To buy in 2016? Homebuyer sentiment improves

To buy in 2016? Homebuyer sentiment improves

Consumer sentiment in California rose in the third quarter (Q3) of 2016. This represents the first boost in consumer sentiment since late-2014. Optimism about future conditions also rose. Planned spending on big-ticket purchases increased significantly from the previous quarter indicating a more positive than negative outlook on the economy, according to Chapman University’s California Consumer Sentiment Survey. 

But keep in mind, future expectations are unreliable as they mostly mirror past experience. They are just projections, not forecasts of likely consumer purchases.

Expect consumer sentiment to continue to rise alongside California’s strong job growth and rising home prices. However, with continued high prices and rate increases on the horizon, many consumers will likely put off home purchases until around 2018.

Updated 09/29/2016. Original copy released 01/15/2013.

Chart update 09/29/16

Q3 2016 Q2 2016 Q3 2015
Anticipated Economic Conditions Index
111.8 95.3 94.7
Planned Big-Ticket purchases Index
117.8 109.5 97.8

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) oscillated around the index number of 100 in 2013 — a trend which appeared to be changing for the better in late-2014 — but has returned in 2015 and early 2016. Index numbers near 100 translate 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. The index number of 111.8 in Q3 2016 is the first big increase in consumer sentiment since late 2014. It generally takes a full year before the results of consumer confidence are experienced, but in Q3 2016 home sales volume is still low.

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 — primarily jobs.

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 increases as we make our way through 2015, some additional positives you can direct potential homebuyers to include:

  • historically low mortgage rates (despite the recent increase of about one percentage point over last year’s bargain-basement rates); and
  • rising consumer confidence about future conditions, indicating prices will gain end user (sustainable) support 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 need to not only accumulate sufficient savings to fund a down payment. Homebuyers need to 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 2013. In 2014, California finally recovered jobs lost during the recession, exceeding pre-recession employment levels. Job growth has remained strong since, but the job market is not expected to reach a full recovery including population growth until 2019.

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.

2013 and most of 2014 saw vast speculator-driven increases in home pricing, unsupported by gains in sales volume. The price jump experienced in 2013 continued into 2014 and is still present in 2015. These developments were woefully inadequate to drive a strong, fast recovery.  Much like the sentiment for future economic conditions seen in the chart, despite this recent drop, the recovery continues on a slow, upward tilting bumpy plateau.

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