Low consumer confidence plagues market

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When consumers are satisfied or optimistic about their economic situations, they are more likely to buy a home. But with consumer confidence at its lowest level in nearly two decades, according to the Consumer Confidence Index survey, the real estate market is unlikely to rebound until at least 2009, some economists say.

“Consumer confidence is at its weakest level in 17 years,” says Lynn Franco, director of The Conference Board’s Consumer Research Center, producer of the Consumer Confidence Index, which surveys 5,000 households monthly for their economic views. “It looks troubling for current conditions and in terms of where the economy is headed.”

“Consumer confidence is at its weakest level in 17 years.”

Another survey that tracks consumer confidence — the Reuters/University of Michigan Surveys of Consumers — had similar findings. The January survey found the largest proportion of consumers in nearly 20 years reported financial distress, according to Surveys Director Richard Curtin. Consumer sentiment seems to be down for everyone, says Curtin.

“We’ve had high inflation, fuel prices and weaker job growth affecting lower income households the most and the loss in housing wealth and stock market wealth affecting higher income households,” he says.

So what does that mean for the housing market? Nothing good, says Franco. “Given the apprehension that consumers have, not only about current conditions but also looking ahead, they might postpone such a big ticket item purchase until they feel things are a little more stable.”

Upturn didn’t happen

Early in 2007, both those surveys reported an uptick in consumer confidence, leading some economists to predict that 2007 would mark a real estate industry turnaround. Instead, consumer confidence sharply dropped last summer.

“We had a tremendous amount of market volatility in August as housing problems spread into the financial sector,” says Franco. “That was also coupled with soaring oil prices.” More recently, the biggest culprit has been a weakening job market.

“We’re picking up much weaker readings in terms of business conditions, which in turn is spilling over into employment decisions,” Franco says. “Consumers are telling us that jobs are harder to get this month than they were the month before.”

Inflation has had an impact on consumer confidence, as well, says Curtin. “Higher food and fuel prices have weighed on consumers considerably.” In addition, a faltering stock market has left people uncertain about their futures. Finally, the collapsing real estate market, which has led to a loss of tens of thousands of dollars in equity for homeowners across the country, has taken its toll.

“Consumers think credit conditions are not favorable although mortgage rates are more favorable now than they have been.”

“From March 2007 to the present, we’ve recorded rather sharp declines in people’s valuations of their homes. So that’s been ongoing throughout the year and has had a significant impact on the erosion of confidence,” Curtin adds.

Buyers, sellers sidelined

Homebuyers and home sellers are largely sitting on the sidelines, but for different reasons. Homebuyers aren’t so much concerned about interest rates since rates are hovering around 6 percent. Instead, many prospective buyers are more concerned about their creditworthiness, says Curtin.

“Mortgage rates aren’t very high, but lenders want a higher down payment,” he says. “They value the home somewhat less, and they want a higher credit score to qualify for the lowest mortgage rate that they offer. So consumers think credit conditions are not favorable, although mortgage rates are more favorable now than they have been.”

Other prospective buyers recognize that the market has not bottomed out and are waiting to see how low home prices will go. “They are hesitant to buy and then find that by the time they close on their new home, it’s worth less than what they paid,” Curtin says.

For sellers, it’s another story. “Many consumers think their home should be worth near where it was at its peak,” says Curtin. That means even if prospective sellers know they can get a good deal on a house that has decreased in value by 10 percent, they don’t want to take a 10 percent hit on their own homes, he explains. As a result, they’re staying put until home values rise again and they can make more on a sale.

Turning things around

While the news for the real estate industry in 2008 appears rather bleak, it’s not hopeless. According to the latest forecast from the National Association of Realtors, or NAR, soft market conditions are expected to continue during the next few months. But the economic stimulus package recently passed by Congress and signed by President Bush temporarily raises loan limits, which in turn will boost the real estate market, the NAR says.

“Existing-home sales have moved narrowly since last September, but when the full impact of higher loan limits for conventional mortgages begins to impact the market, there is likely to be a notable rise in home sales and prices,” said NAR chief economist Lawrence Yun, in a statement. “If higher limits are enacted very quickly, we’ll see a faster and more meaningful recovery by expanding safe, affordable financing in high-cost areas. That, in turn, would help to stimulate overall economic activity.”

“Right now, both expectations and (the economy) are headed south, so we’re not exactly at a point yet where things are going to turn around.”

Another unknown factor that could affect a market turnaround is the ultimate effect foreclosures will have on consumers. “We’re starting to see the discussion on what the proper role of federal and local governments is in helping or subsidizing housing payments among those who would otherwise be subject to foreclosure,” Curtin says. Any actions taken — or lack thereof — could either help the market to rebound more quickly or cause consumer confidence to sink even further.

Though no one doubts the economy eventually will turn around, the consensus is that it will be a gradual process and consumers should not expect to see a market turnaround over night. However, consumer confidence surveys typically give economists a preview of what the market is going to do.

“You’ll see expectations take off first,” says Franco. “Right now, expectations and (the economy) are headed south, so we’re not exactly at a point yet where things are going to turn around.”