The Bloomberg Consumer Comfort Index
The Bloomberg Consumer Comfort Index is a weekly sentiment index that covers three critical variables:
- Respondents’ perception of the economy’s state
- Respondents’ personal finance evaluation
- Respondents’ judgement of the timing of purchasing goods and services
The index is a random data sample from 1,000 people collected through telephone interviews. Surveyors ask relatively straightforward questions such as are the state of the economy, personal finances, and time to buy goods and services excellent, good, not so good, or poor?
Since the index began in 1985, it has averaged 42. So neutrality isn’t necessarily 50. The highest reading the index ever recorded was +66.3 in early 2000. The index bottomed out at 23 in 2009.
Note that the index was recently rescaled from -50 to 50 to a scale of 0 to 100.
Views of the economy are still highly negative
The index finished the week at 41.7, an increase from the prior week. The report on balance is negative. This isn’t surprising, given that the index itself is below 50.
Perceptions of the economy are highly negative—33% positive versus 67% negative. The perception of whether it’s a good time to buy is also highly negative, at 38% positive versus 62% negative. For more on this, read A critical predictor: Housing starts rise back above 1 million.
As to personal finances, the index ticked down to 54% positive versus 46% negative.
So when you ask consumers about the world around them, they tend to be more negative. But when you ask about their own personal situation, they’re neutral.
Implications for homebuilders
Consumer sentiment is a critical factor in risk-taking. In fact, in a recent earnings conference call, KB Home (KBH) cited consumer confidence as a more important variable than interest rates.
Rising real estate prices were driving increases in orders. But builders have seen order growth slipping more recently. Student loan debt remains a problem for the first-time homebuyer. But even the first-time homebuyer seems to be reappearing. Given that the cost of renting is higher than the cost of owning, a change in sentiment should cause a big spike in new orders.
Housing starts have been highly depressed since the real estate collapse. Even a marginal increase in demand should drive homebuilders forward. Specific homebuilder stocks that will be positively affected by changes in consumer sentiment include Lennar (LEN), PulteGroup (PHM), D. R. Horton (DHI), and Toll Brothers (TOL). To learn how builders gauge consumer sentiment, read Why REITs focus on the Fannie Mae National Housing Survey.
You can also invest in the sector via the SPDR S&P Homebuilders ETF (XHB).