Home and Equity Prices Boost Consumer Confidence

By TJ Kim

September 17, 2012

As home and equity prices rally, consumers are regaining confidence in their household wealth. The University of Michigan released Consumer Sentiment report last Friday. The result for August was up 4.9 points from the previous month to 79.2 points, outperforming the consensus at 74 points.

In addition to rising value in households’ assets, post-recession deleveraging, which lowered household debt gave extra plush to consumers.

“…consumers reported that gains in finances were based on reduced debt and increased asset values. This is an encouraging sign for household deleveraging and suggests that consumers are starting to feel the effects of increasing home and equity prices.”

More importantly, the rise in August’s Consumer Sentiment largely came from the forward looking component of the survey.

“…the economic outlook component, which rose to 73.4, from 65.1 previously. This largely reflected an improved labor market outlook, as only 12% of respondents expected the unemployment rate to increase over the next year, down from 25% in August and the lowest reading since 1966. Consumers expecting good business conditions over the next five years surged to 42%, up significantly from 32% in August and 20% in September 2011.”

As expected from rebounding housing, Consumers’ perception on the housing market appeared positive as the majority of the survey participants expressed that both houses and financing are at affordable levels.

“…62% of consumers thought that prices were low and 54% thought it was a good time to take advantage of low mortgage rates. 7% of consumers cited the expected appreciation of home prices as a good reason to buy; while this is relatively low compared with the historical values of the series, it is the highest reading since 2007…”

Despite rising home and equity prices, consumers’ view on the current economy remains on a negative note as the unemployment rate continuously hovers over 8% and commodity/energy prices are on their way up. Additionally, consumers expressed discomfort in inflation, associated with rising gasoline price.

Improved Consumer Sentiment appears to have translated onto the month’s headline Retail Sales as the figure rose 0.9&, exceeding the consensus. However, once again, the concern lies on rising energy price as Ex-auto and Gasoline Retail Sales reported only a 0.1% increase, far below the consensus at 0.8%. On top of inflation, the Fiscal Cliff may put extra downward pressure on Consumer Sentiment as it may involve tax increases and social program abatement.

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