Home sales may slow if economy picks up

By William Sluis
Chicago Tribune

If the economic pace has begun to quicken, as more and more people believe, an unfortunate side effect could be an end to the boom in new-home construction.

That's because any fresh head of steam in the economic engine usually means higher interest rates. And spiraling costs for home mortgages could snuff out a real estate market that is holding at near-record levels.

Of course, if the economy remains stuck in neutral, the mortgage rate scare will soon recede.

Which brings us to Thursday's report on June housing starts. Economist Lynn Reaser is looking for a marginal gain, to 1.74 million units annually, after a 6.1 percent jump in May, to 1.73 million units.

"The housing market will remain strong even if mortgage rates rise during the second half of this year, as we expect," said Reaser, of Banc of America Securities in St. Louis.

She says the rush to buy homes will continue, because rising rates would signal an economic rebound, accompanied by some new hiring.

Reaser said home builders remain very positive about the outlook because traffic is very strong at model homes and buying hasn't let up.

"Housing still looks like a reasonable investment, even when we see improvement in the stock market," she said. "About the only signs of weakness are for houses in the high end of the price range."

While economists are nearly unanimous that Americans won't quit spending, a cool, wet spring put the damper on some seasonal purchases. That means tomorrow's report on June retail sales will be carefully monitored.

Chicago economist Peter Glassman is looking for a solid gain of 0.6 percent for the month, but notes that some of the increase was because of rising fuel prices.

"Both gasoline and food prices rose during the month, and that directly affects the sales numbers," said Glassman of Bank One Corp.

Car sales, another component of the report, stayed relatively strong, at nearly the same level as May, he said, while sales of home furnishings advanced.

As for coming months, Glassman is in the camp that says consumers are about to rev up spending.

"Our forecast is that growth in the third and fourth quarter will accelerate, and that consumers will be a big part of the expansion," he said.

The big question for Federal Reserve Chairman Alan Greenspan tomorrow, when he delivers his semiannual testimony to members of Congress, is how quickly the economy can regain momentum.

Growth was a meager 1.4 percent in this year's first quarter, and numbers for the most recent three months aren't due out until late this month. So Greenspan's assessment will be vital, especially if he makes any predictions about a revival of the job market.

However, don't look for much excitement on the interest rate front from the central bank chief. The Fed's comments when it reduced rates in June, coupled with expectations of financial markets, make it appear no further rate cuts are on the horizon for quite a while.

Following Greenspan's testimony, watch for the June consumer price index on Wednesday. For what it's worth, Friday's ho-hum numbers for wholesale price pressures raised more concerns about deflation than inflation.

The stock market has managed to rally for four months, with major averages up more than 20 percent. But when traders got back from the Fourth of July weekend and some said the market looked a bit pricey, stocks began wavering.

What happens next will depend not only on the current crop of second-quarter corporate profits but on how companies describe their outlook for the rest of this year.

Chicago investment manager Douglas Nardi says the economy is poised to start growing faster, and that should be good news for stocks.

"The economy has expanded for seven consecutive quarters at a rate above 2 percent. The stimulus that is in place, combined with better investor sentiment, should produce more robust economic acceleration later in 2003," said Nardi, of Scudder Private Investment Counsel.

Historically, he said, July typically outperforms August and September, so Nardi is looking for some price consolidation after this month.

However, he added, "we look for another step up in the market during the fall, as the focus shifts to a more favorable 2004."