Rising home and stock prices boost US confidence

By CHRISTOPHER S. RUGABER and MARTIN CRUTSINGER
AP Economics Writers

WASHINGTON (AP) -- Americans are more confident in the U.S. economy than at any point in the past five years, thanks to surging home prices, a brighter job market and record-setting stock prices.

Stock averages on Tuesday extended the year's explosive rally.

Further gains in consumer confidence could help the economy withstand the effects of higher taxes and federal spending cuts that kicked in this year. Spending by consumers drives about 70 percent of economic growth.

Consumer confidence jumped in May to 76.2, the Conference Board, a private research group, said Tuesday. That was up from a reading of 69 in April and is the highest level of confidence since February 2008, two months after the Great Recession officially began.

A separate report Tuesday showed that U.S. home prices jumped 11 percent in March compared with a year ago, the sharpest 12-month increase since April 2006. Prices rose year over year in all 20 cities in the Standard & Poor's/Case Shiller home price index.

The reports helped fuel a powerful rally on Wall Street. Traders were also encouraged by gains in overseas markets, especially in Japan and Europe.

The Dow Jones industrial average was up about 165 points in late-morning trading. Broader stock indexes also jumped. The Dow has rocketed 18 percent this year.

Surging stock prices and steady home-price increases have allowed Americans to regain the $16 trillion in wealth they lost to the Great Recession. Some economists have said the increase in home prices alone could boost consumer spending enough to offset the cost of a Social Security tax increase that's reduced paychecks for most Americans this year.

Thomas Feltmate, an economist with TD Economics, said higher home and stock prices, along with cheaper gas, have helped consumers shrug off the increase in Social Security taxes.

And the Conference Board survey noted that consumers are also more optimistic about the next six months. That should translate into greater consumer spending, substantial growth in hiring and faster economic growth in the second half of the year, Feltmate said.

The job market has improved steadily over the past six months. The economy has added an average of 208,000 jobs a month since November. That's well above the monthly average of 138,000 during the previous six months.

The unemployment has fallen to a four-year low of 7.5 percent. Some of the decline is due to fewer people looking for work. The government counts people as unemployed only if they're actively searching for a job.

The economy grew at an annual rate of 2.5 percent in the January-March quarter, up from a rate of just 0.4 percent in the October-December quarter. The fastest expansion in consumer spending in more than two years drove economic growth in the first quarter.

Many economists think growth is slowing slightly in the April-June quarter to an annual rate between 2 percent and 2.5 percent. But many economists say growth should strengthen in the second half of this year, boosted by the gains in housing and employment.

A key reason the Case Shiller index of home prices jumped in March was that a growing number of buyers are bidding on a tight supply of homes.

Prices rose in Phoenix by 22.5 percent over the past 12 months, the biggest gain among cities. It was followed by San Francisco (22.2 percent) and Las Vegas (20.6 percent).

``Rising home prices may begin to alleviate a lack of housing inventory ... by encouraging more homeowners to put their properties on the market,'' Maninder Sibia, an economist with Economic Advisory Service, said in a research note. ``The housing market is clearly improving.''

The U.S. housing market is benefiting from solid job gains and near-record low mortgage rates. Sales of new homes rose in April to nearly a five-year high. And sales of previously occupied homes ticked up in April to the highest level in three and a half years.

Builders are responding to the supply shortage by ramping up construction. Applications for building permits rose in April to the highest level in nearly five years.

The supply of available homes jumped in April but was still 14 percent below its level a year earlier.

Stan Humphries, chief economist at Zillow, a real estate data provider, said the increase in the Case-Shiller index has been skewed higher by cities such as Phoenix and San Francisco. Fewer homes are available in those areas because many homeowners still owe more on their mortgages than their homes are worth. That makes it difficult to sell.

Yet even excluding those markets, prices are rising steadily nationwide, Humphries said. The increases are ``certainly confirmation that the housing market is experiencing a brisk recovery,'' he added.

The housing recovery is creating construction jobs and bolstering the economy in other ways. Higher home prices make homeowners feel wealthier and encourages them to spend more.

Rising prices also encourage more would-be buyers to purchase homes before prices rise further. They also enable more homeowners to sell homes, by reducing the number of people who owe more on their mortgages than the homes are worth.

Prices have been rising steadily since last summer. Still, they are about 29 percent below the peak reached in July 2006.

Banks have raised their credit standards since the housing bubble burst and are demanding larger down payments. That's made it particularly hard for some potential first-time buyers to get a mortgage.