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Why aren't happy consumers buying homes?

Some mixed economic data out this week was a bit of a head-scratcher.

Consumer confidence surged to a new post-recession high, increasing to levels not seen since October 2007, driven by an increase in consumers' perceptions of current conditions. This might have something to do with the fact the stock market recently leaped to a new all-time high. Or better yet, for most parents with young children, the back-to-school season is upon us -- and soon many homes will be blissfully vacant for a few precious hours.

Whatever the cause, this confidence isn't helping the housing sector. Home prices dropped in June, on a month-over-month basis, for the second-consecutive month. Is this is the start of something dangerous for housing, or merely a temporary stall?


If you dig deeper into the confidence report, you'll see it was marred by a slight drop in future expectations. The worry is that the good economic fortunes we've been enjoying lately -- including the best run of job creation since the 1990s -- will prove fleeting.

But the pessimism should prove short-lived. Housing supply is tightening again, according to the team at Capital Economics. And given the strength we've seen in the economy and the job market, the last piece of the puzzle needed to push home prices back to prerecession highs -- a lift in wages -- should arrive shortly. We're already seeing early indications of this, with business surveys expressing an expectation that wages will soon rise.


Another factor set to support home prices has been the big rise in rent inflation as vacancy rates drop, shown above. After the recession, home-ownership rates -- especially among 20- and 30-somethings -- dropped hard. Many lost homes. Others were locked out of new credit. More than a few landed on mom's couch. Rental demand went up.

Now rents are getting expensive. At the same time, banks are loosening their mortgage standards on a scale that exceeds what was done during the housing boom, according to the Fed's latest Loan Officer Survey. So, the pendulum should swing back in favor of owner occupation for many first-time and returning home buyers.

And finally, it's important to remember that while home prices have fallen on a monthly basis in May and June, they're still rising on an annual rate -- just at a slower pace. Currently, the 20-city S&P Case-Shiller home price index is rising at an 8.1 percent annual rate. Although that's down from a 13.2 percent rate seen back in January, it's still pretty healthy.

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