A better-than-expected housing report has experts optimistic about consumer spending in general. It stands to reason, after all, that if Americans are buying homes, they'll need things to fill them.
According to the National Association of Realtors, sales of existing homes rose 5.5% to an annual pace of 5.17 million units in October, from a rate of 4.9 million units in September. The October figure was above economists' forecasts for an annualized sales rate of 4.98 million units.
"This is positive news," said Mickey Levy, chief economist at Banc of America Securities. "To the extent the housing market holds up, it's going to support consumption of household durables." Previously owned homes account for 84% of houses sold and are considered a good gauge of consumer spending.
Some home retailers have already seen the benefits. Yesterday,
Pier 1 Imports
said November sales are running ahead of forecasts and that its third-quarter earnings will be better than expected.
After the terrorist attacks, many Americans have placed greater emphasis on their homes. "It is one large asset that people have and take care of," said Brian Postol, a retail analyst at A.G. Edwards. "They see it as their castle and make improvements to raise its rate of inflation."
Since Sept. 10, several home retailer stocks have risen sharply:
Bed Bath & Beyond
is up 35%,
has risen 39%, and
has climbed 41%.
Since the recession began in March, the housing market has proved an anomaly: Existing home sales are up 3.1% on a year-over-year basis. Typically, home sales are the first to go in a recession. During the 1990-91 downturn, for example, sales of previously owned homes fell 9.6% on a year-over-year basis.
"Housing has been a sideshow of this recession," said Josh Feinman, chief economist at Deutsche Asset Management. "But it's providing support to the rest of the economy." Existing home sales rose from a peak of 5.43 million in March, to a record level of 5.54 million in August.
Some economists are even optimistic the trend can continue, although a
drop in consumer confidence and rising unemployment remain risks in the coming months. "The number of mortgage applications suggests the housing market will stay strong," said Brian Jones, an economist at Salomon Smith Barney.
Behind the strength in housing has been a decline in 30-year fixed-mortgage rates, which have been below 7% since August, according to Freddie Mac. A year ago, they were 7.75%.
"Borrowing costs dropped rapidly enough to limit the damage from the latest recession," said John Lonski, an economist at Moody's Investor Service. "If mortgage rates stay below 7%, you could see an upturn in home sales, and with it a much improved pace of spending on furniture and appliances."