December 27, 2016 / 3:15 PM / in 7 months

U.S. consumers ebullient; home prices gain

5 Min Read

Shoppers are reflected in a window as they walk though Times Square in New York November 30, 2014.Carlo Allegri

(Reuters) - U.S. consumer confidence shot to its highest in more than 15 years in December as Americans saw more strength ahead in business conditions, stock prices and the job market following the election of Donald Trump as president in November.

House prices continued their steady recovery in October, although a spike in borrowing costs after Trump's Nov. 8 victory could present a headwind to sustained home value gains.

The Conference Board said on Tuesday its Consumer Confidence Index rose to 113.7 this month from an upwardly revised 109.4 in November. That topped estimates in a Reuters poll for a reading of 109.0, and was the highest since August 2001.

The gain in confidence was entirely due to rising expectations as consumers' assessments of current conditions dipped, and was led by surging optimism among older Americans, Lynn Franco, director of economic indicators at The Conference Board, said in a statement. The private economic forecasting group's Expectations Index hit its highest since December 2003.

The modest pullback in current conditions "still suggests that economic growth continued through the final months of 2016," Franco said. "Looking ahead to 2017, consumers' continued optimism will depend on whether or not their expectations are realized."

Benchmark U.S. stock indexes have surged to record highs following the election, in which Republican Trump surprised most pre-election polls to defeat Democrat Hillary Clinton.

The S&P 500 .SPX has gained more than 6 percent since Election Day, while the blue chip Dow Jones Industrial Average .DJI has risen by nearly 9 percent to near the 20,000 mark. Small cap stocks have outpaced both, with the Russell 2000 gaining 15 percent in the same run.

All three indexes were up modestly on Tuesday in light, post-Christmas holiday trading.

Interest rates have also risen on expectations that Trump's economic plans will accelerate growth and inflation and the Federal Reserve will ratchet up the pace of hikes to its benchmark overnight lending rate. The Fed raised that rate earlier in December for the first time this year by a quarter percentage point to a range of 0.50 percent to 0.75 percent, and most forecasters expect at least two hikes in 2017.

Trump will inherit an economy that by most assessments is on solid footing, even if growth has been subdued for much of outgoing President Barack Obama's term. The unemployment rate recently dropped to 4.6 percent, its lowest since the Great Recession ended, and the economy has added an average of 188,000 new jobs a month over the past 12 months.

Borrowing Costs, Income Growth Pose Risks

With benchmark 10-year Treasury yields US10YT=RR around their highest in more than two years, the average rate on a 30-year fixed-rate mortgage has hit its highest since May 2014, potentially posing a risk to the U.S. housing price recovery, which continued apace in October.

The S&P CoreLogic Case-Shiller composite index of 20 metropolitan areas rose 5.1 percent in October on a year-over-year basis, up from a downwardly adjusted 5.0 percent climb in September and matching the estimate of a 5.1 percent gain from a Reuters poll of economists.

"Home prices and the economy are both enjoying robust numbers," said David M. Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices.

"However, mortgage interest rates rose in November and are expected to rise further as home prices continue to out-pace gains in wages and personal income," Blitzer said.

"With the current high consumer confidence numbers and low unemployment rate, affordability trends do not suggest an immediate reversal in home price trends. Nevertheless, home prices cannot rise faster than incomes and inflation indefinitely."

Prices in the 20 cities rose 0.6 percent in October from a revised 0.5 percent in September on a seasonally adjusted basis, the survey showed, outpacing expectations for a 0.5 percent increase.

On a non-seasonally adjusted basis, prices increased 0.1 percent from September.

The biggest year-over-year gains were recorded in the West and Texas, including gains of more than 10 percent in the Seattle and Portland areas. Prices in the Denver and Dallas markets increased by more than 8 percent from a year earlier.

The smallest annual gain was in the New York metro area, where prices rose just 1.7 percent.

Reporting By Dan Burns; Editing by Meredith Mazzilli

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