If you're like most Americans, you're more satisfied with your job and economic situation now than you were six months ago. You're also more likely to buy a house, according to analysts who say that rising consumer confidence is painting a rosier picture for the real estate industry in 2007.
"Being secure about your financial future and having confidence is what it really takes to make a commitment on a big-ticket purchase," says Walter Maloney, a spokesman for the National Association of Realtors. "People want to feel good about the future -- about their own personal situation -- before they make that kind of a commitment."
A couple of surveys are designed specifically to measure the amount of confidence consumers have in the economy at any given time. One such survey, the Consumer Confidence Index, which surveys 5,000 households monthly, found that consumers were more satisfied with their economic situations at the beginning of 2007 than they were in 2006.
"We ask consumers to assess both business conditions and employment conditions, which are good barometers of the health of the economy," says Lynn Franco, director of the Consumer Research Center for The Conference Board, which produces the index. "When we look at consumer assessment of the present situation, we see that their assessment is quite strong at the moment and it's stronger than we had seen it in the third quarter of last year." Another survey, the Reuters/University of Michigan survey of US consumer sentiment, found a similar increase in consumer confidence at the start of 2007.
From happy to house-hunting While surveys can scientifically measure consumers' attitudes about the economy, is it a stretch to assume consumers' newfound confidence will lead them to the nearest mortgage lender? The consumer confidence surveys suggest it is not. "One of the questions in (the Reuters/University of Michigan) survey is, 'Do you think now is a good time or bad time to buy a house?'" says Chris Porter, a senior consultant with Irvine, Calif-based John Burns Real Estate Consulting. "By the early fall of 2006, this measure had hit its lowest value in about 16 years, but we've seen that pick up in the last several months."
The Conference Board's survey asks a similar question. "We ask about home intentions and whether or not consumers plan to buy within six months," says Franco. "We've seen that uptick in January as well." It shouldn't come as a surprise that there's a correlation between economic satisfaction and a robust housing market, Franco says.
"Obviously, if consumers are concerned about the economy, concerned about their earning potential, they're not going to make the long-term investment -- they're going to postpone that type of activity," Franco says. "So as long as the labor market remains strong and confidence remains strong, we should see an improvement in the housing market overall." Return of good times So why are so many people whistling to the tune of "Happy Days Are Here Again?" And -- more importantly for those attempting to get a handle on the 2007 real estate market -- will such sentiment last? "The most significant factor is the labor market," Franco says.
"That's the primary source of earnings for consumers, so confidence tends to go as the labor market goes." Other factors that affect consumer confidence include interest rates and prices of commodities such as gasoline, both of which have been favorable to consumers in recent months.
There are some pockets of the country that aren't following the national trend. For example, "in the Midwest, they've just experienced job losses in the last year," says Porter. Unsurprisingly, "confidence is the lowest in that part of the country," he says. But for the most part, analysts expect the national labor market to remain strong and interest rates to remain stable, meaning consumer confidence isn't expected to take a nosedive anytime soon.
More difficult to predict are the non-economic factors that can play a role in consumer confidence levels. Major geopolitical events such as Hurricane Katrina and the beginning of the Iraq war are examples of major geopolitical events in which consumer confidence dropped even though economic factors were good. But even if a major disaster or tragedy shakes consumer confidence, experts say such events don't typically create lasting effects.
"The rule of thumb is that if there are no economic repercussions, confidence will bounce back to previous levels within two to three months," Franco says. Words of caution However, some experts caution against assuming that rising consumer confidence will lead to a booming real estate market. While rising consumer confidence levels generally coincide with increasing home sales, there have been exceptions to that rule. "Consumer confidence wasn't going off the charts during the last recession but the housing market was very strong and stayed strong throughout the entire recession," says Dian Hymer, a real estate broker and author of "Starting Out: The Complete Home Buyer's Guide."
The opposite could prove true, as well, with high consumer confidence and low home sales, she says. Likewise, "consumers may have confidence, but they also need the ability to buy a house," says Celia Chen, director of Housing Economics for Moody's Economy.com. "Mortgage delinquencies are rising, particularly among subprime loans and nontraditional loans," Chen says.
"The regulators are worried, so they've been asking lenders to be more cautious about lending." As a result, it's harder for some consumers to get loan products in which the initial payments are very low. "As that type of lending dissipates or shrinks a bit, it will be harder for households to purchase homes," Chen says. Experts also point out that other factors such as the national inventory level play a bigger role in the success of the housing market than consumer confidence. If there are too many sellers and not enough buyers, the market will continue to sputter, they say. Finally, consumers don't necessarily drive the market.
"While consumers are very important in the housing market, part of the reason that we saw the strong boom in housing over the last couple of years was due to investors," Chen says. "Investor confidence is still weak, particularly when you think about certain markets where investors who purchased homes a year ago or a year and a half ago are now not able to unload these homes and make money." While experts differ on how much of an impact rising consumer confidence levels will ultimately have in 2007, most agree that it can't hurt the market.
"There are certainly a lot more buyers out looking for houses and interested in the market right now than there were in November and December," Hymer says. But whether that translates into sales remains to be seen, she says. -Bankrate.com
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