Booming consumer optimism could affect housing

One reason buyers have been on the sidelines so long in the U.S. housing market in general and the New York market in particular has been their lack of confidence.

Nationally, that confidence jumped up again in May, according to the Conference Board’s Consumer Confidence Index, which had improved considerably in April.  The Index now stands at 54.9 (1985=100), up from 40.8 in April.  The Present Situation Index increased to 28.9 from 25.5 last month.  The Expectations Index rose to 72.3 from 51.0 in April.

Says Lynn Franco, Director of The Conference Board Consumer Research Center:

“After two months of significant improvements, the Consumer Confidence Index is now at its highest level in eight months (Sept. 2008, 61.4).  Continued gains in the Present Situation Index indicate that current conditions have moderately improved, and growth in the second quarter is likely to be less negative than in the first.  Looking ahead, consumers are considerably less pessimistic than they were earlier this year, and expectations are that business conditions, the labor market and incomes will improve in the coming months.  While confidence is still weak by historical standards, as far as consumers are concerned, the worst is now behind us.”

If she’s correct, does that mean buyers will be leaping off the fence?  The answer lies in how secure they feel in their jobs, how concerned they are about trying to catch the bottom of the market and how much they need or want to move.  Of course, whether subsequent conditions will undermine the level of confidence today is unknowable.

According to the Conference Board, consumers’ overall assessment of current-day conditions improved again.  Those finding that business conditions are “good” increased to 8.7 percent from 7.9 percent.  However, those saying conditions are “bad” increased to 45.3 percent from 44.9 percent.

Consumers’ appraisal of the job market also was more favorable.  Those evaluating jobs as “hard to get” decreased to 44.7 percent from 46.6 percent in April.  Those saying jobs are “plentiful” edged up to 5.7 percent from 4.9 percent.

Consumers’ short-term outlook improved significantly in May.  Respondents expecting business conditions to improve over the next six months increased to 23.1 percent from 15.7 percent, while those anticipating that conditions will worsen declined to 17.8 percent from 24.4 percent in April.

The employment outlook was also less pessimistic.  The percentage of consumers expecting more jobs in the months ahead increased to 20.0 percent from 14.2 percent, while those anticipating fewer jobs decreased to 25.2 percent from 32.5 percent.  The proportion of consumers anticipating an increase in their incomes edged up to 10.2 percent from 8.3 percent.

The index level is almost now back to where it was last summer, which was just before panic and paralysis set in and the index fell off a cliff to levels never before recorded.  With the recovery in the index over the past two months led by the forward-looking component, the big question now is whether the increasingly widespread expectation that economic recovery is just around the corner will be fulfilled or dashed.

“Our belief remains that what we are seeing in these (and most other) data is a shift from ‘end of the world’ readings to those that more closely approximate something seen in a regular economic slump. We do not think that conditions are going to progress in a straight line up from here, and our forecast remains that the road to recovery will be a longer and more difficult journey than most believe at the moment,” Joshua Shapiro of MFT commented to the Wall Street Journal.

Added Abiel Reinhart of JPMorgan, “Sharp gains in confidence typically occur right at the end of a recession.  These gains are due to jumps in expectations, which is also what is happening now. ”  At the same time, Ian Pollick of TD Securities was cautious.  Said he: “We cannot lose sight that the trend is key, and given that the index continues to sit in historically low territory (note: average index value has been 95 since 1977) should temper the immediate implications of this report.

So, as usual, economists are finding and sending mixed messages.  I don’t know whether the optimists are right, but I’m sure rooting for them.  Wouldn’t it be nice to discover that the glass is half full?

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Malcolm Carter
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022

M: 347-886-0248
F: 347-438-3201

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