although the pace of activity still remains quite depressed by historical standards.

Chart 1 shows total housing starts by quarter and annual averages for the past three years. The 1991 annual average of 1.015 million units was the lowest on record since the end of World War II, partly reflecting the extremely depressed multifamily market. However, the chart also shows that on a quarterly basis, the free fall in starts during 1990 appeared to hit bottom in the first quarter of 1991 and has been on the rise ever since, with further gains likely to occur in each quarter of 1992.

On a regional basis, the average declines of the past few years were mot pronounced in the Northeast and the West as shown in Table 1. The Northeast, still reeling from the impacts of the contracting financial services and defense industries, saw a declining share of residential construction. Although slipping home prices in some parts of the region helped improve affordability, other fundamentals such as employment prospect and slow population growth suggest that the Northeast may face problems in regaining share.

[TABULAR DATA OMITTED]

The West faces some of the same problems as the Northeast in addition to continued affordability problems. Consequently, the declining share was not surprising. However, the long-term outlook for the dominant state of the region - California - remains good. While 1992 may be a troubling year for California, long-term population and job growth is expected to result in brighter prospects.

The Midwest and South picked up the share lost by the other two regions. The painful downsizing of manufacturing in the Midwest during the 1980s left the region with an extremely lean-and-mean manufacturing sector - a sector that is highly competitive internationally given recent movements in the exchange value of the dollar. Even with continued difficulties in the auto industry, the prospects for growth in the next few years remain favorable, with the home construction outlook boosted by the relatively low inventories of homes available for sale in many markets. Once sales do pick up, residential construction in the region is likely to respond quickly.

The South also fared relatively well during the past two years and is expected to do better in 1992. The adjustment to the crash in energy prices in the mid-1980s is now largely complete in the Southwest, and Texas again is being viewed as a good place to do business. In the Southeast, the recession hit hard, but the prospects for a stronger recovery than the national average look promising.

Existing home sales did not slip as badly nationally as did starts, but declined nonetheless (See Table 1). The shifts in regional shares were similar to those for starts. Both the South and Midwest gained at the expense of the Northeast and West.

Movements in existing home prices also reflected relatively better performance in the Midwest and South. From 1989 to 1991, national existing home prices rose 7.3 percent. During the same period, prices rose 9.1 percent in the Midwest, 5.2 percent in the South and 5.1 percent in the West, but actually fell 3.6 percent in the Northeast.

On balance, a broad-based, but moderate, national housing recovery appears to be underway. Although some regions appear poised for stronger gains than others, the current attractive levels of mortgage interest rates and the prospects for stronger growth in the second half of 1992 should result in better conditions in most markets by year's end.
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Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Holloway, Thomas M.
Publication:Mortgage Banking
Date:Mar 1, 1992
Words:689
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