Housing Bubble

Real estate market is vulnerable in wartime

February 14, 2003

If the U.S. gets involved in a war, housing prices may fall, according to RealEstateJournal.com, The Wall Street Journal's guide to property. Although every war -- and its economic backdrop -- is different, wars often depress housing prices because they hurt consumer confidence, especially when they occur during periods of economic distress. In 1991, the year of the Gulf War, sales of new homes fell 4.7%, and new home prices, adjusted for inflation, dropped 5.8%.

Today, as the U.S. contemplates a second war with Iraq, the U.S. economy is once again in a precarious state, with the national unemployment rate at its highest level in eight years.

"If the U.S. goes to war in 2003, housing is going to be vulnerable," says Valerie Patterson, senior producer of RealEstateJournal.com.

Just how vulnerable, though, will depend on how long the war lasts. If the war is quick and decisive, many analysts think it could actually help the economy by reducing the uncertainty that now hangs over the stock market and consumer confidence. But if the war drags on, it easily could lead to higher oil prices and higher interest rates, two problems that would almost certainly result in fewer home sales.

"During wartime, most people become cautious about committing themselves to any kind of major purchase," says Patterson.

In his new RealEstateJournal.com column, "House Talk," Wall Street Journal reporter Patrick Barta notes that there is some good news. Interest rates for 30-year mortgages are extremely low -- below 6%. The supply of homes is tighter than during the Gulf War. And Americans appear to be more willing to view real estate as a safe haven than in the early 1990s; after all, sales of homes have been robust since Sept. 11, 2001. While all of that won't necessarily prevent a slowdown in the event of a conventional war, it could help offset some of the pain.