Home buying conditions soften in September, but remain good

The release of the preliminary data of the University of Michigan Consumer Sentiment survey by Thompson Reuters indicated consumer confidence turned down again in September, more than accounting for the slight gain in August. While these numbers can be expected to change with the release of the final numbers at the end of the month, the preliminary data have been a very good indicator of the trend in recent months. We can expect the final numbers for September to show a moderate decline.

The preliminary numbers show a 2.3 point decline in consumer sentiment in September, to 66.6.  Consumers felt little change in their current circumstances, with the present situation index more or less stable (up 0.1 points) at 78.4. However, they are becoming increasingly pessimistic about the future, with the future expectations index falling 3.8 points to 59.1. This is likely a response to reports over the last month of the continued weakness in employment. Until individuals see a noticeable improvement in their employment prospects, we can expect consumer sentiment to remain low. With employment growth expected to remain weak over the next 12 months, further declines in consumer sentiment are likely before we see a sizable recovery.

The preliminary numbers point to a decline in the index of buying conditions for homes in September, down 7 points to 147. This returns the index to the level of January this year. The downturn was driven by a decrease in the number of respondents identifying buying conditions to be good, down 3% to 73%, with a shift in the respondents main reasons – low interest rates (down 3% to 43%) and low prices (down 4% to 61%). Only 2% of respondents (down from 3% in August) considered buying a house a good investment.

Despite the fall in September, the index of buying conditions for homes remains high. After reaching a peak of 162 in May 2009, the index has fluctuated within a relatively narrow range around 150. The decline in the respondent’s assessment of buying conditions for homes is likely to be a response to the recent reports of poor home sales in July following the expiration of the homebuyer tax credit. We expect the hang-over from the homebuyer tax credit to suppress home sales in the third quarter of 2010. However, by October, we anticipate conditions will improve with home sales expanding – moderately at first, then gaining strength and momentum through 2011 and 2012.



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