October 17, 2008 / 3:34 PM / 10 years ago

Housing market and consumers on the ropes

NEW YORK (Reuters) - Consumer confidence suffered its steepest monthly drop on record in October and construction starts on new homes fell to a 17-1/2 year low the previous month, as the financial crisis sent shock waves through the economy.

Shopper on Chicago's Magnificent Mile in a file photo. REUTERS/John Gress

The fall in consumer confidence came as a sharp deterioration in credit markets punished stocks and wiped out large chunks of savings held in retirement accounts. The sentiment drop erased a recovery in previous months that was inspired by a retreat in oil prices that had been at record highs.

“Confidence is collapsing so that’s not good even as you have gas prices falling,” said Doug Smith, chief economist for the Americas at Standard Chartered in New York. “People are seeing what’s happening to their 401ks, stocks and home prices. It’s just awful.”

The Reuters/University of Michigan Surveys of Consumers said on Friday its index of confidence plummeted to 57.5 in October from 70.3 in September.

Earlier, the Commerce Department said overall starts on new homes fell 6.3 percent to their slowest pace since January 1991, and well below expectations of Wall Street economists.

Both releases showed the spiraling credit crisis was pounding an already weak economy.


Financial markets continued their volatile ride. Stocks were down but attempting to pare their losses on bargain hunting and some reassuring earnings results from companies.

Safe-haven government bonds extended gains in the wake of the release as many investors were worried over the deepening of the U.S. economic malaise.

Friday’s data was the latest reminder that the economic and financial troubles all originated in the U.S. housing market.

In a particularly stark example, the category of single-family homes saw starts fall at a rate of 12.0 percent to the slowest pace since August 1982.

With falling home prices, soaring foreclosures and financial turmoil that was curtailing the availability for of mortgages for prospective home buyers, builders in September were clearly bracing for a deeper downturn. New applications for building permits fell 8.3 percent in September.


The University of Michigan consumer sentiment index is now at its lowest since June this year. The report said there have been only four surveys that posted monthly declines of 10 index points or more.

“Consumer confidence in early October registered its largest monthly decline in the history of the surveys,” the report said.

“All of the prior double-digit declines were based on severe economic dislocations with the losses accelerated by fear and panic,” the report said.

Slideshow (4 Images)

The index came out well below economists’ expectations for a reading of 65.5, according to the median of their forecasts in a Reuters poll. Their 64 forecasts ranged from 55.0 to 70.0.

The University of Michigan confidence index dates back to 1952. Its record low was 51.7, which it hit in May 1980.

Consumers rated current economic conditions the worst on record, with this gauge falling to 58.9 from September’s 75.0.

Additional reporting by David Lawder in Washington and Richard Leong in New York, Editing by Chizu Nomiyama

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