Home Sales Drive Otherwise Slack Market

Glut of office space in nation's cities will take most of the decade to unwind

MORE "For Sale" signs will appear and then disappear from America's front lawns in 1993 than in any year since 1979.

Analysts expect about 4.4 million new and existing homes to be sold. Yet the commercial real estate market will still flounder in the sea of empty office space built in the late '80s.

Though housing has historically led the nation's economy out of recession, "the housing engine is only chugging along at a moderate pace," says Brian Bragg, editor of U.S. Housing Markets, a real estate research publication. "A rolling recession has hit all sections of the country over the last six or seven years.... We're still seeing white-collar layoffs, so it's not over."

The housing recovery that has begun is "not going to be a boom," Mr. Bragg adds. "I think that's good because the housing industry has historically followed booms with busts."

Where housing outlays have contributed one-third of total growth during the first year of previous economic recoveries, this time around homebuilding accounts for only one-fifth of the increase, the National Association of Home Builders (NAHB) reports.

The recovery has not created the large number of new jobs needed to put the United States economy on a firm footing.

"What's interesting is that the housing market did as well as it did last year," says Eric Belsky, an economist with the NAHB. The economy has "gotten into a recovery through productivity growth, and not growth in jobs."

Most of the activity in the market for new and existing houses last year was precipitated by mortgage interest rates running near 20-year lows, real estate analysts say.

"Housing starts should be up to 1.31 million, new home sales up 8 percent to 660,000, and existing home sales up by about 7.5 percent to 3.75 million," says David Berson, chief economist of the Federal National Mortgage Association, often referred to as Fannie Mae.

But residential real estate is being held back by "a number of negatives," says Michael Carliner, a vice president of NAHB. These include the slow formation of new households, a lingering lack of consumer confidence, and weak income growth in the age groups that most often buy homes.

Analysts agree that some sectors of the real estate market have started to gain, including single-family homes and retail space. The multifamily housing and office-space markets have been a less tractable problem.

In the last year, vacancy rates have climbed in central business districts of cities, says Hugh Kelly, director of economic research and strategic studies for Landauer Real Estate Counselors. He estimates that the office market will not fully recover for several years.

Michael Sumichrast, editor of The Sumicrast Report, is slightly more optimistic. "The office market is going to bottom next year," he says. "But everything else, including industrial space and stores, already has."

CAUTIOUS optimism is the byword. The US economy will continue to grow, "but that growth is not going to be very good," says David Runkle, senior economist at the Federal Reserve Bank of Minneapolis. "The prospects facing the incoming Clinton administration are much worse than people have hoped. This is due in large part to a downward revision in long-term growth prospects."

But most analysts say this recovery is sustainable. "We expect the momentum to carry through to next year when prospects for income growth are going up," Mr. Belsky says.

The biggest surprise in store for the housing markets, predicts Mr. Berson, is that the "Northeast will not be the weakest part of the country this year." That unfortunate ranking will go to southern California, he says.

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