Wealth Makes a Comeback

November 1, 2003

After a cooling-down period following the stock market bust two years ago, high-end homes are poised to make a comeback. And once again it’s stocks that could fuel the sales.

Low- and mid-range homes have been the star of the housing boom over the last two years. Thanks to strong demand from young, minority, and immigrant households—groups that helped boost first-time buyers to more than 40 percent of sales last year—the housing market was robust even as the broader economy remained sluggish.

The low interest rate environment, which helped keep housing affordable for many buyers at the same time that strong demand drove healthy price appreciation, was a critical part of that equation. It’s no surprise that existing home sales had two record months in a row this year, July and August, setting the stage for yet another record or near-record year.

Job losses continue to be an uncertainty throughout this otherwise sunny picture for low- and mid-range home sales. The U.S. economy has lost 2.7 million jobs since early 2001, most of them in the manufacturing sector, sending the unemployment rate up two percentage points to 6 percent in the latter part of 2003.

Now, however, the job picture’s showing some signs of improvement. Job creation is expected to hover around 100,000 per month through the balance of 2003 and into 2004. A brighter business environment helps account for the job growth. Corporate profits are up, business investment is growing, and the stock market’s once again heading up.

These trends are putting the pieces in place for renewed interest in high-end homes. If the trend takes root, even moderately increasing interest rates may not derail luxury sales. That’s because many high-end buyers pay cash. A Coldwell Banker survey puts the number of cash buyers at nearly one out of three.

Moving into 2004, U.S. economic growth is expected to be in a healthy 3.5 percent range. That rate of growth should keep homebuying interest strong, even as interest rates rise modestly. And now with signs suggesting improved wealth creation in the stock market, home sales could be fairly balanced between the low- to mid-range and the luxury sectors.

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.

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