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Consumers regain confidence from improving job, housing markets

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Consumer confidence soared to a five-year high this month as an improving job market and double-digit gains in home prices lifted consumer spirits, according to a survey released Tuesday.

The Conference Board's closely watched index of consumer sentiment registered a 7-point jump in May to 76.2, a level not seen since February 2008. The increase suggests that consumers have put worries about budget cuts and the partisan standoff in Washington behind them, said Lynn Franco, an economist at the business research group.

"Back-to-back monthly gains suggest that consumer confidence is on the mend and may be regaining the traction it lost due to the fiscal cliff, payroll-tax hike and sequester [spending cuts]," she said.

One reason consumers are feeling better is huge gains in house prices in the past year. In a separate survey, Standard & Poor's Corp. reported Tuesday that price gains in the top 20 U.S. metropolitan areas accelerated to nearly 11 percent over the past year, led by gains of more than 20 percent in formerly depressed markets such as Phoenix and San Francisco.

The U.S. has not seen double-digit home price gains since the height of the housing bubble in 2006.

The combination of improving confidence and rising home prices spurred a strong rally in the stock market Tuesday. The Dow Jones Industrial Average surged more than 200 points in morning trading but settled back by the end of the day and finished up 106.29 points, or 0.69 percent, at 15,409.39.

The broader S&P 500 index rose 10.46 points, or 0.63 percent, to 1,660.06. The Nasdaq composite index climbed 29.74 points, or 0.86 percent, to 3,488.89. The Dow has advanced 17.6 percent this year and the S&P 500 index is 16.4 percent higher as investors have piled into stocks.

On the housing front, the S&P/Case-Shiller price index for March "was the strongest in years," said Patrick Newport, an economist at IHS Global Insight, noting that prices were up for four months in a row in all 20 major U.S. cities, and 12 cities posted double-digit gains. He attributed the resurgence to a shortage of homes nationwide as few have been built in the past five years because of a historic collapse in housing construction after the 2008 financial crisis.

"As prices go up, more homeowners will list their homes, which will reduce the shortages somewhat. Eliminating the shortage, however, will require new construction," he said. IHS predicts an upsurge in building as the jump in prices makes home sales more profitable for developers.

"This house price appreciation is an important tailwind for the recovery," said Harm Bandholz, an economist at UniCredit Research. For consumers, it lifts spirits and buying power through a "wealth effect" and prompts them to spend more, he said.

Consumer spending powers more than two-thirds of economic activity in the U.S. A sustained 10 percent rise in house prices this year could increase economic growth by a half percentage point because of a broad rise in consumer spending, Mr. Bandholz said.

Moreover, it helps heavily indebted homeowners recover from deep losses during the recession, as millions are lifted out of "underwater" status and start to accumulate equity again, he said.

Average home prices remain down nearly 30 percent from their peak, however, and are at 2003 levels in most parts of the country, according to S&P.

Builders are responding to the supply shortage by ramping up construction. Applications for building permits rose in April to the highest level in nearly five years. The supply of available homes jumped in April but was still 14 percent below its level a year earlier.

The strong U.S. economic news on multiple fronts contributed to gains in stock markets around the globe Tuesday.

In Europe, Britain's FTSE 100, which was closed for a public holiday Monday, rose 1.6 percent to close at 6,762.01. Germany's DAX advanced 1.2 percent to 8,480.87, while France's CAC-40 rose 1.4 percent to 4,050.56.

In commodities trading, the price of oil rose 86 cents, or 0.9 percent, to $95.01. Gold fell $7.70, or 0.6 percent, to $1,378.90 an ounce. The dollar rose against the euro and the Japanese yen.

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