Two-year low in US consumer confidence as home prices drop
Published 31/10/2007 | 10:02
Consumer confidence in America declined for the third month in a row this month to its lowest level for two years. The Conference Board organisation reported yesterday that its index of consumer sentiment fell more than expected in October.
The news comes on the back of growing concerns about weakening business conditions and the impact that could have on the job market, and a recession in the US housing market.
The severity of that was also confirmed in a separate report that showed home prices posting their biggest drop in 16 years during August. Fears of the effects the continuing credit squeeze is having seem to have intensified, with concerns focusing on the prospects for unemployment. Lynn Franco, director of the Conference Board's consumer research centre, said further weakening in business conditions had tempered consumers' assessment of current conditions and might "very well be a prelude to lacklustre job growth in the months ahead".
Consumer spending is responsible for driving about two-thirds of the US economy's growth, which in turn acts as an engine for much of the world, especially for major exporters such as China, Japan and the eurozone.
The aftermath of Hurricane Katrina and rising fuel costs have also made Americans feel poorer. "There is a quite profound confidence deterioration under way," said Pierre Ellis, senior economist at Decision Economics. "Consumers are definitely getting more gloomy. The question is whether that will be reflected in their spending."
It certainly appears to be reflected in their more muted enthusiasm for real estate. The Standard & Poor's/Case-Shiller index of 10 major metropolitan areas showed home prices declined 5 per cent in August compared with a year earlier, partly due to the record high supply of unsold homes.
As usual in a property downturn, prices are falling fastest in housing markets where they rose most. In Tampa (-10 per cent year on year), Miami (-7.8), Washington (-7.2) and Las Vegas (-7.7), home values are dropping at an alarming rate, exacerbating the problems faced by "sub-prime" borrowers who've defaulted on their mortgages, and thus face repossession and ruin.
The outlook is even gloomier. Future contracts traded on the Case-Shiller index indicate that market expectations are for house prices to continue to fall until 2010, with a peak-to-trough decline of more than 15 per cent priced in.