- The Washington Times - Saturday, January 26, 2002

Homes sales posted a record year in 2001 despite the nationwide recession, illustrating how this has been one of the mildest of downturns for the American consumer.

Buoyed by low mortgage rates and barely nicked by rising unemployment, Americans poured their money and hopes into homes, propelling sales of existing properties to a record 5.25 million last year. New-home sales also likely reached a new high over 900,000, marking the fourth straight boom year for the housing market.

Besides benefiting from favorable economic factors, home sales got a boost as consumers took notice of the sizable gains in housing prices, which far outperformed the battered stock market for a second year in a row. Stock returns have been largely negative since March 2000.

In the Washington area, home prices showed double-digit gains for a second straight year, with the median home price jumping 17.4 percent to $221,600 last summer, according to the latest figures available from the National Association of Realtors. Median means half the homes sold above that price and half below.

Nationally, the price gain in 2001 was a more modest 8.4 percent still a better return than stocks.

"After being jilted in their love affair with the stock market, households rediscovered the joys of the residential real-estate market," said Joel Naroff of Naroff Economic Advisers, noting that the booming housing market has been a key source of strength in cushioning consumers from the worst of the recession.

"What made people smile the most was that home prices were up sharply quite a switch from watching their 401(k)s tank," said Mr. Naroff.

Even if they didn't sell their homes, many consumers tapped into their growing home values through cash-out refinancings and home equity loans, freeing up money to spend on other things. Economists say the near record rate of car sales last year was due in part to the increased liquidity and cash available through refinancings.

With the economy poised to rebound this year, home sales ironically may not do as well, Mr. Naroff said, because mortgage rates are expected to rise. Still, housing is likely to remain one of the economy's strongest spots for a while to come.

"While we may not set another sales record in 2002, housing could still help power the economy" because people will have to spend money fixing up and furnishing the homes they bought, Mr. Naroff said. Sales of appliances, furniture, landscaping, building supplies and other home-related expenses could soar, providing a boost to overall growth, he said.

Economists point to last year's record home sales in warning that the recovery this year is likely to be sluggish, since consumers will have little pent-up demand to buy houses and cars as is usual at the end of a recession. In addition, the unemployment rate, which hit 5.8 percent last month, is expected to continue rising and acting as a drag on consumers.

David Lereah, chief economist with the Realtor group, said the lowest mortgage rates in a generation were behind the success of the housing market last year. While he expects rates to rise this year, they will not go up so much that they cripple housing, he said.

The average 30-year rate for 2001 was 6.97 percent, and it should rise to about 7.3 percent in the second half of this year, he said.

David A. Levy of the Jerome Levy Economic Institute said the record overall rate of sales last year masked some growing weaknesses in the housing market.

About 40 percent of home sales during the 1990s were to first-time buyers, but the recession is taking a toll on sales to these lower-income people, who tend to have little savings and rely on growing incomes to buy homes.

High-end homes and second-home sales got a big boost during the 1990s from soaring stock prices. Many technology entrepreneurs and executives received stocks as compensation, and they, along with a growing army of stock investors who made big gains during the decade and purchased expensive homes.

But the travails of the stock market in the past two years has put a damper on such high-end sales, Mr. Levy said, while record levels of debt and delinquencies will restrain sales to first-time buyers.

"Although housing demand remains relatively strong, expect it to soften in the coming months," he said.

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