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Home Prices Tumble, Consumers Shaken

As housing prices slide across the country, consumer confidence takes a hit

The latest data on home prices show that the downturn in the housing market is getting worse, rather than better, raising questions about consumers' ability to keep propping up the economy. American consumers have taken a hit not just from falling home prices, but also rising energy prices and a wobbly stock market. "The big concern is the whole wealth issue," says Stephen Gallagher, chief U. S. economist at Societe Generale (SG). "The sense of wealth is very important, not just the actual wealth itself."

Homes certainly aren't the piggy banks they once were. Prices in 10 major metropolitan areas fell at an annual rate of 5% in August, the sharpest decline in 16 years, according to data released on Oct. 30 by Standard & Poor's for its S&P/Case-Shiller Home Price indexes. A broader index of 20 major markets showed an annual decline of 4.4%.

"At both the national and the metro levels, the fall in home prices is showing no real signs of a slowdown or turnaround," said Robert Shiller, chief economist at MacroMarkets, who helped develop the index. "There is really no positive news in today's report, as most of the metro areas are showing signs of declining or vanishing returns on both an annual and monthly basis."

Homebuilders Take the Hit

The news hit homebuilders hard. The stocks of Centex (CTX), Pulte Homes (PHM), DR Horton (DHI), Beazer (BZH), KB Home (KBH), and Lennar (LEN) fell after the indices were released. Shares recovered somewhat in the afternoon, but are still down between 40% and 70% over the past year.

The housing price news came the same day that new research showed the American consumer has been shaken a bit by the economy's wobbles. The Conference Board said that its gauge of consumer confidence dropped to 95.6 in October, down from 99.5 in September and well below the expected 99. "Consumers are growing more pessimistic about the short-term future, and their rather bleak outlook suggests a less-than-stellar ending to this year," says Lynn Franco, director of the Conference Board's consumer research center.

The developments seem to make a cut in interest rates from the Federal Reserve on Oct. 31 a near certainty. Investors and economists certainly expect one of at least a quarter point. "They're going to cut tomorrow," says Gallagher.

Still, what's unclear is how widespread the most serious housing troubles are. Gallagher points out that the Case-Shiller index, though valuable, is a limited in key ways. "They only look at 20 metropolitan markets," he says. "I'm not sure they're capturing the whole thing."

The Case-Shiller indexes are considered among the most accurate measures of housing prices. They are designed to track the price of a typical single-family house by measuring the change in prices of thousands of specific homes.

Housing prices have tumbled across the country over the past year. The hardest-hit metro area, according to Case-Shiller, was Tampa, where home prices dropped 10.1% over the past year. Detroit was the second worst, with a 9.3% decline, followed by San Diego, with an 8.3% drop.

Only two metro areas showed improvements in August, compared with the previous month. But both of those—Denver and Detroit—only had smaller declines, rather than actual improvement in prices. Eight of the 20 metro areas reported their worst returns on record: Cleveland, Las Vegas, Miami, Minneapolis, Phoenix, San Diego, Tampa, and Washington.

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