Assuming there are no further terrorist attacks on the U.S. mainland, the recession should be short, the already low mortgage interest rates may dip further and then rise only modestly, and better times will be here by spring.
That was the prediction of David Lereah, chief economist for the National Association of Realtors, at the trade group's annual convention, which attracted 23,000 members and guests to Chicago last week.
"That's my best projection," said Lereah (pronounced Le-RAY). "If there were another attack, we can't tell how consumers will react."
The economy was headed into a recession before Sept. 11 because of a loss of $6-trillion in value in the stock market since March 2000, the bursting of the tech bubble and a manufacturing sector that was already in trouble.
Nonetheless, "We were fundamentally a sound economy on Sept. 11, with interest rates and inflation relatively low," Lereah said. Typically, recessions are characterized by rising interest rates and high inflation.
What will lead the nation out of the recession, he said, is a three-part package: continued low interest rates; a federal economic stimulus package of as much as $100-billion that creates jobs (disaster relief, corporate tax cuts, airline bailouts, defense spending); and "a very, very accommodating Federal Reserve" that will keep rates low and the economy in check.
The Fed's rate cut Tuesday of another half-point in the Federal Funds Rate, which will have the effect of lowering consumer interest rates, is an example of that accommodation.
"For consumer confidence, we need to do this," Lereah told the Realtors. "It could lead to higher rates and inflation down the road," he acknowledged, but "it's the right thing now."
He has been predicting that 30-year, fixed rate mortgages will "hit a floor of 6.6 percent," or perhaps even 6.4 percent. Then rates will rise by the end of 2002 to about 7.2 percent, he predicts.
The recession "will be short-lived," he said, with negative gross domestic product growth of minus 1.6 percent in the fourth quarter of this year and "a rebound in the first quarter of 2002: February and March." He expects a GDP of 1.9 percent in the first quarter and 4.0 in the second quarter.
That prediction sounded optimistic to Lereah's predecessor as the NAR's economic chief, John Tuccillo, who is now a private consultant and attended the Chicago convention. He expects a flat first quarter and sees no real recovery until the second quarter of next year. Tuccillo also cautioned that efforts to prod a sagging economy back to life may have the unwanted side effect of inflation a year from now.
Whenever it comes, the rebound will lean heavily on the government stimulus package and the accommodating Fed, and "the housing sector will be extremely important," Lereah said. "It kept the economy afloat pre-Sept. 11, and it's important that it stay healthy to encourage a rebound."
Realtors plan to make sure the White House realizes that housing represents 14 percent of the GDP and that 40 percent of household disposable income is housing-related, Lereah said. "Our trump card is that the housing sector is critical to the health of the economy."
The economic stimulus package being formulated now in Washington "is not the last," and the NAR's goal is "to make sure real estate is part of any package," he said.
The NAR is still predicting 5.19-million existing home sales this year, the second-best year on record and an increase of 1.3 percent over last year. For next year, it expects 5.16-million sales, down just 0.6 percent.
Lereah's predictions were cautiously optimistic, but he acknowledged that the world changed on Sept. 11. "There's a whole new list of priorities for our government, and we need to salute and get on the bandwagon," he said. "They're going to impact our personal and business lives."
Among them: Before Sept. 11, the economy was in an expansion mode; now it's in a recession. Defense spending was flat or declining; now it's increasing. The federal budget had a surplus; now there may be a deficit.
"We need to be very, very careful about basing our business lives on the assumptions of the past," Lereah said. Before Sept. 11, he would have based his forecasts on an expectation of 10 years of budget surpluses, low inflation and low interest rates. That's no longer a sure thing.
"We want low rates, but not at the expense of inflationary pressure," he said. "We all have our limits. The Fed can't be accommodating forever."
Inflation may be avoidable, he said, "if the Fed operates with diligence and skill to keep (the economy) from going out of control."