GALLUP NEWS SERVICE
PRINCETON, NJ -- The number of new home sales fell in July and is now down 22% from the same time a year ago according to the most recent Commerce Department report. Given slowing sales, the supply of unsold homes hit its highest point since November 1995, and the median price of a new home tumbled $3,800 to $230,000 -- only $800 above the median new home price from a year ago. At the same time, the National Association of Realtors reported that July sales of previously owned homes were at their lowest level in two and a half years, while the inventory of unsold homes climbed to a record high.
These most recent data simply confirm the widely held perception -- noted by Gallup last month -- that housing activity has slowed significantly in 2006. The real question is whether the current housing slowdown will moderate, providing a so-called "soft-landing" for the economy, or whether there will be a housing debacle that could pull the rest of the economy into a recession.
While the ultimate answer to this question remains in doubt, the August UBS/Gallup Index of Investor Optimism poll shows investors are worried that the real estate markets are continuing to deteriorate. The new poll also shows that investor optimism continued its steady seven month decline, reaching a new low point for the year in August.
Real Estate Market Conditions Worsening
Fifty-six percent of investors rate current nationwide real estate market conditions as "only fair" (44%) or "poor" (12%). This represents a significant worsening of attitudes compared with June and July, when 46% of investors held this view.
Even more importantly, 7 in 10 investors believe conditions in the residential real estate market nationwide are getting worse, not better -- up from 63% in June.
Investor Optimism Continues to Decline in August
Investor optimism continued to decline in August, reaching an index of 53 -- down two points from July and its lowest point of the year according to the UBS/Gallup Index of Investor Optimism. Since January, the Index has declined 40 points. The Personal Dimension of the Index fell three points from 57 in July to 54 in August, indicating that investors are less optimistic about their personal portfolios than they were a month ago. At the same time, the Economic Dimension is -1 in August, implying that investors as a whole are essentially neutral about the economic outlook for the next 12 months.
Increasing Odds of a Recession
As the U.S. economy has slowed, Wall Street has cheered because the downturn has taken the pressure off the Federal Reserve Board to increase interest rates. At the same time, many political and economic observers also cheered the so-called "soft-landing" as they continue to argue that the economy is much stronger than generally perceived by the public. Interest rates are still comparatively low by historical standards and fiscal policy remains highly stimulative.
On the other hand, U.S. auto makers continue to shed thousands of workers and the residential real estate markets show every sign of an old fashioned housing recession. It is true that housing and auto manufacturing no longer dominate the economy the way they did a couple of decades ago; even so, the significant declines in these two important sectors of the U.S. economy have greatly increased the odds of recession late this year and in early 2007.
The reasons for the next U.S. recession may be somewhat new, including record high oil prices, fears of job outsourcing to foreign countries, middle class wage stagnation, and the collapse of some local real estate markets. Hopefully, the Federal Reserve was working on better ways to deal with these issues as it celebrated what Chairman Ben Bernanke called an "unprecedented" pace of global economic integration at its annual retreat in Jackson Hole, Wyoming, last week.
Survey Methods
Results for the Index of Investor Optimism Poll are based on telephone interviews with 802 investors, aged 18 and older, conducted Aug. 1-17, 2006. For results based on the total sample of investors, one can say with 95% confidence that the maximum margin of sampling error is ±4 percentage points. In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.
