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Can Consumer Confidence Rise If House Prices Falter?

The economic headlines look good on first glance: consumer confidence is up and home prices logged their first year-over-year gain.

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But a closer look at the numbers may reveal reasons to doubt the ability of consumers to keep on driving a sustained economic recovery.

Paul Dales, an economist from Capital Economics, said he doubts the improved consumer mood is here to stay, because he believes home prices will likely fall again.

Although the annual rate of house price inflation turned positive in February for the first time since January 2007, prices fell in February. That was the first month-to-month decline since May of last year, and Dales expects the slide to continue.

"Both the FHFA and Case-Shiller measures now show that the double-dip in house prices that we have been expecting for some time has begun," Dales said in a research note.

The extent of the decline may not become immediately apparent. At the moment, there are still plenty of homebuyers rushing to get the government's tax credit, and that might help support prices in the near-term, but Dales said prices are likely to drop back by at least 5 percent by the end of the year.

As for consumer confidence, Dales said consumers still remain unusually depressed.

Consumer confidence rose to 57.9 in April from 52.3 in March. Dales attributes the move to rebounding equity prices and tax rebates, which may be blunting the impact of rising gasoline prices. He also admitted it "is encouraging that most of the rise was due to a jump in the expectations component, from 70.4 to a 36-month high of 77.6."

That said, Dales still sees reason for concern. The headline number, although improved, remains far below the long-run average of 94.

"Overall, we find it hard to believe that consumption will be able to drive a sustained economic recovery when households are still depressed and house prices are heading south once again," Dales said.

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