Consumer confidence and home sales plummeted after jobs as well as jumbo and exotic mortgage loans suddenly became hard to get last month, new figures showed yesterday.
Confidence fell to the lowest level since fall 2005, when Hurricane Katrina flooded New Orleans and destroyed thousands of homes and jobs, the Conference Board reported. Consumers are encountering increasing difficulties finding jobs and selling their homes.
A report from the National Association of Realtors yesterday showed that sales of existing homes fell 4.3 percent in August just as lenders restricted access to jumbo loans exceeding $417,000 and other exotic mortgages, causing sales in high-priced cities such as San Francisco to collapse. The number of single-family homes for sale rose to an 18-year high. At the current sluggish sales pace, it will take 11 months to reduce the supply.
The Realtors report indicated that home prices flattened in the past year, but Standard & Poor’s released separate figures showing home prices in 10 major metropolitan areas, including Washington, fell by a record 4.6 percent.
“It’s getting ugly out there,” said Bernard Baumohl, managing director of the Economic Outlook Group, an economic advisory firm in Princeton Junction, N.J.
Mr. Baumohl said the cluster of reports shows that the Federal Reserve must act further to revive the economy with lower interest rates.
“This expansion is fragile — so fragile, in fact, it could easily succumb to recession if faced with a new domestic or international shock,” he said. “Up to now, we have been able to count on a reasonable amount of consumer spending and exports to keep this economy out of any serious trouble. But now even these sectors are starting to show signs of struggle.”
The International Council of Shopping Centers reported yesterday that retail sales last week fell for a second week in a row. Kohl’s and Target slashed sales projections as consumers acted out their reduced sense of wealth and confidence, Mr. Baumohl said. A rise in oil prices to more than $80 a barrel signals another assault on consumer purchasing power through higher heating oil and gasoline prices.
Since consumers drive about 70 percent of economic activity, Mr. Baumohl said, much is at stake in coming months as consumers react to the mounting hurdles before them.
“If we do enter a period of significant consumer retrenchment, this expansion is doomed,” he said.
Josh Feinman, chief economist at Deutsche Asset Management, said consumers are increasingly vulnerable because lenders have closed the spigot of easy loans that financed their consumption in recent years.
Consumers are having a hard time obtaining jumbo loans, as well as hybrid and other nonconforming mortgages that cannot be purchased by Fannie Mae and Freddie Mac. Even before the credit crunch, consumer-spending growth had dropped to a more subdued 2.8 percent pace from the robust 3.4 percent growth posted during the housing boom between 2002 and 2005, Mr. Feinman said.
“The jury is still out,” he said. “House prices have not finished correcting,” and in any case consumers will adjust their spending patterns only gradually and belatedly in response to the drop in house prices, he said.
Dan Chung, investment officer at Fred Alger & Co., said some economists and investors exaggerate the dangers to the economy. He said the credit crunch and housing recession are taking a hard hit against only a few million consumers in lower income and socioeconomic brackets.
Meanwhile, the top 20 percent of households by income continue to spend more than the bottom 60 percent, and they have been mostly unaffected by the credit crunch because they have access to prime mortgage loans, he said.
“The mortgage mess is hitting the bottom 20 percent or 40 percent and is hardly touching the upper levels,” he said. “That is not to downplay the human cost of more than a million families losing their homes to foreclosure, but that alone cannot derail an economy of 300 million people and $13 trillion.”