Interest rates, slowing economy play tug-of-war

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The U.S. housing market and general economy have entered a classic tug-of-war between lower interest rates and slowing economic growth, according to a release from the National Association of Realtors.|ret||ret||tab|

David Lereah, NAR's chief economist, said numerous factors are at play. "In the short run for housing, the positive impact of lower interest rates wins the battle but the inhibiting effects of a slowing economy may win the war. The real question is whether the Fed will be successful in orchestrating a soft landing, or will it come in for a hard landing," he said.|ret||ret||tab|

Lereah said the biggest wild card is rising energy costs. "As consumers are hit with bigger and bigger energy bills, there will be less money for consumer spending. Considering that two-thirds of our Gross Domestic Product depends on consumer spending, the impact could be significant if severe winter conditions persist," he said.|ret||ret||tab|

"The good news for housing is that it's now the strongest sector of the economy, driven by a combination of demographic demand, low unemployment and affordable interest rates," Lereah added. "The baby boom generation is continuing to buy homes, while the children of the boomers an even larger generation of about 85 million people are entering the market as first-time buyers and are benefiting even more from the drop in interest rates, he said.|ret||ret||tab|

Lereah said 30-year fixed mortgage interest rates are expected to average 6.9 percent this year. "However, the Fed has signaled its willingness to deal aggressively with the slowing economy, and I expect them to make additional interest rates cuts which would help to bring down mortgage interest rates even further."|ret||ret||tab|

Lereah also said he expects existing-home sales to rise 2.5 percent this year to a total of 5.14 million units, the second highest on record. New-home sales are forecast to hold steady in 2001 at 894,000 units, while housing starts should rise 0.9 percent to a total of 1.62 million units. |ret||ret||tab|

"Although the crystal ball is a little hazier this year, these strong housing numbers should help to sustain related industries as people purchase a variety of goods and services that typically are needed when moving into a home," Lereah said. "By some estimates, housing and related industries account for more than 20 percent of the Gross Domestic Product."|ret||ret||tab|

NAR forecasts the national median existing-home price to be $146,300 for this year as a whole, an increase of 5.5 percent over 2000, while the typical new home price is projected to be $175,600 in 2001, up 5.7 percent from last year.|ret||ret||tab|

The NAR projects U.S. economic growth, as measured by the Gross Domestic Product, to be 2.7 percent for 2001, while consumer price inflation for the year also should be 2.7 percent.|ret||ret||tab|

NAR forecasts the unemployment rate to average 4.2 percent for the year, while disposable personal income will grow about 2.8 percent in 2001.|ret||ret||tab|

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