Consumers Don't Yet Feel At Home


February sales of existing homes plunged nearly 10% from January. Sales of new single-family homes hit the lowest level since records began in 1963. Snowstorms weighed on those numbers, and existing-home sales over the last three months were the highest since June, when the first-time homebuyer tax credit expired.

Still, it will take more than a turn in the weather for the housing market to get healthy. Home prices have declined steadily since August, with the S&P Case-Shiller home-price index for January reaching levels just barely above the recession low. Eleven of the 20 markets surveyed hit the lowest levels since home prices started dropping four years ago.

Not surprisingly, builders are reluctant to construct homes with prices dropping. Housing starts are near two-year lows, and building permits are at a record low. Spending on residential investment represents less than 5% of total U.S. economic activity, and after the sharp decline of recent years the sector is unlikely to detract meaningfully from near-term gross domestic product.

But home prices play a crucial role in consumer confidence, which slumped in March. With nearly 25% of mortgaged homes worth less than the mortgage balance, continued weakness in home prices is likely to extend the recent wave of foreclosures.

Because of improving affordability, a sustained rebound in employment would go a long way toward stabilizing the housing sector. But until home prices stop dropping, a full-fledged rebound in consumer confidence seems unlikely.

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