JOHN HEINZL
Globe and Mail Update
For years, economists have been amazed by the resilience of the U.S. consumer, who shrugged off high gas prices, bloated household debts, terrorism, war, and acts of nature in a single-minded pursuit of more and more stuff.
Don’t worry about the economy, the experts said. As long as consumers keep buying cars and flat-panel TVs, everything will be fine.
Well, maybe they should start worrying. Yesterday, in one of several troubling signs, the U.S. Conference Board’s consumer confidence index tumbled to its lowest level in nearly two years, as falling home prices, tighter borrowing standards and a weakening labour market finally dented Americans’ optimism.
“This is surprisingly grim,” Ian Shepherdson, chief U.S. economist for High Frequency Economics, said of the index’s nosedive to 99.8 in September from 105.6 in August.
As if to underline the slide in confidence, shares of Target skidded 4.6 per cent after the discount chain slashed its forecast for September sales. And Lowe’s slid 6.7 per cent after the home improvement retailer said full-year profit could miss the low end of its forecast.
Another stock that got hit yesterday was Lennar, the largest U.S. home builder, which fell 4 per cent after it reported a third-quarter loss of $513.9-million (U.S.) – the biggest in its history.
The slumping housing market is, of course, a big reason consumers are suddenly feeling more pessimistic. And there was more troubling news on the home front yesterday.
According to the Chicago-based National Association of Realtors (NAR), sales of existing homes fell 4.3 per cent in August from July, and were down 12.8 per cent from a year ago, as disruptions in the mortgage market prompted more consumers to postpone or cancel purchases when financing fell through.
More disturbing than the drop in sales are the 4.58 million unsold homes now languishing on the market. At current sales rates, that represents a 10-month supply, up from 9.5 months in July.
“This is a case of a bad situation getting worse,” said Benjamin Reitzes, economic analyst with BMO Nesbitt Burns. “With inventories still growing despite waning demand, prices need to drop further, maybe significantly, before demand balances supply.”
The trouble with falling home prices is that it removes a key source of consumer spending power, namely mortgage refinancings. When home prices were soaring and interest rates were falling, consumers treated their homes like ATMs, extracting hundreds of billions of dollars in equity to finance their spending binge. Now that prices are falling, many consumers are struggling just to hold on to their homes, let alone borrowing more against them.
According to the NAR, the median home price actually rose 0.2 per cent in August from the same month a year earlier. But Mr. Reitzes finds that hard to believe. He puts more stock in the Case-Shiller’s 20-city home price index, which fell 3.9 per cent year over year in July.
“The housing sector has yet to bottom,” he said.
Nor has the U.S. consumer.
