Consumer Confidence Slides as Home Price Declines Intensify

MBA (2/27/2008 ) Velz, Orawin
Significant oversupply market conditions, as banks tighten lending standards and home buyers remain on the fence in a declining housing market, brought about a sharp deterioration in home prices at the end of 2007.
To examine home price trends, it is more appropriate to look at measures of home prices that track prices of the same home over time, using a repeat sales transaction methodology. Unlike median or average home prices, these measures are not biased by the change in the mix of sales. Yesterday’s economic releases offered two measures of home prices using this methodology. Both measures showed significantly worsening home price trend in the fourth quarter of 2007.

First, The Office of Federal Housing Enterprise Oversight (OFHEO) House Price Index (HPI) showed that home price appreciation slowed to 0.8 percent in the fourth quarter from a year ago, following a year-over-year increase of 2.3 percent in the third quarter. This was the slowest pace of year-over-year increase since the fourth quarter of 1990. The HPI includes prices based on refinance and purchase transactions. The index excluding refinance transactions (i.e., the purchase-only index), which has a shorter history than the overall index, showed a year-over-year decline of 0.3 percent—the first drop in the index’s 16-year history.

Of the 291 metropolitan areas covered by OFHEO, 99 posted declines in the overall HPI, up from 83 in the third quarter. All but two of the 20 worst-performing metro areas are in California or Florida, with Michigan and Nevada being the remaining two.

The second measure—the Standard and Poor’s Case-Shiller national house price composite index—covers only purchase loans. It showed that home price declines intensified in the fourth quarter. The index was down 8.9 percent in the fourth quarter of 2007 from a year ago, following a 4.6 percent year-over-year decline in the third quarter. The fourth quarter was the largest decline since the inception of the series in 1988.

While both measures showed worsening home price trend, the OFHEO HPI painted a relatively better picture of national home prices because it has not yet registered a year-over-year decline in this current housing downturn. The OFHEO HPI tends to overstate home price trends as it is based on data from Fannie Mae and Freddie Mac. Thus the index includes only conventional, conforming loans and effectively excludes jumbo loans.

In addition, the OFHEO data include relatively fewer subprime loans as well as adjustable-rate mortgage loans and other nontraditional mortgage loans, which have performed relatively worse over the past year. The Case-Shiller index therefore captured the impact of the considerable stress in the jumbo market since the August financial turmoil and significant tighter lending standards that is not reflected by the OFHEO HPI. While the Case-Shiller index has an advantage over the OFHEO HPI because it covers all loan products and sizes, it has a smaller geographical coverage than the OFHEO HPI, especially in smaller states.

Another report showed that consumer confidence has trended down significantly in recent months, weighed down by many factors, including declining housing market and home prices, more stringent lending standards in consumer and mortgage loans, slower employment growth and rising gasoline prices. The Conference Board’s Consumer Confidence Index fell to 75 in February from 87.3 in January. The index is now at its lowest since the second invasion of Iraq in 2003.

Both the present conditions and expectations components fell during the month. The expectations component fell 11.4 points to 57.9, its lowest level since 1991. The present conditions component dropped to 100.6 from 114.3 in January.

Consumers’ assessment of the labor market also deteriorated sharply. The share of respondents saying jobs are hard to get rose to 23.8 percent from 20.6 percent in January. The share of respondents indicating jobs are plentiful fell 3.2 percentage points to 20.6 percent, the lowest since 2005.

A separate report indicated that wholesale prices surged in January. The Producer Price Index (PPI) rose 1.0 percent, following a 0.3 percent decline in December, driven by jumps in energy and food prices. Excluding food and energy items, the core PPI was still up a strong 0.4 percent.

Over the past year, the PPI surged 7.7 percent, the biggest increase since October 1981. The core PPI rose 2.4 percent from a year ago, the largest gain since October 2007. While, the PPI is not a focus for the Federal Reserve’s policy, its recent rising trend is consistent with other price measures.

In his speech yesterday at the University of North Carolina, Fed Vice Chairman Donald Kohn said he does not expect recent price increases to sustain. Kohn acknowledged that the housing recession is spilling over into other sectors of the economy and added that slower economic activity poses a greater threat than inflation.

Long-term yields fell in response to weak economic data and Kohn’s speech suggesting that more rate cuts are likely. The yield on 10-year Treasuries stayed around 3.86 percent by mid-Tuesday afternoon, four basis points lower than the closing rate on Monday.