Renewed housing drop weighs on economy
Falling home sales, prices create fresh headwinds for recovery
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Four years after the U.S. housing market collapsed, the fragile real estate recovery appears to be breaking down. With job growth just beginning to pick up and consumers feeling gloomy about their prospects, a “double dip” in housing could put the wider economic rebound at risk.
The latest in a series of troubling signals came Tuesday from a report showing a 20-city composite of home prices fell a full percentage point in January from December. That report follows data last week showing existing home sales fell 9.6 percent last month and new home sales dropped to the lowest levels since recordkeeping began nearly 50 years ago.
"We're not seeing improvement in the housing market at all,” said Maureen Maitland, head of index services at Standard & Poor's, which tracks the widely watched Case-Shiller home price index. "What we've seen in the last couple of months has been the same story. Most of the markets seem to be falling at this point and some are hitting new lows.”
The downturn in prices comes as the overall economy is showing signs of life. Last week, the Commerce Department reported that gross domestic product expanded at an annual rate of 3.1 percent in the fourth quarter, up from 2.6 percent in the previous three months. That helped produce 192,000 net new jobs in February, pulling the unemployment rate below 9 percent for the first time in nearly two years. Forecasters are looking for Friday’s employment report to show another 185,000 new jobs were created in March.
That pace of job growth, though a substantial improvement from last year’s gains, has still left millions of workers sidelined by the Great Recession. With the national unemployment rate at 8.9 percent, many job seekers feel the outlook is still bleak.
The gloomier sentiment was evident in the latest survey of consumer confidence released Tuesday. The Conference Board poll found respondents more downbeat about the labor market last month, telling the research group that jobs were not as plentiful and that they expect incomes to decline.
Higher gas prices have also cut into confidence, according to Ken Goldstein, a Conference Board economist.
“The fear here is not only that the price of filling up at the gas tank but the price of filling up the grocery cart are going to keep going up this spring and possibly through the summer,” he said. “That's what spooked consumers.”
"When food and gasoline prices are rising, it causes people to hunker down," said Chris G. Christopher Jr., senior economist at IHS Global Insight.
Consumer spending jumped 0.7 percent last month, and personal incomes rose 0.3 percent, the Commerce Department said Monday. That extra spending was financed in large part by the latest round of economic stimulus from the government, which cut two percentage points in the Social Security tax, raising take-home pay.
But some of the benefit from that tax cut is being offset by the higher cost of the gasoline, which has risen 80 cents a gallon in the past year. Higher food prices have also taken a bite out of the consumers’ budgets. After adjusting for inflation, spending rose just 0.3 percent last month. And after-tax incomes actually fell 0.1 percent.
The recent weakness in the housing market comes as many forecasters point to signs of a bottom, with hopes that demand will begin to pick up this spring and summer. The industry has been struggling to find a footing despite two rounds of government tax breaks designed to spur sales.
But the drops in the pace of sales and a downward drift in prices over the past six months have renewed fears that those tax credits just moved future sales forward, cutting into future demand.
"The U.S. housing sector may have morphed into coma from its tax credit hangover of last summer,” said Mike Englund, chief economist at Action Economics.
Meanwhile, the ongoing high pace of foreclosures is leaving many markets glutted with unsold inventory, much of which is being sold at distressed prices. Those sales are now a big reason home prices are falling again.
Falling home prices have also cut deeply into homeowners' spending power as the drop in the home values has hammered American households’ finances.
From the peak in 2006, some $6.3 trillion in home equity has evaporated. That’s left millions of homeowners owing more on their mortgage than their house is worth. If home prices continue to fall, that will drag even more homeowners underwater. That, in turn, could spark more mortgage defaults, increasing the large inventory of unsold homes that’s weighing on prices.
Falling house prices have also taken a big bite out of confidence among home buyers and sellers, said Maitland.
“A lot of people don't want to get into the market until they feel confident that it's going to turn around,” she said. “Buyers don't want to buy if prices are going to go down and sellers might think: These prices are too low, I'm going to hang on to the house for a while longer.”
Confidence has also been shaken in one of the most most widely watched housing industry bellwethers, the National Association of Realtors monthly data on existing home sales. Due to a variety of statistical glitches, the trade group is reviewing the way it assembles the data in response to concerns that its monthly numbers may be overstating the level of home sales by as much as 20 percent.
If the data are found to be flawed, it would mean that the housing industry is in even worse shape than indicated by the latest series of reports on sales and price trends.
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