- The Washington Times - Friday, August 17, 2001

Consumer prices last month posted their biggest drop in 15 years on plunging energy prices, while housing continued to be the economy's star performer.
Last month's rare 0.3 percent decline in prices was only the second drop since an energy-induced price collapse in 1986, the Labor Department reported. The 5.6 percent fall in energy prices last month also was the biggest since 1986, with falling electricity rates helping to hold down housing costs as well.
Americans now are paying less at the gas pump than they were last summer, but they have been ploughing their money and hopes into homes more than ever. That has sent home prices zooming and has prompted home builders to increase construction starts by a solid 2.8 percent to a near-record rate of 1.67 million last month.
"We may be the last leg of the economy, but so far the leg is still standing," said Robert I. Toll, chairman of Toll Brothers. The leading U.S. builder of luxury homes has several projects in the Washington area and is enjoying record revenues and orders.
"Housing has remained a strong point in the economy even as signs of weakness persist elsewhere" partly because consumers have come to realize that housing remains the best investment for average earners, said Bruce Smith, president of the National Association of Home Builders.
Consumers have taken notice of the double-digit gains in home prices in Washington and other major cities around the country in the last year, which look particularly good compared with the stock market's poor performance since March 2000.
Despite the home-buying binge, builders don't expect the euphoria to continue forever. A dip in applications for building permits last month suggests they don't expect the current robust demand to continue much longer unless there is a revival in the broader economy, Mr. Smith said.
Joel Naroff of Naroff Economic Advisers said consumers are being egged on not only by the recent good performance of housing as an investment, but also by a false belief that housing prices can go nowhere but up. That is despite the collapse of housing prices that followed the last housing boom in 1990, he said.
"Prices change quickly in the housing market," especially if mounting layoffs and rising debt loads suddenly cause a falloff in demand for homes as happened in 1990. Mr. Naroff noted that it took five years for a house he bought in Philadelphia in 1989 to regain its value after the 1990 bust.
"Over half of the work force has never worked during a recession" and seems to be blithely unaware of the danger of a setback in the housing market, he said. "For someone who started work less than 10 years ago, recession is a concept, not a reality. They're not going to have the fear factor."
While many people are prospering because of wealth gains in the strong housing market, Mr. Naroff said he worries that a bubble may be forming in housing prices in some areas. If that bubble bursts, he said, the consequences for the economy could be severe.
"If your house starts falling in value, you have major problems," especially since half of American households continue to suffer from substantial losses in their stock portfolios, he said.
"If we make it through the next six months without a housing crisis, we'll escape" the danger because the economy should be into a solid recovery by then, he said.
Rising home prices have been one of the main sources of inflation in recent months. But last month, they were overwhelmed by the collapse of energy prices.
Gasoline prices posted the biggest drop in the energy sector, falling by 11 percent.
Economists said the fall in consumer prices, while welcome, was a sign of the economy's weakness.
The dramatic evidence that inflation is at bay, for now, clears the way for another interest rate cut by the Federal Reserve at a Tuesday meeting of its rate-setting committee, they said.
Mr. Naroff said he expects the Fed to cut rates by another half percentage point out of concern that the economy is bordering on recession. But the central bank may have to do a quick turnaround next year if price increases in housing and other problem areas like medical care and education resume their upward creep, he said.

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