Home Prices Drop; But Confidence Grows

I like being right. Not twenty four hours after I warned that we should expect home prices to drop this year, the Case Shiller index was released for March showing a 0.3% decline. This was a tad better than February’s 0.9% decline, but it continues to demonstrate that the housing market still has a way to go before it settles down.

Home prices rose a ridiculous 155% from 2000 through 2006, and have now fallen about 31% since. The extent of the bubble is still working its way through the economy and I see no let up any time soon. The monthly declines will not be as great as those we saw last year or in 2008, but I expect them to be fairly steady all year.

As I reported yesterday: there is no evidence of enough support from the usual fundamental factors that support home prices for us to predict a definite turnabout. No matter what the realtors say, real estate is still a weak spot in the economy. And will stay that way for some time.

This doesn’t mean that some areas won’t see changes. March’s national decline masks a strong uptick in San Francisco, San Diego, and other parts of California. Oddly Los Angeles continued its way down though, so even within states there are variations.

This ‘spotty’ performance is typical of an economy reaching the bottom of a cycle, and it usually takes a while for enough areas to turn the corner that the national figures change direction. We had a false start last year when the tax credit for first time owners brought sufficient demand onto the market to arrest the decline, but with the credit now gone the cyclical movement down has re-emerged.

It will stay this way all year.

To balance out this relatively poor news I should report that consumer confidence appears to be back on a more positive track. The Conference Board measure of confidence rose to 63.3 in May, up from 57.7 in April. This is the highest that confidence has been since March 2008, and some sub-components of the index are now back to where they were in 2007. By historical standards these readings are still quite weak, but the index has now gained for three straight months, and we seem to be lifting away the gloom that has dominated for the past two years.

Presumably a continued rise in confidence will eventually support a boost in consumer spending, although I suspect that we will see continued debt pay-downs and increased savings dominate the consumer sector over the summer. By Fall, though, I expect consumers to be buying at a more normal rate. That’s what we need for the economy to reach a sustainable, non-stimulus supported, growth phase.

With real estate wobbly, and consumers only now waking back up, I see no need to adjust my GDP forecast for the year: 2.5% growth is still my base outlook.