Pushed to the edge by terrorists attacks on America, consumer confidence is eroding fast and it could take the real estate market with it.

The New York-based Conference Board's latest Consumer Confidence Index, released Sept. 25, had already declined in August but plummeted further in September at a rate not seen since October 1990.

The index, now at 97.6 (1985=100), down from 114 in August, slid 16.4 points in September, compared to a 23 point fall in October 1990. Deteriorating labor market conditions and weakening business conditions are fueling the erosion in consumer confidence, the board said.

The Consumer Confidence Survey is a monthly measure of the public's confidence in the health of the U.S. economy. It is based on a representative sample of 5,000 U.S. households asked about business conditions, the labor market, and income.

On the same day the board released its index, Standard & Poor's Structured Finance group announced that while it does not expect Sept. 11's acts of terrorism to have a direct impact on the residential housing market, residual effects of additional layoffs and general economic softening related to the tragic events will add to the expected decrease in housing starts and an increase in mortgage delinquency rates.

Confidence Drains

That's not surprising, given nearly a decade of easy-qualifier loans, zero-down mortgages and equity loans that pushed mortgage indebtedness on some homes higher than the homes' values. As more and more jobs are jeopardized, home owners may not be able to afford high monthly mortgage payments.

Also feeling the fallout are real estate markets that relied heavily upon buyers liquidating stock market investments for purchase money. Before the terrorists' attacks, the technology sector was on the ropes, manufacturing had hit a wall and unemployment was on the rise.

After the attacks, airlines, travel and related industries suffered devastating losses and layoffs and aftershocks reverberating through Wall Street sent the Dow Jones industrials down for the week of Sept. 17 by the largest percentage since 1940.

The Conference Board said consumers rating business conditions as favorable fell from 27.7 percent to 22.0 percent. The percent of consumers claiming jobs were "hard to get" increased from 16.0 percent to 18.5 percent in September.

It's all taking the luster off real estate.

Importance Of Real Estate

In the waning days of the longest economic expansion on record, real estate has been perhaps the strongest economic sector, largely credited with keeping the weakened economy out of recession.

That's because so much of consumer spending is tied to the home. Consumers who buy homes also buy things to put in it, they use the equity to buy still more stuff and then they buy bigger, more expensive, larger homes to fill up with yet more stuff.

And consumer spending is the real lubricant that keeps the economy cranking -- it accounts for at least two thirds of the gross domestic product, a measure of the output of goods and services produced by labor and property in the United States.

The real estate sector has been buoyed by near record low mortgage rates that, even after the terrorists' attacks, continued to be a strong reason to buy a home.

That's changing.

"As the economic ramifications of September 11 continue to reverberate in the coming weeks and months, and the number of layoffs continue to rise, the economy faces tougher times ahead. While consumers have managed to keep the U.S. out of a recession for several years now, that soon may no longer be the case," said Lynn Franco, director of the Conference Board's Consumer Research Center.

Silicon Valley's reliance upon the technology industry has made it an early casualty.

The median price of closed sales of single family homes in Santa Clara County dropped for the second consecutive month from $548,450 in July to $529,000 in August, 2001, compared to $525,000 in August 2000, according to the Bay Area Real Estate Market Newsletter, a compilation of data from R.E. InfoLink, the area MLS.

In San Benito County the median price fell from $379,000 in July to $351,300 in August this year, compared to $362,500 in August, 2000, according to the newsletter, produced by broker Richard Calhoun of Creekside Realty in San Jose.

Sales of single-family homes in Santa Clara County rose from 928 in July this year to 1028 in August, but dropped from 1,403 in August last year. In San Benito County, sales were up from 40 in July to 48 in August this year. Last year 46 homes sold in August in San Benito County, according to Calhoun's newsletter.

Bleak Forecasts

The Wall Street Journal reported its partner economic forecasting firm Case Shiller Weiss, lowered its price projections for 18 out of 20 cities that it tracks and now expects prices to rise just 2.4 percent nationally this year -- 3 percentage points below its earlier forecast.

Of the markets it surveys, Case Shiller said the San Francisco market will suffer most with a 3.1 percent decline in the median price of all homes, single-family detached and condos.

"With dot-com collapse, highly inflated prices were already weakening. Now, scared techies are leaving," the report said.

The Conference Board also said expectations for the next six months were pessimistic. The percent of consumers anticipating business conditions to worsen increased from 10.7 percent to 15.0 percent. Those expecting fewer jobs increased from 17.7 percent to 21.9 percent. Consumer income prospects were also less optimistic. Today, only 21.1 percent expect an increase in their families' income, down from 23.2 percent in August, the Conference Board said.

What's A Buyer Or Seller To Do?

"I think it depends on the local real estate market and the personal situation of a prospective buyer," said Eric Tyson, a personal finance advisor and co-author of "Dummies" guides to buying and selling homes.

"If you're in a market that's already weakened and you're very motivated to buy a home, you can probably get a decent deal now. On the other hand, if someone's local market is just beginning to show signs of weakness and the prospective buyer has some personal ambivalence (perhaps due to job insecurity, not seeing themselves staying in the area for too many years), then waiting is probably the right answer," Tyson added.

For more articles by Broderick Perkins, please press here.

Published: September 28, 2001

Use of this article without permission is a violation of federal copyright laws.

Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.