Economic Recovery on the Way?

Latest Housing and Consumer Confidence Numbers May Point to a Sustained Economic Recovery

The U.S. housing market is showing signs of stabilizing just as the American consumer is demonstrating a renewed willingness to start saving less and spending more, according to reports yesterday (Tuesday) from two closely watched economic surveys. The reports buoyed investor hopes that a blossoming economic recovery may well be sustainable.

The Conference Board's Consumer Confidence Index, an important measure of American consumer sentiment, soared in April to its biggest increase since 2005, while the Standard & Poor's/Case-Shiller Home Price Indices showed a slowing in the decline of home prices in 20 major U.S. cities in February for the first time since 2007.

Consumer confidence has direct consequences for the battered U.S. housing market, which is critical to the U.S. economy because of its impact on a wide-range of industries, including construction materials and the sale of appliances and furniture. Consumer spending accounts for 70% of U.S. gross domestic product (GDP).

The Conference Board's sentiment index jumped to 39.2, the highest level since November, from 26.9 in March, the New York- based research group said today. The 12-point jump easily surpassed the 29.7 median estimate of 62 economists in a Bloomberg News survey.

Consumers pulled back spending and increased their savings rate as the recession pushed unemployment rates to 8.5% in recent months. The report indicates that efforts by U.S. Federal Reserve to lower borrowing costs and push banks to resume lending may be paying off.

"Consumers believe the economy is nearing a bottom," Lynn Franco, director of the Conference Board's consumer research center, said in a statement, according to Bloomberg. Still, the index "remains well below levels associated with strong economic growth."

Meanwhile, the S&P/Case-Shiller index showed that the slide in home prices in 20 U.S. markets slowed in February for the first time since January 2007. Prices fell 18.6% in February year-over-year after dropping 19% the previous month. But for the first time in 16 months the fall did not set a new record, suggesting the housing market might be closer to a bottom.

The composite index of 20 metropolitan areas fell 2.2% in February from January.

"While the declines in residential real estate continued into February, we witnessed some deceleration in the rate of decline in some of the markets," David M. Blitzer, Chairman of the Index Committee at Standard & Poor's, said in a statement.

The figures suggest steps to lower borrowing costs and unclog lending are finally moving buyers off the sidelines. The average rate on a 30-year fixed mortgage reached a record low of 4.78% in the week ended April 2, according to Freddie Mac (FRE).

About half of March existing-home sales were of distressed properties, 51% of sales were by first time buyers and prices rose from February, according to data from the National Association of Realtors. While foreclosures have driven prices down and spurred home re-sales, many potential homebuyers may have been waiting for a halt to the precipitous drop in prices before making a purchase.

"We're probably getting close to an inflection point," Michael Feroli, an economist at JPMorgan Chase & Co. (JPM) in New York, who correctly forecast the drop in the index, told Bloomberg. Still, he said, "if we are indeed going to see a recovery in the second half" the double-digit price drops will need to abate in the next few months.

But at least one analyst feels the data simply confirm a bottom has already been reached and sales and prices have nowhere to go but up from here.
"None of this really comes as a surprise," Andrew Waite, publisher of the Personal Real Estate Investor told Money Morning in an interview. "At this point the housing numbers no longer reflect as leading indicators, but rather represent a long-term trend."

According to Waite, the housing market bottomed last year. But that bottoming takes place in stages. Housing values continue to decline, but values can't bottom, solidify, and then head north until sales volumes increase, Waite said.