U.S. Economy: Confidence Weakens, Home Prices Slide (Update1)

By Shobhana Chandra and Courtney Schlisserman


Oct. 30 (Bloomberg) -- Consumer confidence in the U.S. fell more than forecast and home prices dropped the most in at least six years, strengthening the case for the Federal Reserve to lower interest rates tomorrow.

The Conference Board's gauge of confidence declined to 95.6, the lowest since October 2005, from 99.5 in September, the New York-based group said today. Home values in 20 U.S. metropolitan areas slid 4.4 percent in the 12 months that ended in August, according to the S&P/Case-Shiller home-price index.

The figures heighten concern that consumers will put a brake on spending, which accounts for more than two-thirds of the economy. Fed policy makers will need to cut the target rate for overnight loans between banks tomorrow by a quarter point to 4.5 percent to prevent the housing recession from triggering a broader economic decline, some analysts said.

``Housing is clearly the root of the problem,'' said Carl Riccadonna, an economist in New York at Deutsche Bank Securities Inc. who predicted a drop in confidence. ``If consumer spending falls apart, the Fed will have much bigger problems to contend with.''

The benchmark 10-year Treasury note reached its highs of the day after the reports and the dollar pared gains. Treasuries maturing in 2017 yielded 4.38 percent at 11:29 a.m. in New York, from as high as 4.40 percent earlier. The dollar was at $1.4427 per euro, compared with the day's high of $1.4374.

Consumer confidence was forecast to drop to 99, from an originally reported 99.8 for September, according to the median estimate in a Bloomberg News survey of 70 economists. Projections ranged from 95 to 102.

Less Optimistic

The Conference Board's measure of present conditions dropped to 118.8 from 121.1 the prior month. The gauge of expectations for the next six months decreased to 80.1 from 85.

Compared with other sentiment gauges, the Conference Board's index tends to be more influenced by attitudes about the state of the labor market, economists said.

Today's report showed the share of consumers who said jobs are plentiful fell to 24.1 percent in October from 25.6 percent the prior month. The proportion of people who said jobs are hard to get rose to 22.6 percent from 22.4 percent. The 1.5-point difference is the smallest since December 2005.

The decline in home prices reinforce the view among Fed officials and Treasury Secretary Henry Paulson that the housing slump has further to go. Near-record inventory levels suggest sellers will continue to lower prices, posing a threat to consumer spending because homeowners will have less equity to borrow against.

`Number-One Risk'

``This is really the number-one risk: a sustained, sharp decrease in home prices really squeezing consumers,'' said Meny Grauman, an economist at Scotia Capital Inc. in Toronto.

Compared with July, home prices in the 20-city index fell 0.7 percent after a 0.4 percent decline the month before. The figures aren't seasonally adjusted, so economists prefer to focus on the year-over-year change.

``The fall in home prices is showing no real signs of a slowdown or turnaround,'' said Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, in a statement. ``There is really no positive news in today's report.''

Fifteen cities showed a year-over-year decline in prices, led by a 10 percent drop in Tampa, Florida, and a 9 percent decline in Detroit. The area showing the biggest gain was Seattle with a 5.7 percent increase.

Paulson said today it's too soon to call an end to the housing slump.

Paulson on Housing

``We haven't hit the bottom yet in housing,'' Paulson said at a conference in New Delhi. Still, he added ``there is enough strength in the economy that we can grow through this.''

Rising prices for food and home-heating fuel combined with the decline in property values may already be prompting consumers to turn more frugal. The International Council of Shopping Centers and UBS Securities LLC last week reduced their October chain-store sales forecast as merchants dropped prices to attract buyers.

The group now estimates sales rose 2 percent, down from a prior forecast of 2.5 percent. Target Corp. last week lowered its October sales forecast and Wal-Mart Stores Inc., the world's largest retailer, cut prices on 15,000 items for the holidays.

``The outlook for sales heading into the holiday season looks gloomier than a year ago,'' said David Resler, chief economist at Nomura Securities International Inc. in New York. ``With the surge in oil prices likely to soon push up gasoline and home-heating oil prices, more consumers are likely to be forced to curb their holiday shopping.''