It's been a tough year. The enduring memory of 2001 will be the terrorist attacks in New York and Washington, the plane crash in Pennsylvania, and the use of anthrax as a weapon. Thousands of people died before their time, something that will be remembered.

On the business and economic front, it's also been a tough year. Had it not been for the September 11th attacks, there's no doubt that the story of the year would have been the economy and its contraction.

Failing dot-coms have been replaced with failing broadband firms. The travel and lodging industry, already having a hard year, were devastated by the events of September 11th and the aftermath. Unemployment is up, something that cannot be ignored in an economy largely powered by consumer spending. And in particular, New York City has suffered massive damage, harm which will last for years.

It has not been a great year on Wall Street. In addition to dropping share values in many industries, the $100 billion ENRON bankruptcy is a major financial event, something which raises serious questions about the accounting and credit rating services that are supposed to protect the public interest, as well as federal regulators charged with overseeing major companies.

Meanwhile, federal and local budgets -- which were supposed to produce surpluses -- are now headed toward red ink, in large measure as a result of increased security costs.

And yet, in the midst of a generally troubled period, there is a bright spot.

Real Estate's Year

Residential real estate has done well in 2001.

According to the National Association of Realtors, "Existing-home sales will be close to a record this year, and with an economic upturn expected next spring, sales in 2002 will nearly match this year." NAR expects some 5.20 million existing homes to be sold this year, just a touch below the 5.21 million sold in 1999.

NAR says that the national median existing-home price for 2001 will be $146,600, an increase of 5.5 percent over last year.

Not only are existing home sales strong, new home construction is also at peak levels.

"Home sales in 2001 should surpass last year's mark of 877,000 units," says Bruce Smith, president of the National Association of Home Builders. Smith expects this year's production to be "around record levels" of 888,000 units.

NAHB says that in August the typical new home sold for $201,500 -- up from $200,400 in August, 2000. However, the NAHB figures also show higher prices during the year including $207,00 in July, $211,400 in May, and $211,000 in February.

Why Real Estate?

Given a recession, the economic impact of the September 11th terrorist attacks, and rising unemployment, why is it that the real estate sector has remained generally strong?

One reason, surely, concerns interest rates. Despite a rise in the past month, for much of the year mortgage rates have been remarkably attractive -- and even today's rates are far better than interest levels during much of the past few years.

The Federal Reserve lowered short-term interest rates 11 times during the year. Such reductions impact adjustable-rate mortgages (ARMs), but not long-term fixed rate loans.

As an example, many ARMs use the 11th District Cost of Funds Index (COFI) as an index. This measure reflects the costs paid by S&Ls in Arizona, California, and Nevada for mortgage money. This index is now down to 3.628 percent -- the lowest rate seen in 20 years.

But what about fixed rates? If the Fed has little directly to do with falling fixed mortgage rates, what does?

Here you need to look to Wall Street. Investors can take their money and buy stock when possibilities look good. But when future projections are not so hot, investors will move dollars into bonds and long-term securities -- financial instruments which are often major sources of mortgage financing.

Lower interest rates have meant that more people could enter the marketplace as buyers and more buyers could afford more expensive homes. The larger pool of potential buyers created by lower rates helps sellers maintain pricing levels. In addition, reduced rates allow existing owners to refinance and cut monthly mortgage costs -- thus freeing more spendable dollars to power our consumer economy.

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

Published: December 18, 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 .