Spring '96: No Bonanza, But It'll Do Nicely

Today's REALTOR® asked John A. Tuccillo, chief economist of the NATIONAL ASSOCIATION OF REALTORS®, to give us his outlook for the spring homebuying season.

March 1, 1996

No boom. No bust. That's what the spring homebuying market will look like this year.

Here's why. This spring a tug-of-war between low interest rates and slow growth will dominate the national economy. As the bond market has absorbed the realities of today's economy---a growth rate in the 2 percent to 2.5 percent range and low-to-no inflation---bond prices have jumped and long-term interest rates have fallen. The 30-year fixed-rate mortgage is down nearly two full points from the beginning of 1995.

That good news is driving the housing market in early 1996. Moreover, the bond market has bought into the fact that there will be a balanced budget by 2002, and the Fed has shown a real willingness to encourage growth by maintaining lower short-term rates. Look for them to drop to the mid-sixes by the third quarter of 1996.

Spooked by Corporate Layoffs

Were the economy growing at historical rates---an expansion of real gross domestic product (GDP) of about 3 percent---these interest rates would produce home sales at record rates. But, alas, that's not the case. This is a sluggish economy, one in which job security is rare.

We're still creating jobs: Recent months have featured job gains of a little more than 100,000. But the numbers come nowhere near the glory years of the '80s, when the booming economy was generating nearly a quarter million net new jobs per month. When you add to that the negative psychological impact created when a Fortune 500 company announces a high-profile layoff of thousands, the general climate surrounding the economy is ambiguous at best.

Under those circumstances, households are unwilling to make long-term spending commitments, whether for retail purchases or houses. The last holiday season was a case in point: Retail sales were far below expectation. In an economy where consumption is two-thirds of GDP, a reluctant consumer is a real drag on growth.

So the struggle continues---and will for all of 1996. I don't see a national growth rate of much more than 2 percent, which will tend to offset the lower interest rates.

That means a home sales market that'll look little different from that of 1995, though much more stable. Like 1995, 1996 will finish with about 3.8 million existing-home sales and about 1.4 million housing starts.

Don't Bet the House

Like most forecasts, this one is probably wrong in one or more of its elements. Yet, it tracks closely with those of other economic analysts.

My predictions are based on the assumption that Congress and the administration will strike a budget deal. That assumption is the one wild card in the deck. If there's no agreement, if the powers that be allow the stalemate to drag on even through the November elections, the bond market will jump ship, and rates will rise significantly. In that case, the Fed will have to lean against the growth-retarding increase and in so doing will court the possibility of higher inflation.

At that point, the forecast and the economy begin to deteriorate, and the housing market is in for a long, long year.

Look for Even Lower Interest Rates

At the NAR Midwinter Business Meeting in Honolulu, Tuccillo told attendees he wasn't surprised by the Fed's decision to cut the federal funds rate by a quarter point on Jan. 31. He said he expects the Fed to further reduce rates by half a percentage point in the coming months.

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