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In America, Home Isn't Just Shelter

By Christopher Farrell Home sweet home may be a needlepoint cliché hanging on walls in many homes, but the phrase does capture a deeply felt sentiment in America. One statistic highlights just how much owning shelter means to people: The homeownership rate at the end of 2001 reached a record 68.1% -- up from 64% a decade ago -- as people took advantage of low interest rates to buy houses, townhouses, condos, coops, and mobile homes.

It's not just the buying and selling of new and existing homes that's sizzling. Walk the crowded aisles of Home Depot, Restoration Hardware, and Pottery Barn, and you'll see the boom in home improvement and remodeling at work.

The vibrant housing market is the main reason the latest recession was the mildest in the nation's history. Homeowners got a boost in confidence from the $1.2 trillion gain in the value of their home equity over the past two years. Total new and existing single-family home sales rose to a record 6.2 million units in 2001, and in recent months the annual pace has picked up to an unheard-of 7 million units, according to Celia Chen, economist at consulting firm

GDP BOOSTER. The strong demand for housing showed up in last year's gain in home prices: 6%, after adjusting for inflation. In an economy that expanded at an anemic 1% rate last year, Chen estimates the direct and indirect contribution of housing added half a percentage point to real gross domestic product.

Of course, the question now is how durable the current dynamism in the housing market will prove to be. The market is likely to slow somewhat over the coming year, especially with price appreciation for housing running ahead of household income growth. Interest rates are ticking up, and buyer resistance to high prices is starting to show up in a number of major metropolitan areas. Also, a mild winter encouraged an unusual degree of real estate transactions and some payback is likely during spring.

Still, the economic forces of supply and demand look healthy for the long haul. Indeed, if a surprise is coming over the next several years, it could be on the upside.

BUYERS ABOUND. A big reason for the optimism is demographics. The 2000 Census suggests that household formation ran about an average of 1.25 million annually during the 1990s. Household growth likely will average 1.23 million a year over the coming decade, estimates

New households are being formed all the time. Newly married couples set up their own nest. A divorced partner searches for a new residence. The number of single women with good incomes and careers buying their own homes is skyrocketing. Immigrants are avid homebuyers as their economic circumstances improve with time. Many see homeownership as a milestone toward assimilating into their adopted country.

The aging population supports the housing market, too. Middle-age workers are in their prime earning years, and they're typically eager to own a place they can call their own.

MORE TO SPEND. A number of factors affect home prices, but over time price appreciation largely tracks the growth in household personal income. Workers' wages and compensation should continue rising smartly. Personal income per household should climb over the coming decade at a real 2% average annual rate (4% nominal), assuming the economy's noninflationary growth potential is around 3%.

The U.S. may even be able to do better than that, considering the giant strides companies are making in hiking their efficiency. If workers continue to pocket much of the gain from the added output created by the New Economy, then much of that money could find its way into the housing market (see BW Cover Story, 4/1/02, "Retating the '90s").

Americans have demonstrated that when it comes to spending their hard-earned cash, a home and all the stuff that goes into it -- from furniture to windows to stoves -- tops the list. Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over National Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BusinessWeek Online

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