The merits of investing in residential real estate will remain questionable until the market rebuilds one of its core metrics: consumer confidence. Real estate professionals are hopeful spring will bring increased sales and clear signs of a housing recovery. However, based on early indicators, only a modest improvement is likely.
The lackluster outlook is largely the result of low consumer confidence. Until the average consumer believes the recession is over, and feels it's safe once again to purchase a home, the market will attract limited players. For now, there are only three main players: homeowners forced to sell for professional or personal reasons, wealthy buyers unconcerned about jobs or money, and investors with enough liquidity to buy bargain properties and hold onto them until the market recovers. The key demographic -- first-time home buyers -- will likely remain on the sidelines.
The Conference Board Consumer Confidence Index dropped sharply in March, falling from 72.0 in February to 63.4. Lynn Franco, director of The Conference Board Consumer Research Center, attributed the sharp decline in confidence to a sharp decline in expectations. "Consumers’ inflation expectations rose significantly in March and their income expectations soured, a combination that will likely impact spending decisions,” she warns.
Other consumer sentiment barometers are mixed, at best, the survey found. Those who view business conditions as “good” increased to 15.1% from 12.4%. But those who say jobs are “hard to get” edged up, slightly, to 44.6% from 44.4%. Consumers expecting business conditions to improve during the next six months declined from 25.2% to 20.6%, and those anticipating business conditions to worsen increased to 16.2% from 10.3%.
Finally, consumers expecting an increase in their incomes declined significantly, falling from 17.4% to 15.3%. While some prospective buyers may spend the spring touring open houses, few are likely to have the gumption to sign a purchase contract.
Most analysts believe first-time home buyers will continue to find it difficult to enter the market because of tight lending requirements, including increasingly common 20% minimum down payments. In addition, entry-level buyers will likely continue to be nervous because of the fragile economic recovery. And there's more bleak news ahead. In coming months, many middle-income wage earners will lose their state and local government jobs as municipalities and school districts cut budgets. Higher fuel costs will also act as a disincentive for first-time home buyers.
Robert I. Toll, executive chairman of Toll Brothers, Inc. (NYSE: TOL), a leading builder of new homes, may have summed up the mood in the housing market the best. Toll, who announced improved earnings in the firm’s quarter that ended January 31, noted:
The industry needs to string a few good quarters together to create confidence. Improved confidence will pull customers off the fence and into the market, creating volume and pricing power. We are cautiously optimistic as we head into the spring selling season with the emphasis on "cautious." While some data suggests an improving economy, many customers remain hesitant.
During the past few years the industry has, naturally, put very little ground through the approval process. We believe demand is increasing somewhat in certain markets, and that eventually, this demand will bump up against constrained supply. When this happens, we foresee happier days ahead for those home building companies with reputations intact and the capital and home sites to meet that demand.
When the happier days will return is open to speculation. For now, one thing is clear. The housing market will remain fragile until average buyers start believing in it again.