David Lereah is a former senior vice president and chief economist for the NATIONAL ASSOCIATION OF REALTORS®. Today, he is president of Reecon Advisors Inc.
9/11 Attacks Place REALTORS® in New Environment
November 1, 2001
After the tragic events of Sept. 11, it has become increasingly clear that the United States is entering an era dominated by a new set of priorities. A prolonged war against terrorism may change our way of life, both politically and economically.
Over the past decade we’ve lived comfortably off the peace dividend created by the fall of the Soviet Union. Since 1990, defense spending as a percentage of the gross domestic product has fallen by more than 40 percent. But that trend is expected to be reversed over the next 10 years.
Along with the rest of the country, real estate practitioners will need to cope with a new political and economic environment:
- The economy is in recession, and our financial system is under a great deal of pressure and scrutiny.
- Our resources will be focused on military operations as well as on rebuilding critical industries, such as air travel and insurance.
- Free trade, if new controls make it costlier, may become an idea of the past.
- Controls on immigration may accelerate, which could tighten an already tight U.S. labor market.
- The Federal Reserve Board is expected to provide monetary accommodation for financial markets by lowering short-term interest rates. When that stimulus is combined with government spending on the war effort and rebuilding programs, the specter of rising inflationary pressure and federal budget deficits will grow.
The shift in priorities creates a cloudier picture for real estate practitioners looking toward the future. The operating environment may be somewhat different from that of just a month ago.
Before Sept. 11, housing was the only major sector of the economy standing tall, which was the primary reason the U.S. economy didn’t succumb to recession. However, the notion that the housing sector can continue to shoulder the burden of keeping an ailing economy afloat now appears unrealistic. In fact, as we continue to assess the residual economic damage from the attacks—massive layoffs, the crippling of key industries such as air travel, and a rapid deterioration of equity values, to name a few—it appears increasingly likely that the housing sector may also experience the sluggishness that it had adroitly avoided for so long.
All three primary determinants of housing demand—consumer confidence, job security, and mortgage rates—will be significantly impacted by the new era of terrorism.
Consumer confidence is perhaps the most visible, with the nation holding its breath to see whether consumers retrench or invest in the country by buying goods, services, stocks, or homes. Job security will most likely become a heightened issue, and mortgage rates should continue to hover near historic lows because of an accommodative Federal Reserve.
On balance, home sales are expected to experience a decline from the record-pace levels experienced during the first half of this year.
A 5 percent to 10 percent drop-off is likely for the remainder of this year. But compared with the rest of the economy, the housing sector continues to stand tall. Even with a slowing of activity, existing home sales for 2001 are still expected to post the second best level ever. And assuming there will be no more significant terrorist attacks on U.S. soil, it’s likely that housing activity will return to pre-Sept. 11 levels by the second quarter of next year.
But real estate practitioners are now operating in an environment that is markedly different from that of just a historical moment ago. Our near-term outlook is very much dependent on the progress of the war against terrorism. If real estate professionals are to remain successful in their endeavors, they must find ways to adapt to the priorities of the new world order.
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Updated: July 15, 2020