Expectations about future house prices are a critical element to the housing market
For most citizens, their primary residence is their biggest asset, and their spending patterns are highly levered to housing. During the housing bubble, many homeowners monetized home price appreciation and used it to fund consumption. The cash-out refinance and the Home Equity Line of Credit were common ways for Americans to increase their consumption without increasing their wages. In fact, wages have been stagnant for quite some time, especially for the middle class. Home price appreciation and home equity extraction masked the economic effects of stagnant wages. It wasn’t until home price appreciation went away and consumption fell that people started to pay attention to stagnant wages. This ended up launching a populist movement that’s probably here to stay until the economy improves markedly.
Perceptions about future home prices
Over the past year, the percentage of people who think home prices will rise fell from 55% to 48%. Month-over-month basis, this number fell from 50% to 48%. The number of people who expect home prices to stay the same was constant, at 7% over the past year, although it did tick up a couple percentage points from April. Finally, the number of people who think home prices will fall increased from 35% to 39% year-over-year. That number was unchanged from the April reading. Overall, these figures show that consumers are still relatively bullish on housing but are beginning to expect the torrid home price appreciation of the last year to end soon.
Implications for homebuilders
Increasing asset prices, whether stocks or real estate, impact people’s attitudes towards risk-taking. Homebuilders like Lennar (LEN), Toll Brothers (TOL), PulteGroup (PHM), and D.R. Horton (DHI) need strong consumer sentiment in order to sell new construction. In many ways, it has been a bit of a chicken-and-egg story for the economy. Housing construction will drive job growth, which increases consumer confidence. At the moment, we have a stalemate. Investors who are interested in trading the homebuilding sector should look at the S&P SPDR Homebuilder ETF (XHB).