Tags: US | Economy

Americans Increase Spending, but Not On New Homes

Wednesday, 23 Dec 2009 09:28 PM

 

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Americans are starting to spend a bit more money, but not enough to power a strong economic recovery.

Consumer spending posted its second straight monthly increase in November, rising 0.5 percent, the government said Wednesday. But new homes clearly weren't on the shopping list. New home sales plunged unexpectedly to the lowest level since April.

The reports were evidence that the recovery from a deep recession is proceeding in fits and starts, with households struggling in a bleak job market. At the same time, economists said the economy was much improved from this time last year, when the nation was gripped by the financial crisis.

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"People are continuing to pay down their debts, and they remain concerned about their financial futures and whether they will have jobs," said Sal Guatieri, an economist at BMO Capital Markets. "Santa's toy bag won't exactly be brimming with goodies this year, but at least he will show up, unlike last year."

Americans' income, meanwhile, ticked up at the fastest rate in six months last month, though the 0.4 percent increase was less than economists expected. That reflected a $16.1 billion increase in wages and salaries, helped by last month's drop in unemployment.

But consumers are still worried about job security, and that weighs on decisions about big purchases like new homes.

The 11 percent slump in new home sales from October's pace shows that consumers are taking their time following an extension of a deadline for first-time buyers to qualify for a tax credit. The incentive, worth up to $8,000, was set to expire at the end of November. But Congress pushed back the date to April 30 and expanded the program to include current homeowners who move.

The only strong region was the Midwest, where sales rose 21 percent. Sales fell by 21 percent in the South, 9 percent in the West and 3 percent in the Northeast.

And buyers are putting their dreams of palatial McMansions aside. Vince Napolitano, president of Napolitano Homes in Virginia Beach, Va., is hoping to sell 110 houses next year, up from fewer than 70 this year, by focusing on smaller homes that sell for $400,000 or less.

"Those who are out there looking are buying something that they truly can afford," he said. "They're having to settle for smaller homes."

New home sales are considered a good barometer of future real estate activity because they reflect sales agreements signed but not yet completed. That's why most economists expect completed sales to decline during the winter months.

While buyers of previously occupied homes were rushing to close deals by the end of November, buyers of new homes were aware early in the month they could shop longer because of the extension of the tax credit. Though completed home resales rose 7 percent in November, most economists expect sales to decline during the winter months without the looming tax credit deadline.

The results show how reliant the housing market has been on government assistance. About 2 million homebuyers have taken advantage of the tax credit of up to $8,000 for first-time buyers, the National Association of Realtors estimated this week. Another 2.4 million are expected to either tap that subsidy or another one for up to $6,500 for current homeowners.

The Federal Reserve is also snapping up $1.25 trillion in mortgage-backed securities to help keep interest rates low, which makes payments more affordable.

Despite the poor showing from new home buyers, the housing market has been recovering from the worst downturn in decades, largely due to the massive infusion of federal assistance. New home sales are up 8 percent from the bottom in January but 74 percent below the peak in July 2005. Compared with November last year, sales were off 9 percent.

The Commerce Department said new home sales hit a seasonally adjusted annual rate of 355,000 last month, off from a downwardly revised 400,000 pace in October. Economists surveyed by Thomson Reuters had expected 440,000.

Builders clearly saw the drop coming: the National Association of Home Builders said last week its index of industry confidence fell to the lowest level since June. The trade group blamed high unemployment and a slow economic recovery that are stifling demand.

"We're still in a mode where we're surviving," said Joseph Mackey, owner of Target Homes in East Stroudsburg, Pa., who built 15 homes this year, down from 40 or 50 during the boom times. "Our outlook is for it to get no worse. If we can fly at this level for another year and survive, I think we'll be stronger for it."

The industry has cut back on construction in the face of weak demand. Many builders also complain they can't get financing, so their bulldozers are idle. But that has slashed inventory to healthier levels.

Builders had 235,000 new homes for sale nationwide at the end of November, the lowest inventory level since April 1971. Though at the current weak sales pace, that still represents nearly eight months of supply.

Since the housing bubble burst, new home sales have represented a dwindling share of the overall market. New home sales accounted for just 6 percent of total single-family home sales last month, down from a peak of more than 18 percent in summer 2005.

Buyers have been able to find better prices searching for previously occupied homes, especially among foreclosed properties, which made up about a third of sales completed last month.

Builders have tried to compete. The median sales price of $217,400 was down nearly 2 percent from $221,600 a year earlier, but up about 4 percent from October's level of $209,400.

"There's only so much of a haircut (on price) they can give," said Ian Pollick, an economics strategist with TD Securities.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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