Consumer sentiment remains high in the fourth quarter (4Q) of 2012. Surveyed consumers are slightly less optimistic about future economic conditions in 4Q 2012 than in the prior quarter, according to Chapman University’s California Consumer Sentiment Survey. However, planned spending on big-ticket purchases was at its highest since before the recession.
Chart updated 1/15/2013
|4Q 2012||3Q 2011||4Q 2011|
|Anticipated Economic Conditions Index
|Planned Big-Ticket purchases Index
Data courtesy of Chapman University
Reading the chart
Changes in homebuyer opinion in California are tracked based on two survey questions relating to:
- anticipation of future economic conditions — the blue line; and
- consumer plans for big-ticket item spending — the red line.
The greater the percentage of positive responses, the higher the index figure. An index of 100 means an equal number of positive and negative responses. Agents and brokers who follow the trend of both lines will improve their awareness of how potential homebuyers will behave in the coming months.
Why consumer sentiment matters to real estate
To become or remain professionally successful, brokers and agents need to accurately anticipate their future sales numbers. Information on homebuyer sentiment is predictive of future real estate sales volume for brokers and agents, since it tracks both:
- where we have been, as sentiment reflects the experience of past events; and
- where we are going, as optimism about the economy is translated into willingness to make large purchases, such as a home purchase. Further, the level of buyer optimism or pessimism determines the durability of sales volume.
Consumer sentiment: one year forward events
When viewing both lines in the above chart, keep in mind that all survey responses are based on events that have already occurred — as experienced by the person interviewed. As more facts and information become available, reported and absorbed, buyers do change their opinions about the future. Homebuyer sentiment thus has a lag time of approximately a year before any buyer call to action is actually turned into a sale by agents.
Consumer expectations for future economic conditions (the blue line) have oscillated around the index number of 100 in 2012. This translates to an equal split between consumers who are optimistic and consumers who are pessimistic about future economic conditions.
During the Millennium Boom, the index was consistently high, reaching 119 in 2004. It’s no coincidence (but not the sole factor by any standard) that home sales volume and prices were also at cyclical highs in California during that time.
The index remained below 100 in 2005-2010, signaling consumers were primarily pessimistic about their future economic conditions. Recently, consumers were most optimistic in 3Q 2011 when the index was at 107 (compared to the index number of 99 in 4Q 2012). Thus, with the one year lag time before results will be experienced, the last half of 2012 saw a modest upturn in real estate sales from one year prior — just as the confidence scale indicated would occur.
Consumer sentiment’s effect on the broader economy
The chart’s red line, indicating planned large purchases, tracks an issue that will determine not just home sales, but the strength of the economy at large — primarilyjobs.
The red line reveals the current perception of a homebuyer’s ability to buy. If the line is trending upward, the number of prospective buyers who believe they are financially able to make large purchases and take on additional debt is increasing. Thus, brokers and agents can prepare for increased sales, as they will get better results when encouraging buyers to act in the year to come.
Turn consumer optimism into home sales
As sentiment about future economic conditions wavers going into 2013, there are some positives to which you can direct potential homebuyers. These include:
- increased buyer purchasing power fueled by historically low interest rates;
- minimal competition from other homebuyer occupants (set aside speculator competition, which exploded in 2012 and will wane throughout 2013);
- cyclically low home prices; and
- rising consumer confidence, indicating prices will rise one year forward.
Get your buyers pre-approved in writing by two or three institutional lenders. This activity will confirm for sellers and listing agents that the would-be buyer has the ability to obtain a purchase-assist home loan. This initial step will go far to abate buyer concern that mortgage money is not available, which can paralyze potential sales.
For a full recovery, of course, homebuyers must not only accumulate sufficient savings to fund a down payment. Homebuyers must also believe their personal access to mortgage funds will remain stable.
Thus, the job market has much significance for homebuyers. Jobs slowly but steadily improved in 2012. However, as of November 2012, there are still roughly 830,000 more jobs to recover before returning to pre-recession employment levels. Considering California’s annual population growth, a full jobs recovery won’t occur until well into 2018.
Anticipating home sales trends
An individual’s expected future economic condition, shown by the blue line on the chart, indicates the likelihood of a home purchase in the upcoming twelve months. This number is read as an indication of whether homebuyers expect their finances to be strong going forward.
2012 saw small increases in home sales volume and pricing. However, these increases, while durably steady, were woefully small compared to a strong, fast recovery. Much like the faltering sentiment for future economic conditions seen in the chart, the recovery continues on a slow, upward tilting bumpy plateau.
2013 will thus reflect consumer sentiment at the close of 2012. The recovery in home sales volume will continue its slow, dogged path, which is building a solid long-term recovery.