Soaring housing prices are lifting confidence to multiyear highs, according to reports released Monday. But still-stagnant incomes and weak job prospects are holding back the spending that economists say is key to a robust recovery.
"Households see things are getting better. They just don't expect it's going to trickle down to them quite yet," said Joel Naroff, president of Naroff Economic Advisors.
Existing-home prices surged 10.9% vs. a year earlier in March, according to the S&P/Case Shiller composite index of 20 metropolitan areas. That topped economists' forecasts and was the largest increase since April 2006, just before the market peak that summer. The market is buoyed by near record-low interest rates, and pent-up demand for household formation.
A dearth of listings too is creating bidding wars on some properties, while banks are slowly easing the strict lending standards they imposed in the wake of the housing collapse.
Meanwhile, the Consumer Confidence Index rose 7.2 points in May to 76.2, the best level in more than five years, the Conference Board said. But it's still well below prerecession peaks. And while survey respondents say jobs appear more plentiful, many still believe it would be hard to find a new job. And they're not optimistic about their incomes rising.
Wealthier, On Paper
That raises questions about just how much wealth effect will be seen. That is, how much the rising wealth on paper — higher 401(k) balances, and a rising home prices — will translate into spending on new cars, appliances or clothes.
"It's not completely tangible and especially with it all going down in 2008," Tim Daigle, associate economist with Moody's Analytics, said about the recession that wiped away much of that paper wealth five years ago. "They still remember that.
Consumers may become less conservative than they have been, but Naroff doesn't think the data point to any opening of the floodgates on household spending.
Shoppers are still coming to terms with the expiration of the payroll tax holiday this year, which reduced take-home checks. And a round of federal sequestration-related cuts is still rippling through the economy.
Homebuilder stocks rose early on the rising prices and consumer sentiment. But most gave back part or all of those gains along with the general market.
The 10-year Treasury yield soared 12 basis points Monday to a 13-month high of 2.13%. That reflects improving economic conditions as well as Federal Reserve hints that it may slow bond buying soon. Higher Treasury yields will push up ultralow mortgage rates, dampening further increases in home sales and prices.
Such prospects appear to have spurred profit-taking in homebuilders, Sterne Agee analyst Jay McCanless said.
PulteGroup (PHM) rose 3% early, but closed up just 5 cents at 22.78 on the stock market. D.R. Horton (DHI) closed down 5 cents, while Lennar (LEN) slipped more than 1%.