The emergence of a recession, the terrorist attacks in September, and the 18-month meltdown on Wall Street leads to an obvious question: What will happen to real estate?

No one has a foolproof answer, yet there is much to suggest that real estate will handle a recession with minimal discomfort.

Appreciation is likely to stall nationally, price declines in some areas will occur, and unit volume seems destined to decline, but such trends are part of the give-and-take to be expected over time in any marketplace.

Unlike the stock market however, housing is not an option. While people do not have to buy shares, they do want shelter thus there is a continuing market for real estate. While demand for stock may wane, the need for housing is ongoing.

According to the Office of Federal Housing Enterprise Oversight, government regulatory agency that oversees Fannie Mae and Freddie Mac, home prices nationwide rose 8.6 percent in the year ending June 30th.

More interesting, home prices have also appreciated significantly over time: up 34.8 percent during the last five years and 162.2 percent since 1980.

Which areas did best? You might be surprised, but New England showed the most appreciation over the past five years -- 49.2 percent, just nudging out the Pacific region (46.2 percent). Since 1980, New England also had the most growth, 296.3 percent. The Pacific region came in second with a long-term appreciation rate of 210.6 percent.

It helps, of course, that interest rates are well below 7 percent for 30-year fixed rate loans. The Federal Reserve has reduced short-term rates eight times this year and no one would be surprised if the Fed made one or two additional rate reductions before 2002.

In August, says the National Association of Realtors, existing-home sales rose 5.8 percent to a seasonally adjusted annual rate of 5.5 million units. That's a record.

As a result of the September terrorist attacks, however, NAR now expects unit sales to moderate.

"Like everything else, this bright spot in the American economy has been eclipsed by the events of September 11," says David Lereah, NAR's chief economist.

"Our internal tracking shows a downturn following the attack on America, and there will be some natural pullback from big ticket purchases in the months ahead given uncertainty over the future."

NAR expects existing home sales to average below the 5.0 million-unit rate through the first quarter of 2002.

NAR also says the median price for this year should rise 5.8 percent to $147,100, then increase 3.3 percent in 2002 to $151,800.

Standard & Poor's, the huge credit ratings agency, says that, "it does not expect the events of Sept. 11 to have a direct impact on the residential housing market. However, the indirect effects of additional layoffs and general economic softening related to the tragic events will add to the expected decrease in housing starts and an increase in mortgage delinquency rates.

The firm, "expects the overall strength enjoyed by the single-family housing market over the last several years to moderate as fears of recession and announced layoffs increase. The sector had already begun to weaken in August when housing starts dropped 6.9% to an annual rate of 1.53 million homes from the July pace of 1.64 million homes. While this sector is expected to weaken, the impact of lower interest rates may spur an increase in refinancing activity, particularly because further Federal Reserve reductions are expected before year-end."

For more articles by Peter G. Miller, please press here.

Published: September 26, 2001

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .