REALTOR® Magazine-Daily News-Lower Home Prices Hit Consumer Spending

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Daily Real Estate News | June 14, 2007 | Lower Home Prices Hit Consumer Spending
The soft real estate market and rising energy costs are forcing consumers to slow down their spending, says research by consultancy Deloitte & Touche.

"Lower housing prices — which are limiting mortgage refinancing opportunities — and higher energy prices are both putting less cash in consumers' pockets,” says Carl Steidtmann, chief economist with Deloitte Services LP's Deloitte Research. “On the positive side, the labor market is holding up well and real wage growth is still stronger than it was several years ago."

The Deloitte Research Leading Index of Consumer Spending fell this month to 2.93 percent from an upwardly revised gain of 3.27 percent a month ago. The index tracks consumer cash flow as an indicator of future consumer spending.

"In this uncertain environment, smart consumer business companies will continue to keep employment growth modest, maintain low inventories, and keep a sharp eye on costs," added Pat Conroy, a vice chairman of Deloitte & Touche USA LLP and national managing principal of its Consumer Business industry group. "For retailers, incentive programs can help stimulate demand."

Here’s a closer look at the four components of this month’s index:

Real Home Prices: New home prices fell sharply in the most recent month and were the biggest contributor to the decline in the index. Heavy discounting by home builders to move unsold inventory is dragging home prices down in general.

Tax Burden: The pace of growth in household tax burden continues to accelerate. The U.S. Treasury Department's receipts for April were up a stunning 21.8 percent from a year ago, and set a one month all-time record of $383.6 billion. The rise in tax burden is a drag on consumer cash flow.

Initial Unemployment Claims: Claims were the one bright spot in the index. Although claims are slightly elevated from a year ago, they remain low by historical measures and have trended downward in recent weeks.

Real Wages: After rebounding sharply last year, real wage growth is still strong relative to recent years but has slowed sharply in the face of higher energy prices. The sharp run up in gasoline prices is a major headwind to future growth in the Deloitte Index.