War With Iraq May Threaten Housing Market
N E W Y O R K, Nov. 1 -- The housing bubble is a lot like the devil. Even people who don't believe in it fear its power.
The idea that the real estate market could implode as a result of a new war in the Middle East is a frightening prospect, for both home owners and the economy in general.
If we judge by history, we could have reason to be afraid.
That Was Then …
Before the Persian Gulf War in 1991, economists had high hopes for the housing market.
The economy was already in a recession, but interest rates were supposed to drop and home sales were supposed to rise.
It sounded great on paper — until Iraq invaded Kuwait in August 1990.
The summer of Iraq's invasion, oil prices rocketed, interest rates shot up to fend off inflation and all the cheery optimism about the housing market got lost in the shuffle.
Thirty-year fixed mortgage rates in 1990 climbed steadily after Iraq invaded. The annual average interest rate on a 30-year fixed mortgage was about 10 percent, while the home price appreciation rate rose only 2.8 percent.
The housing market slugged along for years before it picked up again in the mid- to late 1990s.
By comparison, last year, which was one of the best the housing market had experienced in decades, the home price appreciation rate was 6.3 percent, and the average 30-year fixed mortgage rate was 6.9 percent.
Will we see a repeat of 1991 — or worse — in the event of another attack on Iraq? Could the housing market take a direct hit? Despite the warning signs, there's some evidence that it won't.
… This Is Now
The main reason is that this is not 1991.
This year, according to the National Association of Realtors, home prices are expected to appreciate 6.8 percent.
While there is little faith that the current 6 percent-plus price appreciation rate can be sustained, economists at NAR are forecasting that price growth could drop as low as 4.1 percent in 2003.
But even if prices drop below the 4 percent mark, or only appreciate 2 percent to 3 percent, that's hardly the nuclear meltdown that some members of the media and banking industry would have you believe.
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