Popular Economics Weekly

Some very heartening news has come from Professor Robert Shiller, author of “Irrational Exuberance”, and co-author of the S&P Case-Shiller home price index. He remarked in a recent New York Times Op-ed piece that the index showed “the sharpest change in direction we have ever seen” in home prices. The 10-City Composite Home Price Index for the U.S. rose 3.6 percent between April and July.

This followed a 4.8 percent decline from January to April. The “suddenness of the shift surprised me,” wrote Dr. Shiller. The closest comparison was a 2.3 percent rise from April to July 1991 that followed the ‘91 recession.

But what about the future? Professors Case and Shiller also run surveys to try to measure homeowners’ future expectations of home prices. Their surveys showed home owners remain optimistic that home prices will rise substantially over the next ten years, in spite of the recession.

In fact, homebuyers’ expectations of average annual home appreciation jumped in July 2009 to 11.2 percent, from 9.5 percent one year earlier when prices were falling at a 20 percent annual rate. Their survey also found that home buyers have become market timers. Seventy-five percent of those polled thought the price slide was over, and they should not delay in buying a home. That attitude is causing the upward pressure on home prices.

This optimism is also showing up in consumer spending. Personal consumption expenditures surged 1.3 percent in August, 0.9 percent when adjusted for inflation, after falling for 3 of the last 4 quarters. This is far above the personal income increase of 0.2 percent. The July and August increases could mean a 3 percent Gross Domestic Product growth rate in the third quarter just ended.


The U.S. Census Bureau also announced that advance estimates of U.S. retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, decreased 1.5 percent (±0.5%) from the previous month and 5.7 percent (±0.7%) below September 2008. But without the 10.4 percent drop in auto sales (due to end of cash for clunkers program), retail sales rose 0.5 percent, exceeding estimates.


Lastly, the Federal Reserve published its most recent Open Market Committee minutes. It said a number of factors were expected to support growth over the next few quarters: Activity in the housing sector was evidently rising, and house prices had apparently stabilized or even increased; reports from business contacts and regional surveys were consumer spending seemed to be in the process of leveling out consistent with firms making progress in bringing inventories into better alignment with sales and with production stabilizing or beginning to rise in many sectors; the outlook for growth abroad had also improved, auguring well for U.S. exports; and financial market conditions had continued to improve over the past several months.

But we are not yet out of the woods. The FOMC minutes also said that consumers were likely to be cautious in spending, and business contacts indicated that their firms would also be cautious in hiring and investing even as demand for their products picked up. Some of the recent gains in activity probably reflected government policy support, and participants expressed considerable uncertainty about the likely strength of the upturn once those supports were withdrawn or their effects waned.

So much of consumer and homebuyer optimism is based on the fact that government has become the solution. At least until the private sector steps back up to the plate and begins to lend and invest some of that $9.6 trillion sitting in MZM bank deposits and money market accounts earning zero interest.

Harlan Green © 2009