The Markets : Real Estate and Consumer Confidence

We constantly hear that American's need to save more in order to make them less dependent upon foreign governments buying US debt. But the truth is, is that the high spending American consumer drives the world's export markets. So when the US consumer confidence index falls by more than 50% over a year (from 111.9 to 50.4) then its becomes time to worry.

My fear is that a global slowdown linked to high inflation will lead to stagflation, the worst of all worlds.

However, as all my clients well know, I love gold. And gold is built for stagflation. Those of you who are holding bullion via the ETF, should stay pat and look to accumulate as the stagflation story gathers pace.

One word of warning. Beware of mining stock in the short term. If the RBOS and Morgan Stanley predictions of catastrophe are correct (Please see blog of Monday 23rd June), then all equities will be affected to a greater or lesser extent, even gold mining. This is because whilst gold loves stagflation, copper and silver and metals that have industrial uses do not and these can all be found in gold mines. They have a direct effect upon the profitability of the mining companies.

Below is an article from the WSJ, followed by a video interview with University of Southern California real-estate economist Delores Conway on just how bad the US housing market collapse is.

Twin the sharp drop in housing with high inflation, low demand and a weak dollar and what we are left with is a perfect storm of bad economic conditions.

PAGE ONE

Consumer Confidence Plummets

Home Prices See Sharp Decline;
Fed Is Likely to Hold Interest Rates Steady

By KELLY EVANS and ANTON TROIANOVSKI
June 25, 2008

American consumers, battered by falling home prices and soaring gasoline prices, are at their gloomiest in decades, raising fears they might cut back on spending later this year and tip the economy into a recession.

Consumer confidence plunged in June to its lowest level since 1992, and home-price declines accelerated in April, according to data released Tuesday. The renewed signs of economic weakness underscored why Federal Reserve policy makers, who wrap up a two-day meeting Wednesday, are likely to hold the target for their benchmark interest rate steady at 2%.

University of Southern California real-estate economist Delores Conway says the correction in the housing market is happening much faster than usual, thanks to Wall Street's relationship to the recent lending spree. Stacey Delo reports.

The Conference Board, a New York-based business research group, said consumer confidence dropped to 50.4 in June from 58.1 last month. The scale -- which uses as its benchmark a 1985 level of 100 -- peaked most recently at 111.9 in July 2007. Consumers' expectations of the economy six months ahead plunged to the lowest levels since the board began conducting its surveys in 1967.

The economic pullback since last year has been led by slumping home construction and flattening business investment. But growth has remained marginally positive: The economy grew at a 0.9% annual pace in the first quarter of this year and will likely post a similar gain in the current April through June period. That's largely because consumers, whose spending makes up two-thirds of U.S. economic output, have remained resilient.

But the latest evidence of slumping confidence and tumbling home prices suggests that Americans' willingness to keep spending is being tested, and the odds of avoiding economic contraction have dropped. (Economists note, however, that consumers' behavior does not always follow what they say about their confidence.)

"The final quarter [of 2008] could be a big mess," said John Lonski, chief economist at Moody's Investors Service. He noted a host of risks to growth through early next year: rising prices of goods and services, continued pain in the housing market, and a possible slowdown in consumer spending once the impact of federal economic-stimulus checks fades. "That might be when we finally observe back-to-back quarterly declines" in gross domestic product, which typically signify recession, he said.

In St. Louis, Companion, a small chain of bakeries and cafes, has already seen its restaurant clients trim back their orders and its regular customers visit less frequently. "There seems to be so much uncertainty, people are just getting spooked," said Companion's co-owner, Josh Allen. Meanwhile, he said, because the price of flour has risen sharply, he charges $3 for a baguette now, up from $2.50 six months ago.

In Washington, Leonel Quijano, a 21-year-old electrician, said he's already changed his buying habits. "A lot of things that I used to buy, I don't," he said. "I don't go out as much as I used to. Instead of going to a bar I'll stay home and get a six-pack."

Consumer glumness is being fueled by an acceleration of home-price declines. Prices of single-family homes in 20 major cities dropped by 15.3% in April from the year before and are now back to 2004 levels, according to the Case-Shiller home price index released by Standard & Poor's. The Office of Federal Housing Enterprise Oversight, which oversees Fannie Mae and Freddie Mac and tracks prices of homes purchased with their mortgages, said home prices were down 4.6% in April from the previous year, the lowest level since its tracking began in 1991.

Tracking Home Prices

The S&P/Case-Shiller index shows larger price declines in part because it tracks metropolitan areas where prices are more sensitive than in rural locations. Ofheo, on the other hand, may understate the weakness because it tracks only so-called agency-backed mortgages, which exclude homes purchased with subprime loans.

Both surveys show that price declines vary sharply by region. Las Vegas and Miami continue to have the largest one-year drops, of 26.8% and 26.7% respectively. Los Angeles, San Diego, San Francisco and Tampa, Fla., have also seen declines of more than 20%, according to the S&P/Case-Shiller data.

Other regions are faring better. In eight areas -- including Boston, Dallas, Denver, Portland, Ore., and Seattle -- prices either rose or stabilized in April from the month before. "If there is anywhere to look for possible improvement, it would be that the pace of monthly declines has slowed down for most of the markets," said David M. Blitzer, chairman of S&P's index committee.

In Chicago, Sergei Mirkin thinks the time to sell is near. The biologist, who moved to Boston a year and a half ago, held onto his old condo but says he's preparing to put it on the market next spring. "The Chicago housing market seems to be on its way to recovery," he said, noting that several other units in his building have recently sold. The home price indexes don't track condo sales, but the S&P/Case-Shiller data show that home prices in Chicago rose in April by 0.1% from the month before.

Getty Images

A house for sale in Miami last month.

Yet across the U.S., potential buyers remain wary. According to the Conference Board, 2.2% of respondents say they intend to purchase a home in the next six months, a 25-year low. Consumers also ratcheted back on plans to purchase cars and major appliances, and fewer said they intended to take a vacation over the next six months.

Worries About Growth

Worries about economic growth are likely to cause the Fed to announce it's holding interest rates at 2%, according to analysts. Low rates could help the economy, by making the cost of borrowing lower for companies looking to invest in their businesses or families interested in buying homes.

But low rates can also stoke inflation at a time when companies and consumers are already noting the sting of rising prices. United Parcel Service Inc. said Monday that an "unprecedented increase" in fuel-costs and the weak economy would hurt its second-quarter earnings. Dow Chemical Co., meanwhile, announced Tuesday its second round of price hikes in a month, saying it will charge as much as 25% more for some products starting July 1.

Bill Hardin, 70, lives in Alton, Ill., and works as a Transportation Security Administration officer at nearby Lambert-St. Louis International Airport in Missouri. He sees first-hand the myriad surcharges now imposed by airlines, and also feels the pain at gas pumps since he drives 25 miles each way to work. "I'm just bent," he said of the higher prices. "Your take-home pay goes down because fuel is more expensive."

Write to Kelly Evans at kelly.evans@wsj.com⁷