Our Changing Globe

Archive for the ‘purchases’ Category

The American consumer cut back so much during the last quarter of 2008, that two recent reports showing that a slight leveling off had occurred in February and March caused many supposed economic pundits to suggest that a bottoming out had occurred and that it was possible to see a light at the end of the tunnel.

The cause for such jubilation?

The Commerce Department announced a rise of 0.2% in consumer spending in February, and the University of Michigan’s index of consumer confidence edged up slightly in March, whilst remaining at near historic lows.

Richard T. Curtin, who has run the University of Michigan survey for decades, said in a just published report, “The good news is that the free fall in confidence has ended. The bad news is that consumers expect their financial situation to remain dismal for the rest of 2009″.

Not only were the increases miniscule, but there were obvious reasons for them. Spending was higher due to higher gasoline prices, and the fact that personal income fell by 0.2% in February got scant attention, even though it most likely means that consumers will have to cut back even further on purchases.

House prices are still falling, the stock market is way down for the year and unemployment continues to rise, but there are a number of economists who believe that consumers who are still delaying the purchase of major items such as a house, a car, or new appliances will soon be forced into buying them, which will in turn create a bounce in the broader economy.

It is totally unclear to me however why the consumer will suddenly feel that he must buy a new car, a new house or a new appliance etc. and I would strongly agree with Howard Davidowitz, who is the chairman of the retail consultancy Davidowitz & Associates who said, “When you’ve got exploding job losses like we have, how would that lead to any improvement in consumer spending? If you don’t have jobs, you cannot possibly have a change in psychology”.

Perhaps ironically, if the consumer’s confidence and appetite do grow, it could well create new problems because the purchasing of big-ticket items in large numbers could create a snap-back in gross domestic product, followed by another recession because of business conditions that are still extremely weak, companies that are still not investing, and weakness in the rest of the world’s economies.

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Even though falling prices made existing homes more affordable, home purchases fell by 5.3% in January to an annual rate of 4.49 million which was the lowest number since 1997 and the decline came in spite of the fact that the average rate on a 30-year fixed mortgage fell to a record low 4.96 % in the week ending January 15th.

A breakdown of the figures showed that re-sales of single-family homes decreased by 4.7 % to an annual rate of 4.05 million and sales of condos and co-ops dropped by 10 % to 440,000. Purchases declined in three of four regions with the Northeast showing the biggest drop which was 15% but the pace of sales was unchanged in the West.

According to the NAR (National Association of Realtors) the median home price dropped by 15% from a year ago to a six-year low of $170,300 and distressed properties accounted for 45% of all sales.

Many economists forecast re-sales would rise to around a 4.79 million annual rate from 4.74 million in December and estimates ranged anywhere from 4.5 million to 4.91 million but sales were down by 8.6% compared with a year earlier and the number of unsold homes on the market at the end of January represented a 9.6 month inventory based on the current rate of sales.

Carl Riccadonna, who is a senior economist at ‘Deutsche Bank Securities’ stated, “It’s going to be very difficult for the housing market to find its footing with the unemployment rate continuing to trend higher. There is a huge inventory overhang, so we need prices to come down further”, and Ethan Harris, who is the co-head of economic research at ‘Barclays Capital Inc.’ said, “This is actually a very disappointing set of numbers. We’re still in this phase of the recession where it’s really kind of a dramatic pulling back in purchases of big-ticket items, due to a tremendous loss of confidence in the economy”.

The competition from distressed sales is hurting builders and Ken Campbell who is the Chief Executive Officer of ‘Standard Pacific Corp’ issued a statement saying, “We saw our sales absorption rate, our cancellation rate and general traffic levels deteriorate beyond normal seasonal changes” and went on to say that he “expected home prices to decline further”.

Federal Bank Chairman, Ben S. Bernanke stated yesterday that the U.S. economy is in a “severe contraction” and warned that the recession may last well into 2010.

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