Consumer Confidence Slips, Home Price Declines Continue

MBA (6/25/2008 ) Velz, Orawin
The Conference Board's Consumer Confidence Index fell 7.7 points to 50.4 in June. The index has reached its lowest reading since February 1992 and its fourth lowest since the record began in 1967.

This was the sixth consecutive drop in the index, indicating that the tax rebate checks have not lifted confidence levels even though they apparently boosted retail sales in May.

The present conditions component fell 9.7 points to 64.5, while the component gauging expectations dropped 6.3 points to a record low of 41.0. Weak labor markets, rising energy prices, falling house prices and credit market concerns likely weighed on confidence.

Consumer assessment of current labor market conditions deteriorated sharply. The share of consumers finding jobs plentiful fell to 14.1 percent—the lowest since December 2003. The share finding jobs hard to get rose to 30.5 percent—the highest since December 2003.

Consumers were concerned about the outlook of the job market and their income prospect. The share of consumers expecting more jobs in the next six months fell to 8.0 percent—matching its lowest level since 1980. The proportion of people who expect their incomes to rise over the next six months decreased to 12.3 percent—the lowest reading on the record.

According to the survey, plans to buy homes declined to the lowest level since October 1982. Plans to buy auto and appliances also dropped. Consumer expectations for inflation remained at their highest level on record back to 1987.

The Conference Board’s measure indicated a severely depressed level of confidence similar to readings in other measures of confidence. For example, the University of Michigan Consumer Confidence Index dropped in early June to the lowest level in 28 years.

Two home price reports released yesterday showed that prices continued to decline in April. A report from the Office of Federal Housing Enterprise Oversight (OFHEO) showed that the purchase-only house price index (excluding refinance transactions) dropped 0.8 percent in April from March. From April 2007, when the index also peaked, the purchase-only index fell 4.6 percent.

Year-over-year home price changes varied significantly by Census divisions. The Pacific division led a decline in prices of 15.0 percent. The New England, South Atlantic and Mountain divisions each saw a drop of between four and 5 percent. Price declines were more modest in the West North Central and Middle Atlantic divisions of 2.4 percent and 3.3 percent, respectively. The West South Central and East South Central divisions saw slight price increases.

Another home price report from Standard and Poor’s showed home price trend in selected big cities. The 10-metro area composite index was down 16.4 percent in April 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 15.3 percent—also the sharpest decline in the history of the broader index since its inception in 2000. These two indices are now down 19.1 percent and 17.8 percent, respectively, from their peak.

All 20 metro areas reported year-over-year home price drops. Las Vegas posted the largest year-over-year decline of 26.8 percent, followed by Miami’s 26.7 percent drop. 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.

Treasury yields rallied while stock markets fell on reports of declining consumer confidence and continued home price declines. The 10-year yield fell eight basis points and stayed around 4.08 percent by mid-Tuesday afternoon.

The Federal Open Market Committee will conclude its meeting today to decide what to do with interest rates. The financial markets largely expected the Fed to keep interest rates steady.

It is likely that the Fed will implicitly adopt a bias toward future tightening by indicating that downside risks to economic growth has subsided while rising energy prices pose an upside risk to inflation.