- The Washington Times - Tuesday, February 28, 2006

The housing market fell further in January as existing home sales dropped to the lowest level in two years and prices stagnated, undermining a critical source of strength for consumers.

The steep decline in housing since autumn and high fuel bills are taking a toll on consumer confidence, which fell from a three-month high last month. Fears that the consumer will sink into a funk and stop spending haunted Wall Street yesterday and sent the Dow Jones Industrial Average down by 104 points.

“We have unmistakable signs that households are becoming more cautious about spending,” said Bernard Baumohl, executive director of the Economic Outlook Group, noting that both new and existing home sales have fallen precipitously from record highs last year.

The 2.8 percent drop in existing home sales to an annual rate of 6.56 million reported by the National Association of Realtors yesterday was the fifth consecutive decline, and left the supply of unsold homes at the highest level since 1998.

New home sales in January fell to the lowest level in a year, and the inventory of unsold new homes jumped to a record high.

Home prices have stagnated at best and have declined in many areas, with the median home price down from $220,000 in August to $211,000 last month, according to the Realtor report.

In the Washington area, the median home price fell from a record high of $441,000 to $433,000 in the final quarter of 2005, although it remained 21 percent above year-ago levels.

The fall in home prices is critical, Mr. Baumohl said, as it “reduces the wealth effect from real estate assets” and will force homeowners both to save more and borrow less by tapping into their home equity.

The cashing out of home equity has been a key source of strength for consumers in recent years, and Wall Street analysts fear the spigot may run dry as the housing market continues to shrink.

The plunge in the Conference Board’s consumer confidence index to October’s level announced yesterday is ominous, Mr. Baumohl said, because it suggests consumers are sinking back into their post-hurricane depression.

Worries about the economy and the high fuel prices spawned by Hurricanes Katrina and Rita in August and September caused consumer spending growth to plummet last fall to 1.2 percent, the lowest rate since the 2001 recession, the Commerce Department reported yesterday.

Spending, which fuels 70 percent of economic activity, and confidence rebounded strongly in January. But the latest fallback in confidence to levels identified with autumn’s “lackluster” spending growth “does not paint a very encouraging picture,” Mr. Baumohl said.

A measure of chief executive confidence also dropped last month after surging in January, with one CEO saying “concern over terrorist activity, drops in productivity and the threat of inflation, plus a flat stock market seems to overshadow a basically sound economic foundation,” according to Chief Executive Magazine.

“The imbalances in the U.S. economy are hampering growth,” said Roger M. Kubarych, senior economic adviser with HVB Group.

The housing boom has gone bust, turning from an economic engine into a drag on growth, while the trade imbalance is ballooning, he said. Together, they caused growth in the gross domestic product to drop to an anemic 1.6 percent rate from 4.1 percent in the summer, a “significant development,” he said.

“A first-quarter rebound is certain because the January record warm temperatures boosted retailing and construction,” he said. But “we believe the growth spurt will be less robust than the consensus and that a softening housing market will hold back GDP throughout the coming year.”

David Lereah, an economist with the National Association of Realtors, said the housing market may stop falling and post a modest rise during the usual peak spring and summer season this year before plateauing in what the industry hopes will be a soft landing for the overstretched market.

“Existing-home sales should stay below the record levels experienced over the last two years, but they’ll maintain a historically high pace,” he said.

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