Patience and Moderation

By Philip Kuharski Executive Vice President Fidelity Mutual Savings Bank Spokane, Wa.

I AST year we L said "the party is over. " We expected a bad year in 1980 for the economy and for housing in particular. Most economic forecasters shared that view. The majority was rieht.-What the majority did not see, however, was the dramatic, historic and fundamental change in real estate financing. Interest rates have apparently ratcheted up to a new higher range that will surely inhibit cost/benefit decisions over the next year or two.

More importantly, the fixed rate, long term loan that offered millions of investors and homeowners positive leverage (benefits and/or appreciation against interest cost) has been replaced with a variety of new loan programs that are full of uncertainty for the borrower.

The public is learning to accept short term loans, balloon payments, renegotiable or variable terms and even shared appreciation mortgages.

But this learning process will retard the normal bounce in real estate demand that we have experienced in past recovery periods. As a result it is difficult to project much more than a 25 to 307o increase in housing starts in l98l for the nation or even in the West.

The improvement in performance will take place after midyear rather than within the next few months. For the record, our national forecast for l98l includes the following essentials:

19'79 1980 l98l est. est degree of accommodation by the Federal Reserve System. In order to reduce inflation and thus interest rates, the Fed is in the process of bringing down the growth rate of money and credit. That is causing pressure in the credit market and the pressure should continue as we go into 1981.

At some point in the first half of next year (I sure wish I knew when) the combined effect of continued monetary restraint and a stagnant economy will begin having an impact on inflation expectations. In fits and starts. the basic level of interest rates will moderate sufficiently so as to begin bringing real estate buyen out of their fox-holes.

Story at a Glance

Even in the West, only a25o/o30% increase in housing starts construction will improve at a slow pace . . no real estate pickup until the second half of '81.

If a delicate balance between demand and available credit can be maintained, these interest rates will not move back to the high part of the new range. During this period, patience by all of those involved in the real estate market place will be required. Construction will proceed at a slowly improved pace. A construction boom in 198 I without a sound economic foundation would not be good. Another year like this past year would certainly not be good.

What is needed is moderate but consistent improvement over 1980 production levels so that excesses are avoided. Along with the necessity of defense expenditures and business equipment purchasing, the solid rejuvenation of real estate construction is a major requirement and probability for our improved economy over the next two years.

While total real national production (Real GNP) will not improve in 1981, the real estate construction component can and will increase. A year from now those builders and suppliers who have weathered the storms of 1980 will be experiencing solid revenue improvement.