Consumer confidence fell in October, mainly due to falling home prices as consumers expressed growing concerns over the housing slump, which has shaken confidence in the overall economy.

An index of consumer sentiment fell to 80.9 in October, down from 83.4 in the August and September surveys and well below the 93.6 recording in October 2006, according to the University of Michigan’s latest survey of consumers.

The overall level of confidence is still well above the point that signals an impending recession, according to Richard Curtin, director of the surveys produced jointly by Reuters and the university.

“Each downward step in confidence increases the probability of recession, which is still below 50 percent, but not comfortably so,” Curtin said.

Falling home prices as well as higher food and fuel prices will make consumers much more cautious spenders. Overall, the pace of growth in real personal consumption is expected to slow to 2 percent over the next four quarters, with the weakest quarterly growth rate of about 1 percent at the turn of the year.

The index measuring consumer expectations was 70.1 in the October 2007 survey, down from 74.1 in September, and well below the 84.8 record last October.

The index measuring current economic conditions was 97.6 in the October 2007 survey, nearly identical to the 97.9 in September, and well below the 107.3 recorded last October.

Twenty-eight percent of homeowners in the survey reported declines in the value of their homes in October, up from 17 percent who said the same three months ago, and above the 1992 peak of 24 percent recorded during the last housing slump.

“The data indicate accelerating declines as 22 percent of homeowners anticipated declines in the value of their homes during the year ahead in October, up from 14 percent three months ago,” said Curtin. Homeowners expect a reprieve over the longer term, as two-thirds expect renewed increases, with an annual average expected gain of 3.7 percent over the next five years.

Consumers held two opposite views on market conditions: More consumers than any time in the past half century mentioned the availability of discounted home prices, and the fewest consumers thought home-selling conditions were favorable because of those same price declines, according to the survey.

“Since most home buyers are also home sellers, the perceived loss from selling loomed much larger than the perceived gain from buying, causing people to postpone their purchases,” Curtin said.

The majority of consumers in October did not judge overall economic prospects favorably, either for the year ahead or over the next five years, according to the survey. While the proportion of consumers who expected a rising unemployment rate was twice as high as during the best of times during the late 1990s expansion, it is about half the levels recorded prior to the past two recessions.

“Although consumers anticipate a slowdown in the pace of economic growth in the year ahead, consumers do not expect an upsurge in the unemployment rate, the signature of a recession,” said Curtin.

Personal financial expectations remained depressed by high fuel and food prices. Given their strained budgets, especially among lower-income households, consumers will continue to insist on price discounts when making purchases. This indicates that there will be renewed stress on the profit margins of retailers and product suppliers during the upcoming holiday season.

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