Housing's mixed bag

By Alan M. Gayle Vice President & Chief Economist Crestar Bank

HE economic expansion continued through 1989 amid increasing signs that momentum was fading. The outlook for 1990 is little different, although good news may be harder to come by. Nevertheless, the housing industry should be affected by special factors that may help avert a severe retrenchment.

Most major sectors of the economy experienced some form of downward pressure in 1989. Consumer spending was trimmed by slower growth in jobs and income, but generous financial incentives kept buyers in the stores and auto showrooms. This strategy can work lor awhile, but by the end of the year, the novelty had worn off and the consumer had cut back. The business sector witnessed the drop in new orders for goods and promptly cut back on production and in many cases instituted layoffs.

Story at a Glance

Less good news In 1990. speclal lactors should helP houslng avold a severe retrenchment. .lower mortgage rates next year.

The good news here was that business seemed to react quickly to the weakness, and cut production before burdensome inventories accumulated. On the trade front, the good news from 1988 on surging exports was not repeated. Growth in exports continued, but the momentum that was created by the falling dollar drifted away, making progress on the trade deficit diflicult. All of these events helped to reduce growth in the economy, and all of them are still key concerns for the new year.

The news on the inflation front was both good and bad, but the bad news came first and left, allowing prices to stabilize toward the end of the year. A spike in oil prices and lefitover pressure from the 1988 drought hit the major indexes early but worked their way out of the system by the fall. Slower demand helped apply some pressure as well, and many businesses contained costs in order to maintain profit margins. In short, doing business in 1989 seemed to be a little tougher.

The forces in place affecting 1990 offer little encouragement over the near term, but there is hope for the second half of the year. The consumer does not appear to be in a strong spending mood, and business confidence and expectations are deteriorating. With growth in exports getting harder to maintain, the prospects are slim for an economic rebound anytime soon.

However, all of this negative commentary does not mean that there are not opportunities for the housing industry, and several forces will help create demand in the new year. First, the slower growth should allow the Federal Reserve to lower interest rates further, holding out the prospect of a 9% conventional mortgage rate by spring. Second, the natural disasters that have hit both coasts will (sadly enough) also increase the demand for repair and renovation work. Finally, the softer housing areas around the country appear to have received the worst of the bad news, and some bottoming out is likely during this time.

The outlook for housing in 1990 should be firm, despite what will otherwise be a soft economy. Interest rates should trend lower, and the weaker housing markets should respond favorably. However, selective market targeting will be a critical element of a successful vear.