What's got American consumers spooked?

Investors are keeping a particularly watchful eye on financial services companies for a better read on whether the mortgage meltdown among financially weaker borrowers spreads to more creditworthy customers. Though dozens of so-called “subprime” lenders have closed their doors or announced big losses, the mortgages themselves have been chopped up, bundled as securities and sold off to banks, pension funds and other big investors. As the holders of that paper start disclosing their financial results for the quarter that ends March 31, a clearer picture of the scope of the mortgage market’s deterioration will emerge.

Housing’s hard times
But the outlook for the home prices won’t be clear for much longer. A house is typically the greatest single asset for most American families — many of whom had been using their rising home equity as a piggy bank. Now they face the prospect of declining home prices cutting into their spending budgets.

The latest news on the housing front isn’t helping. The average price of single-family homes dropped in January, the first year-over-year drop in more than a decade, according to an index of major metropolitan areas published on Tuesday.

The price drop, as tracked by Standard & Poor's/Case-Shiller Home Price Index of major metropolitan areas, amounted to a 0.7 percent year-over-year loss. The drop in the index, stood in stark contrast to the 15.1 percent gains reported this time last year and was the worst showing since January 1994.

"The annual declines in the composites are a good indicator of the dire state of the U.S. residential real estate market," Robert J. Shiller, chief economist at MacroMarkets LLC, said in a release.

The averages mask the uneven nature of the housing slump. Detroit and Boston saw the biggest declines last year, with prices dropping 6.9 percent and 5.6 percent, respectively. Phoenix and Tampa, which had seen big gains during the housing boom, also posted declines. Home prices in Seattle and Portland, Ore., have held up better, according to the report.

A lot depends on how well the housing market holds up for the coming spring selling season, usually the busiest months for home sales. A flood of new listings — on top of foreclosed homes now being prices aggressively for quick sale — could further depress the market.

Major builders aren’t optimistic. Lennar Corp., the third biggest U.S. home builder, was the latest to offer a gloomy outlook when it posted a 74 percent decline in profits Tuesday. The company said it’s not seeing a seasonal pick-up in sales this year and said it couldn’t even hazard a guess about the profit picture for the rest of the year. Other homebuilders and analysts have said the housing market likely won’t recover until early 2008 at the earliest.

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