WASHINGTON - Home prices are surging, job growth is strengthening and stocks are setting record highs. All of which explains why Americans are more hopeful about the economy than at any other point in five years.
Investors on Tuesday celebrated the latest buoyant reports on consumer confidence and housing prices, which together suggest that growth could accelerate in the second half of 2013.
“We’re getting back on track,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “Housing continues tolook very solid in a broad based manner. We’re continuing to expand.”
Greater confidence could spur people to spend more and help offset tax increases and federal spending cuts. And the fastest rise in home prices in seven years might lead more Americans to put houses on the market, easing supply shortages that have kept the housing recovery from taking off.
Tuesday’s report from the Conference Board, a private research group, showed that consumer confidence jumped in May to a reading of 76.2, up from 69 in April. That’s the highest level since February 2008, two months after the recession officially began.
“Back-to-back monthly gains suggest that consumer confidence is on the mend and may be regaining the traction it lost due to the fiscal cliff, payroll-tax hike, and sequester,” said Lynn Franco, director of economic indicators at the Conference Board.
A separate report showed that average U.S. home prices jumped nearly 11 percent in March compared with March 2012, from about $136,830 to $151,710, the sharpest 12-month increase since April 2006. Prices rose year over year inall 20 cities in the Standard & Poor’s/Case-Shiller home price index.
The economic news helped send the Dow Jones industrial average up 106 points to close at a record, and the Standard & Poor’s 500 stock index is on track for its seventh straight monthly gain, the longest winning streak since 2009.
Surging stock prices and steady home-price increases have allowed Americans to regain the $16 trillion in wealth they lost in the recession. Higher wealth tends to embolden people to spend more. Some economists have said the increase in home prices alone could spur consumer spending enough to offset the end of a temporary Social Security tax cut that has reduced paychecks for most Americans this year.
The Conference Board survey said consumers are also more optimistic about the next six months. That should translate into greater consumer spending, substantial growth in hiring and faster economic growth in the second half of 2013, said Thomas Feltmate, an economist with TD Economics.
The Conference Board found that optimism is growing mostly among those earning more than the median household income of roughly $50,000. For those households, the confidence index jumped to 95.1 from 85.3.
Among most other income groups, confidence either rose more slowly or fell. For those earning $15,000 to $24,999, for example, the confidence index rose modestly, from 52.6to 55.9. And for those earning $25,000 to $34,999, it slipped from 59.8 to 57.9.Economists say the disparity points to the gain in stock prices, which mostly benefits more affluent Americans.
Consumers’ outlook on the job market also improved last month. The percentage who said jobs are plentiful rose, and the percentage who said they’re hard to find declined. Economists say the shift suggests that the pace of hiring could pick up.
The economy has added an average of 208,000 jobs a month since November. That’s well above the monthly average of 138,000 during the previous six months.
The job growth has helped reduce the unemployment rate to a four-year low of 7.5 percent.
Some of the decline in unemployment is because fewer people are looking for work. The government counts people as unemployed only if they’re actively searching for a job.
The economy grew at an annual rate of 2.5 percent in the January-March quarter, up from a rate of just 0.4 percent in the October-December quarter. The fastest expansion in consumer spending in more than two years drove the economy’s growth.
Many economists thinkgrowth is slowing slightly in the April-June quarter to an annual rate between 2 percent and 2.5 percent. But lots of analysts say growth should strengthen in the second half of the year, boosted by the gains in housing and employment. The Commerce Department will release a revised GDP estimate for the first quarter on Thursday. Analysts estimate the economy grew at a 2.5 percent annualized rate in the first quarter, the same as estimated in April.
A key reason the Case-Shiller index of home prices jumped in March was that a growing number of buyers were bidding on a tight supply of homes.
“Rising home prices may begin to alleviate a lack of housing inventory … by encouraging more homeowners to put their properties on the market,” Maninder Sibia, an economist with Economic Advisory Service, said in a research note.
Builders are responding to the supply shortage by ramping up construction. Applications for building permits rose in April to the highest level in nearly five years. The supply of available homes jumped in April but was still below its level a year earlier.
Stan Humphries, chief economist at Zillow, a real estate data provider, said the increase in the Case-Shiller index has been skewed higher by cities such as Phoenix and San Francisco. Fewer homes are available in those areas because many homeowners still owe more on their mortgages than their homes are worth.That makes it difficult to sell.
Yet even excluding those markets, prices are rising steadily nationwide, Humphries said. The increases are “certainly confirmation that the housing market is experiencing a brisk recovery,” he adds.
Rising prices typically encourage more would-be buyers to purchase homes before prices rise further. They also enable more homeowners to sell homes by reducing the number of people who owe more on their mortgages than the homes are worth.
Banks have raised their credit standards since the housing bubble burst and are demanding larger down payments. That’s made it hard for some potential first-time buyers to get a mortgage.
One potential obstacle to further economic gains is that workers’ pay is rising only modestly. Without faster growth in pay, some consumers may be reluctant to keep spending more.
“If you don’t think your income is going up, you will not be exuberant in your spending,” notes Joel Naroff, chief economist at Naroff Economic Advisors.
Stronger hiring, though, would enable more people to spend freely. Naroff expects the pace of job creation to average 175,000 to 200,000 a month for the rest of the year. Information for this article was contributed by Christopher S. Rugaber and Martin Crutsinger of The Associated Press, Jim Puzzanghera of the Los Angeles Times and Shobhana Chandra and Chris Middleton of Bloomberg News.
Front Section, Pages 1 on 05/29/2013