Housing Prices Soften, but Consumer Confidence Firms

Tuesday's economic reports showed that the Case-Schiller home price index fell 3.2 percent in the first quarter of 2010 compared to the end of last year, although the index was up slightly from a year ago. Meantime, consumer confidence numbers rose for the third straight month in May. What's it all mean? Diane Swonk fills us in.
-Nelson Wang

Why Home Prices Fell
This home price index fell despite the support provided by the home-buyer tax credits, which expired on April 30. A large influx of foreclosures and distressed sales explains part of the weakness. We also saw some residual weakness from the end of the first-time buyer tax credit last November. (The bulk of the declines in home prices occurred in January and February, after the first tax credits expired and prior to the impact of the extensions hitting.)

Going forward, record-low mortgage rates are expected to provide a partial, but not complete, offset to the end of the homebuyer tax credits. We will need to see a much more substantive improvement in employment, however, before home prices fundamentally bottom and start to appreciate more consistently.

Consumer Confidence Improves, But Could Dip Again
This marks the third monthly improvement in a row for consumer confidence numbers, and largely reflects people's hope that labor market conditions are improving. Consumers are hardly wearing rose-colored glasses, however, and remain relatively anxious about their own financial situations. Indeed, the improvement in confidence continues to lag other recoveries along with every other stat on the current recovery, and very well could slacken again in June, as the losses endured in people's 401(k)s in recent weeks are realized.

Consumer Spending Outlook Mixed
The recovery in the U.S. appears to be holding on better than that among much of the rest of the industrialized world. Being the best of the worst, however, isn't the best of scenarios to live with. That said, the renewed turbulence in financial markets has given us some upside risks to spending in the near-term, as falling mortgage rates have triggered a whole new round of refinancing, while plummeting oil prices are also expected to free up some much-needed disposable income.

Diane Swonk, chief economist at Mesirow Financial, talks to CBS MoneyWatch twice a week about the day's top economic news and developments. Her responses are edited for clarity and length.