» This Story:Read +| Comments

Consumer spending and income rise, but new-home sales drop

Discussion Policy
Comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, we will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site. Please review the full rules governing commentaries and discussions. You are fully responsible for the content that you post.
Washington Post Staff Writer
Thursday, December 24, 2009

Americans' incomes and spending levels rose in November, while new-home sales dropped, according to data released Wednesday that suggest the economy has continued a steady but unspectacular expansion as the end of the year approaches.

This Story

Personal income rose 0.4 percent, the fifth straight month of increase, and consumer spending rose 0.5 percent, the Commerce Department said. Those numbers were lower than expected, but nonetheless suggest that Americans were becoming more confident about spending money as the holiday season began.

However, when adjusted for inflation, the gains are less impressive, and economists said that at those levels of growth, the nation will likely emerge from its deep downturn slowly.

"It is encouraging that income appears to be growing at a steady pace," said Paul Dales, a U.S. economist at Capital Economics. But the current rate of income growth "will not be enough to drive a significant recovery in consumption at the same time that debt needs to be paid down," he said.

The stock market rose modestly on the news, with the Standard & Poor's 500-stock index up 0.2 percent Wednesday. The dollar declined 0.5 percent against a basket of other major currencies, partly retracing sharp gains over the past three weeks.

Even as consumers spent more, they bought fewer new homes in November, according to a separate Commerce Department report. The agency said on Wednesday that sales of newly built single-family homes dropped 11.3 percent from October to a seasonally adjusted annual rate of 355,000 -- the lowest level since April.

Some prospective buyers retrenched because it was too late for them to take advantage of a tax credit for first-time home buyers that was to expire Nov. 30. The data capture buyers who signed contracts in November. To get the tax credit, buyers would have had to complete the sale by the end of November, meaning that many of them would have had to sign a contract months earlier.

The key "seems to have been the drying-up of the flow of buyers under the original program," Ian Shepherdson, an economist at High Frequency Economics, wrote in a note to clients.

In early November, when the tax credit was extended through April 30, other prospective buyers felt no urgency to buy immediately, and economists expect sales to tail off in the next few months before picking up again as the new deadline approaches.

"It's going to take a couple of months before stimulated demand from the extended credit are evident in the sales figures," said David Crowe, chief economist for the National Association of Home Builders.

The new-home sales figures contrast sharply with industry data released Tuesday that show a 7 percent jump in sales of previously owned homes in November. But unlike the new-home sales data, the industry report tallies completed sales and therefore captures the last-minute buying rush prior to the tax credit's scheduled expiration.

Mark Vitner, a senior economist at Wells Fargo Securities, said any tax credit-related sales bump going forward will not come close to the gains made in the past year because the unemployment rate now is much higher than it was when the original tax credit was enacted, and joblessness undermines home-buying activity.

"The economy is getting better, but we've already taken the most capable potential buyers out of the market," Vitner said.

Wednesday's report shows that the median sales price of new houses was $217,400 in November, up from $209,400 in October but down modestly from a year earlier.

The report also shows continued progress in clearing out the excess supply of new homes for sale, which fell to an estimated 235,000 units in November. If sales were to continue at the current pace, there would be a 7.9 month supply of new homes for sale, up from 7.2 months in October but down from the year's high of 12.4 months in January.

"When demand does pick up in 2010, it should pave the way for a solid revival in new construction," Vitner said. "But it is too soon to think that all is well in the housing market."

» This Story:Read +| Comments

More in Business

Time Space Economy

Time Space Economy

Explore economy news through text and photos from around the world.

WashBiz Blog

Local Companies

Post editors and writers keep you informed about the region's business community.

Economy Watch

Economy Watch

Stay updated with the latest breaking news about the financial crisis.

© 2009 The Washington Post Company