Consumers are more conservative about home price appreciation than the pros
In the latest survey, consumers expect home prices to rise by 2.9% over the next 12 months. This is flat month-over-month and down 100 basis points year-over-year. The 3.9% expected home price appreciation a year ago met with low double-digit returns in most indices, whether they’re the FHFA Home Price Index or Case-Shiller. Unfortunately, Fannie Mae wasn’t conducting these surveys during the go-go days of the housing bubble—it would have been very interesting to see what people thought home prices would do. Interestingly, even as prices were falling, consumers were “calling the bottom” and expecting modest home price appreciation.
The 2.9% home price expectation is much lower than the 6%-to-7% forecast we’re seeing out of the National Association of Realtors and the mid single-digit forecast we’re seeing from most Wall Street professionals. Lingering sentiment from prior market moves are typical. Most people didn’t believe the declines early in the bear market, so we shouldn’t be surprised that people don’t believe we’re now in a bull market for homes.
Implications for homebuilders
At the end of the day, whether we want to admit it, a home is an investment. The bear market disabused people of the notion that home prices only go from the bottom left to the top right of the chart, and as a result, many people began to believe that a home is simply a place to live and not an investment. However, homebuilders like Lennar (LEN), PulteGroup (PHM), Toll Brothers (TOL), and D.R. Horton (DHI) need people to believe real estate is a sensible investment and that home price appreciation will continue. Investors who are interested in trading the homebuilding sector should look at the S&P SPDR Homebuilder ETF (XHB).