Consumer Confidence Down; Home Price Declines Intensify

MBA (4/30/2008 ) Velz, Orawin
The Conference Board's Consumer Confidence Index fell 3.6 points to 62.3 in April, following a drop of 10.5 points in March and 10.9 points in February. The index has reached its lowest reading since March 2003, during the U.S. invasion of Iraq, and its second lowest since October 1993. So far, the index has dropped nearly 50 points since the August 2007 financial turmoil.

The present conditions component fell 9.9 points, while the component gauging expectations for the next six months edged up to 50.1 from a record low of 49.4 in March. Weak labor markets, rising energy prices, falling house prices and credit market concerns likely weighed on confidence.

Consumers’ assessment of current labor market conditions continue to deteriorate. The share of consumers finding jobs plentiful fell 2.6 percentage points to 16.6 percent. The share finding jobs hard to get rose 3.4 percentage points to 24.5 percent.

The survey reported that plans to buy homes declined in April to the lowest level since December 1982. According to the National Association of Home Builders/Wells Fargo Housing Market Index released earlier this month, home builders’ confidence during April continued to hover around the record low level reached in December 2007. Builders reported some improvements in traffic through their model homes from the end of last year but noted that increased traffic has not translated to sales. While tighter lending standards have made it more difficult for some households to qualify for a mortgage, real estate agents and builders have reported that some potential homebuyers are more reluctant to buy in declining home price markets.

A report from Standard and Poor’s released yesterday revealed that home price declines in several big cities have shown no sign of abating. The S&P/Case-Shiller Home Price Index tracks repeat sales of the same single-family house over time. It is therefore a better indicator of home price trends than average or median home prices, which can be distorted by the mix of sales of low- and high-priced homes.
The 10-metro area composite index was down 13.6 percent in February from a year ago, the largest decline since the inception of the series in 1987. The broader 20-metro area composite index showed a year-over-year drop of 12.7 percent, the sharpest decline in the history of the broader index since its inception in 2000.

Nineteen out of 20 metro areas reported year-over-year home price drops, with only Charlotte, N.C., showing a small gain of 1.5 percent. Las Vegas posted the largest year-over-year decline of 22.8 percent, followed by Miami’s 21.7 percent drop. Price declines for metro areas have accelerated over time. In February, 17 of the 20 metro areas reported record year-over-year home price declines (10 of which were in double digits), compared with 16 in January and 13 in December.

The 20 selected metro areas do not represent the overall picture of the nation’s housing market, however, with seven of the total coming from the four states experiencing the most significant home price drops in the nation: California, Florida, Michigan and Nevada. The metro areas for these states account for more than half the rate of the decline. The Case-Shiller index for the nation is only available on the quarterly basis.

Another home price measure using the repeat sales transaction methodology is available from the Office of Federal Housing Enterprise Oversight (OFHEO), which uses mortgage data from Fannie Mae and Freddie Mac. The overall house price index (including refinancing transactions) is released quarterly but the purchase-only index (excluding refinance transactions, making it more compatible to the Case-Shiller index) is released monthly.

OFHEO also released February home price data last week, showing that the purchase-only home price index increased 0.6 percent from January, the first monthly increase in eight months. From a year ago, the purchase-only index fell 2.4 percent. While the OFHEO index has better coverage than the Case-Shiller indices, it includes only conventional conforming loans, with relatively fewer subprime loans and adjustable rate mortgage loans.

A huge inventory overhang of homes in many parts of the country has put downward pressure on the areas’ home prices. Another worrisome aspect of housing inventory and home price trend is the rising homeowner vacancy rate—the share of units typically occupied by owners that are for-sale and vacant. The Census Bureau released data on Monday showing that the total homeowner vacancy rate rose to a record high of 2.9 percent in the first quarter of 2008 from 2.8 percent in the final quarter of last year. Rising homeowner vacancy rates put downward pressure on home prices because a seller of a vacant home (who may be paying another mortgage elsewhere) is more likely to slash prices to make a sale than sellers who still live in their homes.

Treasury yields rallied while stock markets fell on reports of declining consumer confidence and accelerating home price declines. The 10-year yield fell four basis points and stayed around 3.80 percent by mid-Tuesday afternoon.

The Federal Open Market Committee will conclude its meeting today to decide what to do with interest rates. Fed funds futures indicated that the probability of a 25-basis point cut in the fed funds rate was about 85 percent. After that, the markets expected an extended pause. The dollar strengthened to a three-week high against the euro on speculation the Fed will signal that it's done with its easing.