Will Real Estate Be a Casualty of War?

N E W  Y O R K, April 11 -- The cost of the war with Iraq isn't limited to the billions of dollars the United States is spending on weapons, manpower and civilian relief. Nor will those costs cause the American economy irreparable damage.

What could have serious economic consequences for the country, however, is the effect war has on consumer spending. If Americans are too nervous and uncertain to book summer vacations, buy new cars, homes and furniture, it's bound to have a devastating impact on America's already fragile economy — of which 70 percent is reliant upon consumer spending.

It could be especially disastrous for the real estate industry, which was already expected to take a tumble, long before the war started. Last year, home prices appreciated nearly double the norm at a 7 percent rate (on a decent year, a 4 percent appreciation rate is considered respectable). After such a remarkable year, and given the fact that mortgage rates were expected to rise after two years of 40-year lows, economists were expecting sales to slowdown, and price growth to drop.

Before the war, the National Association of Realtors' economists, for example, expected the home price appreciation rate to drop 33 percent to 4.7 percent. Now that the country has been at war for two weeks and the economy is in a holding pattern, the real estate sector seems positioned for an even steeper fall.

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Although the results for March home sales haven't been released yet, between January and February sales dropped 4.3 percent. Last week the Conference Board, purveyors of the popular Consumer Confidence Index, reported that the Index declined sharply in February to 64.8, and the Index fell another 2.3 points to 62.5 in March (on the index, 1985 represents 100).

Big-Ticket Sales Slowing

Even if consumers' nervousness hasn't shown up in home sales yet, it has showed up in sales of other big-ticket items. The big three automakers — Ford, Chrysler Group, a subsidiary of DaimlerChrysler, and General Motors — all reported drops in March sales. Ford reported a 7.9 percent drop; and Chrysler and General Motors reported a 3 percent drop each.