U.S. Home Price Growth Rate Falls but Consumers Are Confident

American home prices fell slightly in the latest data, but consumer confidence has reached a yearlong high as cheap oil spurs higher consumption.

The S&P Case-Shiller index saw a 4.5% year-over-year rise in home prices, but that included a 0.1% month-over-month decline in October prices compared to September levels. While the data was in-line with economists’ expectations, some analysts say that the slowdown may continue in 2015 as the real estate recovery slows to a more normalized rate of growth.

American home prices fell slightly in the latest data, but consumer confidence has reached a yearlong high as cheap oil spurs higher consumption.

The S&P Case-Shiller index saw a 4.5% year-over-year rise in home prices, but that included a 0.1% month-over-month decline in October prices compared to September levels. While the data was in-line with economists’ expectations, some analysts say that the slowdown may continue in 2015 as the real estate recovery slows to a more normalized rate of growth.

Consumer spending rose, which helped the U.S. GDP reach a 5% year-over-year annualized growth rate in the third quarter, and that in turn is inspiring greater confidence amongst U.S. consumers. The U.S. Consumer Confidence index rose from 91 to 92.6 in December, indicating that Americans are more willing to spend money and stimulate the economy after several years of growing savings.

Oil impact

Many analysts attribute the growing confidence in American consumers to the fall in oil prices. Despite expectations of a rise in oil futures earlier in the week, WTI contracts expiring in February have fallen below $54, while Brent oil has fallen below $58. Natural gas, which reached its lowest point since the financial crisis, rose over 6% in early trading on Tuesday. Oil has fallen 46% in 2014, the largest drop since 2008.

With lower oil costs, American consumers are more willing to spend on other items as their transportation costs fall. Likewise, a moderately warm winter in the U.S. has limited heating expenditures, compared to last year when low temperatures caused a drag on the economy that contributed to a GDP contraction in the first quarter of 2014.

Despite falling prices and higher consumption, oil reserves rose to their highest point ever. In the U.S., crude inventories are over 387 million barrels. High inventories indicate little pressure on prices going forward.

More Jobs at Stagnant Wages

Cheap oil is helping to fuel U.S. consumption, since incomes have remained stagnant for over thirty years and have not risen above the rate of inflation in 2014. With no wage growth, lower costs have benefitted Americans, but some economists expect higher wages in 2015, which will encourage even more consumption.

The unemployment rate fell to 5.8% by November 2014, and the total number of unemployed people as measured by the U-3 measurement has fallen to 9.1 million people. The unemployment rate fell by 1.2 percentage points in 2014, but the employment to population ratio has fallen to its lowest level in a generation.

Manufacturing saw relatively strong jobs growth in 2014, but the majority of new jobs in the United States are in the service sector. Median weekly earnings in the United States were $790 in the third quarter of 2014, an increase of 2.5% from the prior year. Many economists predict a higher growth rate in 2015, which will spur more spending and a higher GDP.