One of the curiosities of the US economy at the moment is this. If the roof is, quite literally, coming off the housing market, how is it that consumer confidence has managed to remain relatively robust?
For some time, economists have been warning that you write-off the US consumer at your peril – and it appears that Uncle Sam and Auntie Samantha’s appetite for spending is just as insatiable as ever.
It was the strength of the US consumer sector that recently led the National Institute of Economic and Social Research (NIESR) to predict only a mild slowdown in the US this year, with projected growth of 2.2 per cent – not half bad.
Yet, somehow it doesn’t gel. With other economists saying the US is already in recession, with the likes of George Soros talking about the worst economic crisis since World War II, how can the US possibly manage the growth projected by NIESR.
Well, maybe the answer is this. Maybe the US consumer, just like the US trader last year, has got his, or maybe it’s her, head stuck firmly in the sand.
According to a survey of 1,619 home-owners conducted by Harris Interactive for Zillow.com, just 23 per cent of the respondents said they believed their home had lost value over the last 12 months. In contrast, 36 per cent said they thought their home had increased in value, and another 41 per cent said it had stayed flat.
Now, Americans are by nature an optimistic lot. And so often this has been proven to be a good trait.
But last year’s exuberance by US markets seemed totally uncalled for, and this is not being wise in hindsight. We said so over and over again, and so events proved us right.
There is overwhelming evidence to suggest that US house prices have fallen over the last year, so there are only limited explanations for the results of this survey.
Firstly, maybe the data on house prices in the US is wrong – not likely. Maybe the survey did not use a sufficiently-large sample, or the results were biased in some way – perhaps focusing on regions where the market remained relatively strong.
But it seems the most likely explanation is that US homeowners have not woken up to reality.
Just like in the UK, there seems to a nationwide tendency to talk up houses by the bodies who are supposed to provide objective data. For example, the National Association of Realtors reckons house prices will be flat in 2008. Yet Merrill Lynch recently predicted a 15 per cent drop.
The truth is, someone, somewhere is wrong.
Someone is either far too optimistic, or someone else far too pessimistic.
Are the banks right with their pessimism, or are they merely blinded by their own mistakes? Warren Buffett recently called the problem inflicting banks to be “poetic justice” – maybe it’s a justice the banks just haven’t got their heads around yet.
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