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Is War Hell On Housing?
By Broderick Perkins
 A growing number of studies put the tech mecca high on the list of so-called "bubble markets" where fast rising home prices have left the region at risk for sudden price deflation -- or popping, like a bubble -- unless its economy quickly recovers. Operation Iraqi Freedom could be the final card, but just how much damage the war might inflict isn't certain. Experts only agree that both buyers and sellers can win or lose if they can manage to time their transactions just right. Unfortunately, it may already be too late for sellers. "The sooner war is over, the better it will be for the economy," said Leslie Appleton-Young an economist with the California Association of Realtors. The war drain WAR typically drains the economy. Tens of thousands of productive workers have been diverted from producing peacetime goods and services to participate in wartime activities that don't provide the same economic boost as peacetime employment activities. Aircraft carrier groups floating in the Persian Gulf and staging more than a quarter million troops at sea and on foreign lands can cost billions without pumping a like amount back into the economy. The cost of Operation Iraqi Freedom could be compounded by rising unemployment, shrinking tax revenues due to lackluster corporate sales and higher energy costs, among other factors. "When gas prices go up, it's not just the cost of gas it's everything trucked, food, clothes, appliances. And anything that requires petroleum to make, like plastic, is going to go up too," said San Francisco real estate broker Ray Brown, co-author of a series "Dummies" guides for home buyers, sellers and mortgages. "It has got to be a huge cost just to have troops stationed over seas. I see inflationary pressures exposing themselves," said Ray Brown (broker) co-author of a series "Dummies" guides for home buyers, sellers and mortgages. Taking more dollars out of the economy than rolling back in creates deficit spending and ultimately inflation which the government attempts to cover by borrowing. Competition from business and consumers for the same money inflates the cost of credit -- including mortgage interest rates and the cost of housing. At least that's the theory. "If war is protracted, deficit spending could be fairly significant, expensive and put an upward pressure on interest rates and that, more than anything, will have an effect on the housing market," said Appleton-Young. Insulating interest rates, home equity RECORD-LOW interest rates for months and consistently low interest rates during the past few years is largely responsible for home buying activity that's helped keep an otherwise weak economy from tanking. "Here's the thing: In terms of deficit spending we've been deficit spending since Sept. 11 (2001) and (government) budgets have been submitted with deficit spending, yet still the rates have continued to go down. It's an absolute conundrum to me that the market has maintained and is actually at the point where it is now," said Mike Donohoe, president of the Santa Clara County Association of Realtors and broker owner of Silver Creek Financial in San Jose, CA. Alone, refinancing to lock in lower interest rates allowed households nationwide to cash out $200 billion in home equity, $70 billion of which was used to pay down debt last year. Half the cash out billions were used for home improvements and other purchases that help fuel the economy, according to Federal Reserve Chairman Alan Greenspan. "There can be little doubt that the availability of a ready source of home equity has reduced the costs and uncertainties associated with income volatility, retirement, unexpected medical bills and a host of other life events that can unexpectedly draw down savings," said Mr. Greenspan, speaking March 4, before the annual convention of the Independent Community Bankers of America in Orlando, FL. Higher interest rates, combined with insecurity and fears about terrorism and uncertainty about the economy and the war's potential effect likely will send some potential buyers to the sidelines. Reduced demand could push prices down, said Janet Houde president elect of the Santa Clara County Association of Realtors. "I call it 'hunkering down'," said Ms. Houde. Some buyers are already there. "If you hold an open house now, people will come but the decision to buy is being held back because of the possibility of war. It just makes people less secure. It's the not knowing where we are going. Once they do anything (about the war), I think that will help the market," said Ms. Houde, also an independent real estate broker in San Jose. Continued: Desert Storm vs Iraqi Freedom >>
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Copyright © 2003 DeadlineNews.Com
Broderick Perkins
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Is War Hell On Housing?Desert Storm vs Iraqi Freedom
IT'S DIFFICULT to make any economic fallout comparisons between conditions that existed before the curren war and conditions before Operation Desert Storm.
First, war this time is likely to be much more protracted and expensive than the Gulf War, which lasted little more than a month.
Also, today's economic conditions are markedly different from those in 1991.
Even it's weakened state, today's economy is much stronger than it was 12 years ago, according to "Taking the Consumer's Temperature: Gulf War I vs II," released Feb. 14 by Credit Suisse First Boston Bank.
In December 1990, a month before the U.S. began kicking Iraq out of Kuwait, inflation was more than double the rate in the month before Operation Iraqi Freedom, unemployment was nearly a percentage point higher, disposable income was falling instead of rising as it is today and consumer confidence was 20 points lower, according to Credit Suisse.
Perhaps the most telling economic difference was mortgage interest rates.
A month before the Gulf War, 30-year mortgage fixed interest rates averaged 9.67 percent with 1.9 points (each point is one percent of the amount financed.) In February, this year, a month before the U.S. invaded Iraq, interest rates were nearly half, 5.84 percent and only 0.6 points, according to Freddie Mac's Weekly Mortgage Rate Survey.
After the 1991 war, instead of rising, mortgage rates fell and continued to fall for more than a decade never again rising to the pre-war level. On March 6, Freddie Mac said the 5.67 percent fixed interest rate for 30-year mortgages was the lowest it's been since April of 1971, when it first started tracking rates.
The two periods parallel more closely in Silicon Valley. Then, as it is now, Silicon Valley's economy was in the throes of marked change.
When the 1991 war began, Silicon Valley was already suffering the effects of the defense industry cutbacks, emigration by the manufacturing industry and overcapacity in personal computers all exacerbated by the 1989 Loma Prieta earthquake and a host of other natural disasters.
Before the war, Silicon Valley's housing market was on the ropes with the rest of the economy. Home prices peaked in 1989 and were already sliding when the war began. Victory at war was followed by a brief, euphoric rise in home prices that ended a few months later as the recession deepened and home prices slid further. From 1989 to 1993 -- four years -- home prices plummeted about about 9 percent.
Today, Silicon Valley is well into the third year of an economic slow down and the housing market is showing significant signs of wear. The highest median price ever for single family homes in Silicon Valley was $578,000 in May of 2002. February's median was $535,000 -- in less than a year prices have fallen more than 7 percent, according to Richard Calhoun, of Creekside Realty, a broker who analyzes data from the area's multiple listing service, RE InfoLink.
"I believe the Persian Gulf is the best example. People will freak out. They will freeze and they won't buy any real estate and prices will plummet. We'll win the war everyone will get exuberant and prices will jump and then fall back to economic reality," said Calhoun.
"If anybody needs proof the market is not doing well, look at the February volume of transactions. It's only $442 million dollars. We are experiencing the third worst month since February of 1999," said Calhoun.
Bubble markets
WITHOUT considering the war factor, two recent reports put Silicon Valley at the top of the heap of so-called "bubble markets" regions that have experienced a run up in prices and now face economic conditions that could cause prices to suddenly deflate.
In February, Walnut Creek-based PMI Mortgage Insurance Co.'s PMI Risk Index said San Jose's risk of home prices declining by 10 percent in the next two years is twice that of the national average. Only two metropolitan statistical areas in the survey had a higher risk.
Late last year, Consumer Reports' subscribers-only "Making Your House Pay Off" used Wellesley, MA-based Local Market Monitor's price-income ratio as a barometer for overpriced markets. The ratio found San Jose's homes overpriced by about 20 percent or $100,000. Oakland and San Francisco were similarly overpriced, according to the report.
Others insist, because of Silicon Valley's resilience, its ability to remake its economy, and the chronic supply-demand shortfall, home prices aren't likely to suffer through a war.
"There is a net migration right now, but the immigrants are here and they are sharing households. Even though they are not moving in, they are two families that can move out of rental homes and buy," Mr. Donohoe said.
Professor of finance and real estate, Michael Carney, director of the Real Estate Research Council at Cal-Poly University, Pomona, CA agrees excess demand for housing will carry the market.
"War tends to be a negative factor in home prices. If there is going to be an effect it won't be positive, but because of the excess demand for housing I don't think there will be any discernible, measurable, identifiable effect from the war on home prices," Mr. Carney said.
Calhoun doesn't agree and says if his projections are correct, sellers may have already missed the boat should this war precipitate a further slide in prices. Buyers, on the other hand, still have time to wait for lower prices -- provided they are gainfully employed and mortgage rates cooperate.
"People think this war is going to be shorter than the Persian Gulf War. If Saddam can pull it off and get his military into cities it could take a long time," said Mr. Calhoun.
"The short term effect will be significant because you will have plummeting prices. It will be initially positive for buyers. In the long term it will not be good for anybody if something doesn't stimulate the economy," he added.
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