ROARING REAL ESTATE
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Through war and a slowdown of hostilities, Americans remain focused on one clear goal for the future: placing a new roof over their heads. As a result, despite the war in Iraq and other unsettling events, the housing market remains strong.
Last year, the real estate market set records as prices surged. Mortgage rates fell to near-record lows. Since the beginning of 2003, however, an unseasonably harsh winter has placed a crimp on activity.
Get ready for a 6 percent rebound in March housing starts on Wednesday, following an 11 percent fall in February. That’s the prediction of Chicago economist Brian Wesbury, who says fears that the economy will sink into a double-dip recession are overblown.
“With mortgage rates at rock-bottom levels not seen since the 1960s, and incomes still growing faster than inflation, the housing market should see additional strength,” said Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm.
February, he said, was “a terrible month, filled with one-time events, including an orange alert, a frenzy to buy duct tape and terrible storms that included 50-year low temperatures.”
None of that, however, equals a long-term downward trend, according to Wesbury.
For one thing, a lot of new-home construction remains in the pipeline, he said, because permit applications in February soared.
“Builders were just waiting for the weather to clear, so now they are getting started on a lot of new housing,” Wesbury said.
“And the market still has plenty of buyers.”
FEDERAL RESERVE
Talk of a tonic
Although inflation could soon revive, with prices for some commodities on the rise, few warnings are being offered by members of the Federal Reserve about price pressures.
In fact, policymakers of the central bank are far more worried that the economy will go stone cold than it will overheat.
There were reports last week that Fed Chairman Alan Greenspan is refining an emergency plan to flood the banking system with billions of extra dollars. Sources said it would consist of buying back long-term government debt.
This plan would be undertaken if Greenspan decides that ratcheting down short-term interest rates from rock-bottom levels isn’t doing the job.
Chicago banker Kenneth Skopec says there is little likelihood that the Fed will create another tidal wave of money, and not much chance the central bank will cut interest rates when policymakers meet May 6.
But he says the economy is in dire need of a spring tonic.
“At this point, lower rates alone are not the answer,” said Skopec, vice chairman of MB Financial Bank.
“The economy needs a shot in the arm, a quick fix that would make everyone feel good again. About the only thing that can do it is a tax cut that is passed without further delay,” Skopec said.
Unless something is done soon to get the domestic agenda back on track, he said, it is likely that President Bush will be, like his father, a one-termer.
“Boosting the economy at this point rests squarely with Congress, not the Federal Reserve,” Skopec said.
Meanwhile, the Fed gets a fresh reading on inflationary pressures in Wednesday’s report on the March consumer price index.
Expect it to show a small gain, on the order of 0.3 percent, analysts say.
Also due out: the March report on industrial production and capacity utilization, on Tuesday.
Watch for signs that excess capacity is beginning to diminish, even though factories have been operating at a rate barely above three-quarters of their ability.
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EQUITIES
Profit fretting
Instead of reacting with joy to the prospect of a successful conclusion to the fighting in Iraq, the stock market responded with the usual jitters.
Traders began fretting over ho-hum first-quarter corporate profits, coupled with downbeat forecasts for the remainder of this year.
Bannockburn-based mutual fund manager Henry Van der Eb says there is room for the market to rally, but the upside appears limited.
“Companies still lack pricing power,” said Van der Eb, of the Gabelli Mathers Fund. “When carmakers are offering zero-percent financing for five years, they can keep up with paying their bills, but earnings quality is lacking. We are faced with a profitless prosperity.”
He said the economy is operating “below stall speed. Unemployment is rising, and there is not much in sight that would provide a meaningful jump-start.”
However, if the expansion were to gather speed, Van der Eb said, the outlook for Wall Street would improve.
He added, “The real test is whether the economy can create jobs.”
Meanwhile, stock, bond, options and futures markets will face a four-day week, closing for Good Friday.