Posted on: Monday, February 17, 2003

Slowdown seems unlikely for housing

By William Sluis
Chicago Tribune

As the nation's manufacturing base drifts away in the direction of China, the economy is growing more dependent on a single engine for economic growth: residential construction.

In all corners of the land, opulent new houses are rising while an intense hunt is under way for skilled crafts workers. There are few signs of any slowdown in the home-building juggernaut.

That brings us to Wednesday's report of January housing starts. Analysts expect a slight pullback from the torrid annual rate of 1.84 million units in December.

Economist Douglas Duncan says the housing market continues to boom, though there is some weakening of prices for homes at the upper end.

"There is much more volatility in prices for very expensive houses, as well as vacation homes, and we are seeing a bit of price hit," said Duncan, of the Mortgage Bankers Association in Washington, D.C.

Overall, houses should gain in price by about 4 percent this year, he said, after jumping 8 percent last year.

As for new construction, activity should slow by a modest 3 percent or less in 2003, he said. But that still would place this year ahead of 2001, which was then a record.

"We don't expect the market to soften at all," Duncan said, unless there is a protracted war in Iraq. "With current low mortgage rates, renters continue to move up and become home buyers."

An endless and seemingly bottomless trade deficit is starting to bruise the dollar in its battle against other world currencies. Don't look for much improvement Thursday, when fresh numbers are reported for December.

Economist Sung Won Sohn expects the chasm to narrow slightly, to $38.3 billion from $40.1 billion a month earlier.

"The bulge in imports that took place following the West Coast dock strike settled down a bit, but otherwise there isn't much good news about trade," said Sohn, of Wells Fargo & Co. in Minneapolis.

He said the world is starting to perceive that the negative balance of goods and services, which is running at nearly 5 percent of U.S. gross domestic product, must be addressed.

Add to that deep concern, especially in Europe, about a lengthy war in Iraq, and the dollar is placed on the defensive, Sohn said.

"Clearly, this trade dilemma can't be sustained," he said. "The country can't continue to run a cash-flow deficit approaching $2 billion a day. Unfortunately, there is no short-term solution. In the long term, it is a very sticky situation."

Fears that inflation will reappear are based mostly on prices for gasoline and heating fuel, which have soared in the run-up of worries over Iraq.

Reports on the January producer price index Thursday and the month's consumer price index Friday are both expected to show an advance of 0.3 percent.

Also worth tabbing: January leading economic indicators Thursday. The report is supposed to be able to predict events six months or more in the future.

The stock market, which is on a three-year-plus losing streak, has seen its luck worsen since the beginning of this year, with the Dow Jones industrial average and the Standard & Poor's 500 index down about 5 percent.

Does that mean a quick turnaround is inevitable?

Henry Van der Eb, a mutual fund manager based in Bannockburn, Ill., is telling clients he sees few signs that equities can rebound, citing, among other factors, oil above $35 a barrel, greater efforts at personal saving and "risk-averse investors who mistrust Wall Street hype."

Another factor holding back stocks is a slowdown in how many times a given amount of money is being spent during a year, sometimes called monetary velocity, Van der Eb said.

"This is why the Federal Reserve and Washington have intensely focused their monetary and economic policy initiatives on improving the current gloomy psychology toward consumption, capital spending, hiring and buying stocks," Van der Eb said.

His bottom line: "The current boom-bust cycle resembles the U.S. in the 1930s and Japan in the 1990s. It is increasingly apparent that the most aggressive rate cuts in Fed history have been relatively ineffective."