PrintIt is not an overstatement to say that confidence has played a significant role during the past decade with regard to the performance of the economy and housing markets. Who could forget the day when America shook after the terrorist attacks on September 11, 2001 and consumer and investor confidence plummeted? Consumer spending came to a halt with the exception of essential goods and services during the days following the attack, while investors seeking a safe haven invested their funds in U.S. Treasuries. The U.S. economy literally stood still for almost a month after 9-11.
Since that fateful day, the level and direction of confidence has meaningfully influenced the health of the economy and housing markets. One of the reasons for the start of the real estate boom earlier this decade was that investors and households, nervous about a fragile stock market, put their funds into more tangible and stable assets like property. Investment in real estate surged during the first half of this decade because of a rise in confidence in property ownership for investment, resort and/or first-time buying purposes. Unfortunately, rising confidence in real estate turned into speculation or, shall we say, overconfidence, and eventually the real estate boom turned into a bust.
Today, confidence is hovering near cyclical lows and that is inhibiting consumers, investors and businesses alike. There are now three major confidence indices regularly reported: The Conference Board index of consumer confidence; the University of Michigan consumer sentiment survey and the ABC News/Washington Post consumer comfort index. The Conference Board index registered a historic low of 38 in December suggesting that consumers’ confidence is shattered, portending unfavorably for future spending. The ABC News/Washington Post comfort index registered 53 in the week ending January 18, approaching confidence near its all-time low. The University of Michigan survey registered its confidence index at 61.9 in January up slightly from a month ago but down from a year earlier.
Consumer confidence depends on many factors such as the job situation, income, wealth, prospects of war, and so on. All of these factors have turned negative during the past year resulting in deteriorating confidence among most households. Lower confidence has decreased spending on goods and services, particularly the big ticket items like automobiles and homes.
Unfortunately, falling confidence spreads quickly throughout an economy. With the economy contracting due to less consumer spending, businesses soon lose confidence as well and, in response, cut back on production and lay off workers. Similarly, investors lose confidence in the economy and seek other avenues for their investment funds.
As for the housing markets, confidence or lack thereof has plagued housing demand for the past two years. Households are less confident today, nervous about future prospects for home values. Believing that home prices are likely to fall further this year, many households are postponing home purchases. Many potential first-time buyers are choosing to rent rather than buy; many homeowners are choosing to stay in their homes rather than trade up; and many homeowners are postponing purchasing a resort property.
On the business side, the National Association of Homebuilders, NAHB, housing market index fell to a historic low 8 in January from 9 in December. Builder confidence is at an all-time low with many homebuilders possessing little confidence for business prospects. The vicious cycle of falling confidence causing falling spending causing falling confidence permeates the housing marketplace. It is clear that a boost in confidence is a necessary ingredient to a recovery in the housing sector.
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