Though indications point to a slightly less exuberant market, all in all, the 1999 real estate market is shaping up quite nicely, says Dr. Steven H. Ott, director of the Center for Real Estate Studies at the University of Kentucky.

Ott recently outlined the 1998 real estate market figures and offered his predictions for the coming months at the 1999 Economic Roundtable held by the University of Kentucky's Carol Martin Gatton College of Business and Economics.

Residential markets

1998 turned to be an extraordinary year in terms of real estate, said Ott, surpassing most expectations. The average 30-year fixed-rate mortgage interest rate hovered between 6.9 and 7.6 percent, "the lowest mortgage interest rates we've seen in a generation." As a result of those low rates, the country has seen home ownership rates increase from 64 percent to 67 percent.

"Most people look at that and say 'big deal,'" noted Ott, "but that's three million renters who've become home owners."

In addition to low unemployment rates and an overall inflation rate of less than two percent, the baby-boomers continued to play a major role in the demographic trends, consuming housing at a higher rate and moving up into larger homes.

"When you mix all of that up into a pot, what do you get?" queried Ott. "You get 1.26 million home starts in 1998, up 12 percent from 1997, which was already a great year."

Futhermore, added Ott, existing home sales were "phenomenal," numbering 4.77 million nationwide.

Builders and developers, mortgage bankers, materials suppliers and realtors are among those benefiting from the surge, not to mention consumers, who've either managed to get into their first home or move up into a bigger house.

"This is not something we can see every single year," Ott emphasized. "Basically, the economic heavens and stars are aligned and it doesn't get any better than this."

Commercial real estate

"What's nice about this economy in the commercial market right now is that supply and demand for space tends to be at an equilibrium across the country," noted Ott. "In the '80s, developers [had] a 'Field of Dreams' mentality: 'If I build it, they will come.' It didn't matter about the supply and demand of the marketplace. Then we got overbuilt, lenders lost money on loans, bankruptcies, etc. It's very, very different in the '90s. I've never seen it like this before. People get really scared about overbuilding and rents going down and vacancy rates going up."

Ott pointed to the figures surrounding equity REITs (real estate investment trusts), which function, in essence, as mutual funds for real estate.

"The stock market is booming and has been, but look at real estate stocks Ð down last year 17.5 percent," Ott pointed out. "There is extreme discipline in the real estate market these days. Those stocks plummeted when there were signs of construction in 1998 and everybody became worried about what was happening in the marketplace. They didn't want to see the overbuilding of the '80s and investors pulled their money out of REITs, driving the stock market prices down."

As a result, Ott explained, REITs are having more trouble borrowing money because of the lower stock prices and they can't raise new money in the stock market because of the lower stock prices. Accordingly, REITs have backed off significantly, construction has slowed down and lenders are cutting back on mortgage loans.

"We're not seeing the kind of overbuilding we saw in the '80s," Ott continued. "In fact, we're stopping before the boom even starts. So this is an indication that the real estate cycle, if not dead, has certainly been moderated by the fact that capital markets are so involved in real estate these days. It's no longer private decisions among lenders and developers. It's Wall Street, it's analysts, it's all of us looking at these stocks and realizing that that [is what] influences the marketplace."

For 1999, Ott is predicting steady to slightly lower mortgage interest rates and slightly higher inflation, likely in the 2.5 percent range. He is also anticipating that the trend in move-up buying is likely to slow, as will the rate of new home ownership. Still, sales levels of both new and existing single-family homes are likely to remain high, though Ott is forecasting a decline of some five percent from the 1998 figures.

"But we have to remember this is still, historically, a very high level of homes," emphasized Ott.

Overall, those factors add up to a very nice scenario for the coming months. So what could spoil the 1999 market? Though Ott mentioned several possibilities, he doesn't believe any of them to present significant problems.

"Weaknesses in Latin America and Asia...didn't seem to spoil anything in 1998, so I don't really foresee that being a problem," he said, adding that other international matters such as the problems in Bosnia and the continuing conflict with Saddam Hussein have been "going on year after year, but don't seem to pull us down." As for national politics, Ott said, "people just ignore what's going on in Washington and consume and buy and manufacture."

"I think the things that could change this [forecast] are things we don't know about right now. Nobody's really sure of what they are, it's the unknown," he continued. "But nobody's seeing that, so we're predicting a very good year for 1999."

Karen Baird is associate editor of The Lane Report.