Tuesday, June 24, 2008

U.S. Economy: Consumer Confidence, House Prices Slide (Update3)

By Shobhana Chandra and Timothy R. Homan

June 24 (Bloomberg) -- Confidence among Americans dropped to the lowest level in 16 years and house prices fell the most on record, raising the risk that consumers will cut back on purchases after spending their tax rebates.

The Conference Board's confidence index fell to 50.4 in June, lower than forecast, from 58.1 in May. Home prices in 20 cities dropped 15.3 percent in April from a year earlier, according to S&P/Case-Shiller, the most since the group began collecting data.

Consumers, whose spending accounts for more than two thirds of gross domestic product, are being hurt by the housing slump, rising unemployment and higher food and fuel bills.

``We've seen this dive in confidence in the last two months at the same time these stimulus checks'' have been mailed, Chris Low, chief economist at FTN Financial in New York, said in a Bloomberg Television interview. ``It tells me if we see this pop in spending, it's not going to last.''

The confidence measure reached the lowest level since February 1992, when the economy was in the midst of the so-called ``jobless recovery'' following the 1990-1991 contraction.

Concern over jobs contributed to the erosion in confidence. The share of consumers who said jobs are plentiful fell to 14.1 percent from 16.1 percent last month. Those saying jobs are hard to get increased to 30.5 percent from 28.3 percent. Buying plans over the next six months for automobiles, houses, appliances and vacations all declined.

Greenspan Pessimism

Recent economic data ``suggests we are on the brink'' of a recession in the U.S., former Federal Reserve Chairman Alan Greenspan said today via satellite to a conference in Johannesburg. The next year will be ``a very sluggish period,'' with a ``highly volatile oil market,'' he said.

Treasuries rose, dropping the yield on the benchmark 10-year note to 4.08 percent at 4:45 p.m. in New York, from 4.17 percent late yesterday. The Standard & Poor's 500 stock index fell 0.3 percent to close at 1,314.29.

Mortgage defaults and foreclosures are adding to the glut of properties on the market, while stricter loan rules are making it more difficult for prospective buyers to get financing. A separate report from the Office of Federal Housing Enterprise Oversight today showed prices fell 4.6 percent in April from a year earlier.

While the Fed has pledged to combat any increase in inflation expectations, economists predict the central bank will keep its benchmark interest rate at 2 percent tomorrow. They will also be reluctant to signal an imminent increase in borrowing costs.

Car Sales

Ford Motor Co., the second-biggest U.S. automaker, last week said domestic sales of large pickup trucks will decline because of $4-a-gallon gasoline. Best Buy Co., the largest U.S. electronics retailer, last week said first-quarter profit fell 6.8 percent as consumers bought less profitable items such as video games and laptop computers.

United Parcel Service Inc., the world's largest package- delivery company, yesterday lowered its second-quarter profit forecast because of rising fuel costs and a slowing U.S. economy.

``People are really, really ill at ease right now,'' New Jersey Governor Jon Corzine said in an interview today with Bloomberg News in New York in response to the consumer confidence report. Corzine, a Democrat, is the former chairman of the investment bank Goldman, Sachs & Co.

The public feels that way about elected officials and are concerned about the security of their own jobs, health care coverage and pensions, Corzine said. He advocates spending more on infrastructure, both in New Jersey and nationally, as a way to boost the economy.

April Drop

Home prices in the S&P/Case-Shiller index decreased 1.4 percent in April from a month earlier after a 2.2 percent decline in March, the report showed. The figures aren't adjusted for seasonal effects, so economists prefer to focus on year-over-year changes.

The index was forecast to fall 16 percent from a year earlier, after a previously reported 14.4 percent drop in the 12 months ended in March, according to the median forecast of 23 economists surveyed by Bloomberg News. The confidence index was projected to retreat to 56.

All of the 20 cities in the index showed a year-over-year decrease in prices for April, led by a 27 percent drop in both Las Vegas and Miami. Charlotte, North Carolina, showed a decline for the first time.

One bright spot in the report was that more cities showed a gain in prices in April compared with the previous month. Houses in eight areas rose in value, compared with just two in March. Month-over-month gains were led by Cleveland and Dallas.

`Some Surprises'

There may be ``some surprises in the next few months that would indicate we are at or near a bottom in probably one third to one half of the country,'' Karl Case, an economics professor at Wellesley College, said in an interview on Bloomberg Television.

Case created the home-price index with Yale University's Robert Shiller based on research from the 1980s.

Reports this week may reinforce the dim outlook for housing. Combined sales of new and existing homes in May probably were the third-lowest on record, according to the Bloomberg survey median.

New-home sales probably fell, approaching March's 17-year low, a report from the Commerce Department tomorrow may show. The National Association of Realtors may report the following day that purchases of existing houses, which account for 85 percent of the market, rose last month from a record low.

Rates Rise

Rising borrowing costs aren't helping. Fannie Mae, the largest mortgage buyer, last week cut its forecast for new and existing home sales this year as 30-year fixed mortgage rates jumped to an eight-month high.

Banks repossessed twice as many homes in May as they did a year ago and foreclosure filings rose 48 percent, according to RealtyTrac Inc., a real estate database in Irvine, California.

Homebuilders are reeling. Standard Pacific Corp., an Irvine, California-based homebuilder, last week said new home orders for April and May fell 12 percent from a year earlier, citing ``difficult housing conditions'' in most of its markets.

Ofheo's price measure has a broader geographical database than the S&P/Case-Shiller index, though it doesn't include so- called jumbo mortgages. Those loans are above the federal limits, which were raised on a temporary basis in February to as much as $729,750 in some areas.

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