Though existing home sales reached a record high in August, experts predict a considerable drop over the next two quarters as the country enters into a recessionary period and consumer uncertainty rises, sparked by the Sept. 11 terrorist attacks.

According to the National Association of Realtors, August figures show that existing-home sales went up by 5.8% to a seasonally annual rate of 5.50 million units from an upwardly adjusted level of 5.20 million in July. This year's numbers stayed at 5% more than the 5.24-million unit pace in August 2000. Before that, the record high was an annual rate of 5.45 million units in June 1999.

"The August numbers pretty much reflect the traffic that occurred in July," said Lawrence Yun, senior forecast economist at the NAR. He said that some sort of a lag effect occurred where people looked for homes in July but closed on the sale in August.

Despite the upward trend in home sales thus far, the NAR expects a 10% drop in the next two quarters as the U.S. economy weakens.

Street research has also lowered its projections for existing home sales. According to a UBS Warburg report, "existing home sales are likely to drop for September, even if the strength of the housing market (i.e, daily turnover levels) remains unchanged."

Analysts said that since September only has 19 business days, there should be an 11% drop in home sales based on day-count alone. However, because of the WTC attacks, the number of business days would likely only be 17-18 days. This would probably mean a 15% or more decline in home sales for the month.

People are closely paying attention to the September figures because these numbers will be crucial in determining the true market's reaction to the terrorist attacks

A Bear Stearns report said that the first indications of the next step in the housing market would be the consumer confidence reading released on Sept. 25 as well as the existing home sales figures for September that will come out on Oct. 25.

"In both cases, these numbers will capture both pre-attack and post-attack conditions, and will give the first indication of how homeowner behavior may have changed," said Bear. "Subsequent months, of course, will fully measure the response to the new political and security reality."

Consumers take a step back

As the country faces an imminent recession and as the unemployment rate rises, consumer confidence has been dealt a major blow, especially with the uncertainty that followed the WTC incident.

The floundering economy combined with the rising uncertainty will stop consumers from making big-ticket item purchases, said NAR's Yun. Though mortgage rates should remain attractive, "consumers would probably wait and see before they step back into the housing market. The 10% decline we are predicting reflects this negative sentiment," he stated.

The hesitancy would come mostly from high-end buyers with the stock market continuing to see bad days, and as people are unable to cash in their stock options. However, there will likely be more marginal homeowners coming in as they take advantage of very low mortgage rates.

No east coast, west coast bifurcation

Though the recent terrorist attacks only happened in the east coast, the effects on the housing market will be national in scope.

"People would be worried more about where the next attack would be, it wouldn't necessarily be in Washington or New York," Yun stated.

Yun cited the Oklahoma bombing incident as a point of comparison. In this case, however, the decline in home sales was fairly local.

"The attack on Washington and New York was really an attack on the whole country, thus it's affecting consumer confidence throughout the nation," said Yun.

If regional differences were to be considered, economic factors would take precedence. Places like Florida and Las Vegas, where employment is based on the aircraft and hotel industries, would probably be the most affected, said Yun.

Recovery in the spring

The NAR anticipates that after declining by 10%, home sales will start showing a 5% pickup starting in the spring of next year as the economy starts to recover.

The economy would be spurred by various government efforts such as spending on defense contracts, the rebuilding of New York and Washington and its assistance given to the airline industry. The insurance money for the families of the victims will also have started trickling in by then. These, along with the effect of the numerous Fed rate cuts, should start the ball rolling again.

And as the economy springs back, investors should start switching from bonds to stocks and this should raise overall long-term rates. Yun said that those who are in a good position to buy a house should consider doing so right now when mortgage rates are at historically low levels.

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