Home prices
Is the long housing market rally ending? A recent slowdown in the pace of sales is generating fears that upward movement in prices is running too strong and may soon reverse course.

Some areas ARE likely to see price declines. Most vulnerable: Cities with huge gains in existing-home prices over the past year ... Las Vegas (up 52%), Riverside/San Bernardino, Calif. (39%), San Diego (38%), and Miami and Fort Lauderdale, Fla. (both up around 25%).
But there’s no nationwide home price bubble ready to burst. Rather, a bit of air is escaping from a somewhat over-inflated market. Unlike in the late 1980s, when house prices took a substantial dip, supplies today remain tight. The national inventory of unsold homes is steady at 4.3 months’ worth, well below the 9-month danger point.

Mortgage rates have actually turned lower in recent weeks, keeping demand buoyant, though not as strong as earlier this year.
And rates will rise only gradually in coming weeks. The average on a 30-year fixed mortgage will hit 6.25% by year end ... 7% by 2006.
A calmer market is just what’s needed to avoid a housing bust, allowing buyers to relax a bit. Homes for sale are less likely to spur a bidding frenzy, driving prices upward to eye-popping levels.
Overall, home prices will still go up, albeit at a slower pace. Look for an average nationwide gain of 4% in 2005 versus 7% this year.

Energy
Talk about the U.S. managing oil prices is just that ... talk. Some analysts liken oil to interest rates, promoting intervention to prevent the economic damage caused by excessive price volatility. They urge tapping the 1.5 billion barrels of strategic oil inventories held by the U.S. and 12 other nations to help meet strong demand.
Supply management is a difficult proposition, given the size of the oil market and the chance of countermeasures by key oil producers. The benefits of releasing oil could easily be offset by production cuts.
And there’s a danger of overshooting, sending prices tumbling. If the market is already nearing a peak, even a relatively minor tweak could collapse prices. That would cause problems for producing nations and deter energy companies from making investments in new production.

Efforts to boost imports of liquefied natural gas face hurdles, despite big demand for the fuel. More imports would help balance supplies with the growing consumption of natural gas by U.S. manufacturers, which rely on the clean-burning fuel to comply with antipollution laws.
Local politicians balk at building new LNG processing facilities in their communities because the installations may pose safety problems.
But U.S. courts will overrule their objections. By 2010 or so, they likely will have granted the Federal Energy Regulatory Commission a stronger hand in deciding where new LNG plants should be located.

Texas and Louisiana are the favored locations for new LNG terminals, adding to existing facilities in Massachusetts, Maryland, and Georgia. In about 10 years, when the new processing terminals come on line, imports of LNG will provide up to 20% of U.S. requirements, up from about 3% now.
Supply disruptions will still be a worry, though. Why? Key LNG suppliers are located in politically shaky countries in Africa.

The economy
August’s solid job gain ushers in a period of steadier hiring. Managers in big and small firms are bullish heading into fall, and slowing productivity gains mean they’re squeezing as much as they can from current staff. Raising output now means having to add workers.
More hiring will give consumers a second wind after a respite this summer amid the big fuel price run-up and fading tax-cut stimulus. Don’t write off consumers after soggy August back-to-school and auto sales.
We’re still on track for 4% GDP growth this year, 3.5% in 2005.

The 144,000 increase in jobs raises odds of an interest rate hike on September 21. Loath to appear politically influenced by delaying a jump until after the November election, the Federal Reserve will pursue its course of measured rate increases. The job gain nearly cinches the next hike.
By year end, look for the fed funds rate to be 2% vs. 1.5% now. Expect banks to raise their prime rates by about a half-point as well.

© 2004 The Kiplinger Washington Editors, Inc.