U.S. Economy: Consumer Confidence Slumps, Home Sales Decline

By Shobhana Chandra and Bob Willis

Sept. 25 (Bloomberg) -- Consumer confidence slumped to the lowest level in almost two years and home sales weakened, threatening U.S. household spending and bolstering the case for the Federal Reserve to keep cutting interest rates.

The Conference Board's index of consumer confidence fell more than forecast in September, to 99.8 from 105.6. The National Association of Realtors said August sales of previously owned houses dropped 4.3 percent and a separate index of home values fell the most in at least six years in July.

``These numbers will encourage the Fed to cut rates again,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``The recession in housing is continuing, home prices are still falling and that's going to eat into housing wealth and home-equity extraction. The net result is we'll see sluggish consumer spending into 2008.''

Traders increased expectations that the Fed will lower borrowing costs twice more this year, interest-rate futures showed. Policy makers reduced their benchmark by half a point last week, aiming to forestall a broader economic slump.

Futures prices on the Chicago Board of Trade indicated a 70 percent likelihood the Fed will reduce its main rate to 4.25 percent, from 4.75 percent, by year-end. The odds rose from 52 percent yesterday.

The consumer confidence index was the lowest since November 2005. The reading was forecast to fall to 104.3, from an originally reported August reading of 105, according to the median estimate in a Bloomberg News survey of 71 economists. Projections ranged from 100 to 107.

Home Sales

Purchases of existing homes fell to an annual rate of 5.5 million, the fewest since August 2002, the agents' group said in Washington. Sales dropped 13 percent compared with a year earlier and median home prices rose 0.2 percent to $224,500.

Home prices in 20 U.S. metropolitan areas fell 3.9 percent in the 12 months through July, according to the S&P/Case-Shiller home-price index, which was also released today. The drop was the biggest since record keeping began in 2001, indicating the threat to consumer spending was rising even before credit markets seized up in August.

Sales are likely to keep falling after borrowing costs rose and mortgages became more difficult to get last month. The number of properties on the market rose to a record in August.

``Housing is weak, it's taking a bit of a toll on consumer spending, and consumer psychology is obviously following that down,'' said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. ``While the holiday shopping season is still months away, it is probably going to be weaker than we've seen in many years.''

Properties for Sale

As lenders make it tougher to get loans following a surge in subprime mortgage defaults, the number of unsold properties on the market has risen, pulling prices lower.

The supply of homes for sale at the end of the month rose to 4.58 million, the most ever. At the current sales pace, that represented 10 months' worth, the highest since record keeping began in 1999 and up from 9.5 months' at the end of August.

Existing homes account for about 85 percent of the market and sales of new homes make up the rest. The report on new-home purchases, which are calculated based on signings and are considered a more timely indicator, is due from the Commerce Department on Sept. 26.

Sweeter Incentives

With inventories rising, homebuilders are sweetening incentives to close sales. Hovnanian Enterprises Inc., the biggest homebuilder in New Jersey, Sept. 14 began offering discounts worth as much as $150,000. The company held a three-day sale in 18 states including California, New Jersey, New York, Arizona, Ohio and Illinois, that led to 2,100 contract signings.

Buyers are ``hesitant to purchase,'' Chief Executive Officer Ara Hovnanian said last week at a conference in New York. ``The trend is slowly trying to get back to recovery.''

Lennar Corp., the largest U.S. homebuilder, today reported the biggest quarterly loss in its 53-year history after $848 million of costs to write down the value of real estate.

The Conference Board's measure of present conditions fell to 121.7 from 130.1 in August.

``Usually this component tracks labor market conditions, so this is a potentially significant move,'' wrote Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York, in a report to clients.

The share of consumers who said jobs are plentiful decreased to 25.7 percent from 27.5 percent in August. The proportion of people who said jobs are hard to get increased to 22.1 percent from 19.7 percent.

While job losses at construction and mortgage-related firms have risen recently, reports suggest businesses in other industries are retaining their staff until there's more evidence the economic slowdown will deepen, economists said.

The number of Americans filing claims for jobless benefits fell in the week ended Sept. 15 to the lowest level in almost two months, the Labor Department reported last week. The number of people continuing to collect state unemployment benefits plunged by the most since May.

Last Updated: September 25, 2007 11:46 EDT