- The Washington Times - Friday, October 19, 2001

The Washington-area housing market has had an incredible year, so far. Home prices have skyrocketed, many homeowners have refinanced their mortgages and home sales have been higher than any year on record.

But what do the next six to 12 months hold in store? How will the events of Sept. 11 and the current war on terrorism affect local real estate?

Home sales for September did not appear to suffer much.

There were 6 percent fewer home contracts written last month than in September 2000. It's hard to say, however, if that is a result of the recession, the terrorist attacks or something else. Because the past 14 months have been the busiest on record, comparing today's sales figures to them can be tricky.

"When a locality experiences a record level of sales, the following years can appear to be experiencing difficulty, when that isn't really the case," says Lawrence Yun, senior forecast economist at the National Association of Realtors (NAR).

According to surveys done by the NAR, some of the country's largest real estate firms saw their business drop 20 percent in the weeks following the attacks. "But recently, they are saying business is back to 95 percent of the level you'd expect if the attacks had never happened," Mr. Yun says.

National surveys of the housing industry don't have much bearing on the Washington region, however. Real estate is an inherently local industry, driven by local unemployment figures and local economic factors. Even while the rest of the country was sliding into recession this summer, Washington-area home sales remained at record levels. The question now is: Can this region continue to buck national trends?

Although the attacks on America have been unprecedented, it is possible to look at previous international conflicts to help us understand how Washington's real estate industry might respond in the coming months.

World War II brought thousands of new workers to the Washington area. Many of them came to work in the Pentagon, which was built during the war. Today, if you live in one of the many two-story, red-brick Colonials in Arlington, you are occupying a home built to house Washington's flood of new workers.

A more striking parallel to today's events happened more recently: the Gulf War.

Similar to 2001, 1991 was a recession year in which we went to war in the Middle East.

"During the Gulf War, federal spending increased more in one year than in any of the previous 20 years," says Stephen Fuller, professor of public policy at George Mason University. "Federal procurement spending which usually increases about 7 percent each year went up 16 percent in 1991. Now, we are looking at a minimum of $4.5 billion extra in local spending in the coming year. That's about 20,000 new jobs."

This contrasts sharply with other regions. Seattle, for example, is facing the loss of 20,000 aircraft manufacturing jobs due to layoffs at Boeing Co. Considering that Seattle's technology-sector was already experiencing a slowdown this year, the outlook for Washington state is very different from the city of Washington.

"Because we have the federal contractors and the departments of Defense, Transportation and Justice, current events will benefit Washington in a way unlike any other city," Mr. Fuller says.

Although thousands of jobs are being lost in the local retail, travel and hospitality sectors, the defense industry is hiring in a big way. Such companies as SAIC (Science Applications International Corp.) and TRW are hiring thousands of new employees right now.

"CACI (International Inc., a large Arlington-based information and communications technology firm) got a big contract just two days after the attacks," Mr. Fuller says. "Companies like these are technologically intensive they aren't hiring people right out of college. They need people with security clearances, older and more experienced workers. Many of these will have to relocate to Washington to take these jobs."

This potential for inflow is one of the reasons why the local housing market will probably remain quite strong in the coming year. Washington's low unemployment rate has maintained a high demand for housing all year, and these new hires will keep up the pressure.

"We have the fastest job-growth rate in the country," Mr. Fuller says. "Although this area only represents 2.5 percent of all jobs nationwide, we generated 10 percent of all new jobs in the country in the past year."

Northern Virginia is likely to benefit the most from the new hiring. Half of the region's defense and high-tech employers are in Virginia, with Maryland and the District sharing the other half. The supply of homes for sale has been lowest in Northern Virginia this year. When you couple that with strong demand from buyers, it's easy to understand why the average home in Fairfax, Arlington or Alexandria is selling in 20 days or less.

"So much of the price escalation we've seen this year has to do with supply and demand new jobs will only increase the demand," says Jim Smith, a certified financial planner with Trusted Financial Advisory Services in Falls Church.

"There is just so much that points to economic resurgence in the next six to 12 months," Mr. Smith says. "The president is looking for additional tax cuts, interest rates have been drastically reduced and consumers are going to start regaining confidence. These things are going to give us a nice bounce next year."

While a stronger economy will have positive effects on the local real-estate industry, a strong housing market is likely to return the favor, further boosting Washington's economy.

"A strong local housing market is great for the Washington area," Mr. Smith says. "When someone takes advantage of the low interest rates to do a cash-out refinance on their home, they pump thousands of dollars into the economy. They buy materials for remodeling their home, or they purchase cars and other consumer goods. Rising home prices, home equity loans and refinancing are just a few more reasons why the local economy is going to recover."

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