IBD / TIPP economic optimism index falls in July, but don’t blame interest rates
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The Investor’s Business Daily/TechnoMetrica Optimism Index has a good track record of predicting how the two major consumer confidence indices – the Conference Board and the University of Michigan Consumer Confidence indices – will look when they are released later in the month. The IBD/TIPP Index is conducted from a poll of 858 adults in the last week of May.
The index has three major components: the six month economic outlook, the six month personal financial outlook, and confidence in Federal policies.
Consumption is the major driver of the U.S. economy and accounts for 70% of GDP. Consumption has been relatively subdued since the recession began as Americans have boosted their savings rate and spent only on essentials. The real estate bubble drove consumption in the mid ’00s as people took out cash refinances and spent the extracted home equity. This had the effect of increasing the cost basis for many people’s homes and left them vulnerable when house prices collapsed. As a result, they have focused more on paying down debt than spending.
Highlights from the report
The IBD/TIPP Optimism Index decreased by 1.9 points to 47.1 vs 49 in June. It is just slightly below its 12-month average. A reading below 50 indicates pessimism.
The six month economic outlook improved 6.2 percent to 48.1.
The personal financial outlook dropped 1.5 points to 56.1. Rising asset prices (particularly real estate and stock prices) contributed positively to the report.
Finally, the confidence in the government fell again to 37.2. Overall, Americans have little faith in government.
The press release said that the recent drop in interest rates may push real estate prices (and therefore consumer confidence) lower, but so far they have seen no evidence of it yet.
Implications for home builders
Buying a home (particularly a new home) requires a great deal of confidence in the future. Indeed, KB Homes said that consumer confidence is even more important than interest rates. Home builders need for consumers to be comfortable in their personal situation, the economy, and the future of home prices. The index shows that people are more confident in their own situation than they are on the economy in general.
For home builders, it pays to focus on the segments of the market that seem to have the most confidence, and that means people with appreciating homes and portfolios; this means the luxury and move-up buyer. The most obvious beneficiary of this dynamic would be Toll Brothers (TOL), which focuses on the luxury and move-up market. Their average sale price is $557,000. The other beneficiary would be NVR, which has an average selling price of $317,000, although NVR is exposed primarily to the East Coast. The East Coast has been lagging the West Coast in price appreciation, although some of the latest indices show that activity is starting to pick up, while shortages are cooling off the West Coast. Meritage (MTH) is another builder focused on the move-up buyer. KB Homes (KBH) and Ryland (RYL) have lower price points and focus more on the first-time home buyer.