2003 ... what’ll it be?

Where is the economy heading this year and what does that mean for real estate?

by Mark Dotzour   Global capitalism has been described as a "gale of creative destruction". Every day, new businesses are created and successful businesses continue to grow. At the same time, poorly run and obsolete businesses wither and finally cease to exist. During economic expansions, all firms, good and bad, tend to prosper. When the inevitable recession occurs, the poorly run firms are swept away, creating room for the next generation of successful companies. This weeding out process has been going on now for the past two years. While it is painful to live through, the results will be positive.

Many American companies have been going through a process of "right-sizing" their firms, similar to the downsizing and corporate re-engineering that occurred in the late 1980s. At that time, corporations reduced staff and consolidated business locations. The goal was to become highly profitable. Once the downsizing was completed, the U.S. economy experienced a decade of continuous expansion from 1991 to 2000.

Today, we are in a similar situation. Companies have been "right-sizing" for the past two years. Their efforts are likely to pay off in 2003, with higher profits and stock prices. We are clearly in the very early stages of the next extended economic upswing. What does this mean for residential and commercial REALTORS® in Texas?

Residential real estate: Will we have another strong year?

Residential home sales have been extraordinarily strong in Texas for the past five years. There are several reasons for this. First, the population growth in the past decade has been relentless. Every year, the Texas population grows by about 350,000. It’s like adding a new Corpus Christi to Texas each year. Second, Fannie Mae and Freddie Mac have been very aggressive in creating home-loan programs for virtually everyone. Low income, lack of credit, and lack of downpayment are no longer barriers to homeownership. In the past five years, homeownership rates have risen to record levels. Third, the robust Texas economy has been creating jobs for many new Texans all over the state. Fourth, the incredibly low mortgage rates have enabled many homebuyers to move up to more expensive homes without increasing their payments. Will these trends continue in 2003?

Population growth and job growth are likely to be very sluggish in 2003. Most of the layoffs in Texas businesses have already occurred. However, expect to see continued consolidation in all businesses related to telephones. In 2002, state and local government provided strong job growth throughout most Texas cities. However, both of these sectors are experiencing budget problems and are unlikely to be a source of job growth in 2003. Defense spending and health care will be the strongest sectors this year.

Interest rates are likely to remain at current low levels at least through the first half of the year. The sluggish economy is creating no inflationary pressures. Low inflation translates directly to low mortgage rates. If the economy does start to pick up steam in the second half of 2003, expect mortgage rates to rise gently with it.

Count on Fannie Mae and Freddie Mac to continue to produce new loan products every year. They are now publicly traded companies that must produce earnings growth to satisfy stockholders. They have a vested interest in continuing to see the homeownership rate rise in the United States. Expect home sales in 2003 to look a lot like 2002 as we experience slow but positive job growth and very low interest rates.

Commercial properties: Think small (companies, that is)

Commercial real estate demand for most Texas cities is likely to be very light in 2003. Here is the likely scenario for the commercial markets: The economy will slowly start to expand by the second half of 2003. The need to lay off more workers will dwindle. While most of the layoffs have been completed, many companies have excess real estate capacity. So when business picks up, they will expand into the unused space they already have.

Small privately owned businesses will be the best source of business for commercial real estate professionals in 2003. The owner of such a business can move or expand his company whenever he wants. Managers of big businesses that must report to stockholders don’t have this flexibility. Any decision to move or expand must please their stockholders. With the recent declines in stock prices, most companies are unlikely to suggest moving or expanding in 2003. Keeping costs low is the best way to deliver needed profits to shareholders.

Texas has weathered the first recession of the 21st century remarkably well. Many of our major metropolitan areas have experienced modest declines in employment in 2002. Texas has a broadly diversified economy, driven by many powerful engines. Our state is made up of people with tenacity and an entrepreneurial spirit. While 2003 could be sluggish as we wait for the world economy to reawaken, we are building the base for the next prolonged expansion.

Mark Dotzour, Ph.D, is chief economist and director of research for the Real Estate Center at Texas A&M University.

Illustration © Artville.

home   current issue    top 10    resources 

discussions   contact us   search

Buyers & sellers, visit www.texasrealestate.com.
REALTORS®, visit www.texasrealtors.com.