War's Impact on Housing

While we are all hoping for a quick resolution to the Iraqi conflict, we also are wondering if our business strategies need to be adjusted because of the war. While pessimists abound, you should know that the housing market improved dramatically during and after the last conflict.

I have compared the current situation to the housing situation before and after Desert Storm, which began in February 1991. Hopefully, this comparison will give you some confidence regarding the business decisions you are making.

In 1991, the United States was emerging from a recession, just as it is today. However, the housing market was in dismal shape before Desert Storm, and it only got better after the war. This is primarily because mortgage rates were at 10%, and the Federal Reserve began dropping interest rates after Desert Storm began. Additionally, builders were struggling with the aftermath of the 1989 FIRREA Act, which wiped out much of the capital available to the industry, and builders were continuing to build through the oversupply of housing caused by having too much capital available before the FIRREA Act. The housing market is much healthier today.

The three most interesting comparisons involve consumer confidence, home sales and builders' perception of the housing market (the Housing Market Index).

Consumer Confidence
In the months leading up to Desert Storm, consumer confidence declined dramatically, just as it has during the past 10 months. Once it became clear that the United States and its allies would succeed in Desert Storm, confidence surged upward. I expect consumer confidence to surge upward again, assuming that coalition forces appear to be on their way to accomplishing their objectives. The opposite would be true if the war effort stalls.

Home Sales
In the months leading up to Desert Storm, home sales declined sharply. A similar decline took place two months ago, partially in anticipation of this new war. After Desert Storm, home sales reversed the trend and began to increase steadily, but I believe the improvement in sales was attributable to substantial declines in mortgage rates and the status of the housing cycle in early 1991 rather than wartime success. The lesson here is that the war should be putting pressure on the Federal Reserve to lower interest rates, although chairman Alan Greenspan already has indicated he does not want the housing market to get much stronger.

Housing Market Index
The Housing Market Index (a survey of builders' sales and traffic) showed a sharp decline last month, just as it did in early 1991. The difference is that we were at a very high level this year versus a very low level in 1991. The Housing Market Index surged after Desert Storm began, but that was because mortgage rates declined and the oversupply of housing dwindled.

Conclusions
I conclude that the war has had a short-term negative impact on the housing market, just as it did in 1991. The long-term future of the housing market depends on national economic and demographic conditions rather than international conditions. The good news is that mortgage rates are unlikely to spike, and home sales should continue to be dependent on job growth (currently improving), demographics (currently outstanding) and affordability (currently good in about 70% of the U.S. markets). With unsold inventory near record lows and sales near record highs, the odds are very good that housing market conditions will not change dramatically in the near future.

About the AuthorJohn Burns publishes three free Building Market Intelligence e-mails each month: U.S., Local and Strategic. He helps real estate executives develop and execute strategic plans, conduct market research and maximize profitability. More information is available at www.realestateconsulting.com.