Consumer Confidence in August, Interest Rate Hikes by New Years, Housing Market Implications?

Six years after the official end of the recession consumer confidence has recovered most of the ground lost during the downturn. The Conference Board reported that its trademark Consumer Confidence Index jumped more than 10 points in August. The present situation index and expectations index rose 11.1 points and 10.2 points, respectively, pushing the overall confidence index up 10.5 points to a level of 101.5. The pre-recession peak was 111.9 in July 2007.

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Despite the August increase in overall confidence, respondents’ appraisals of current conditions and expectations for the next six months were mixed. While 82% of respondents rated current business conditions “good” (23%) or “normal” (59%), 56% of respondents characterized employment conditions as “jobs not so plentiful.” The remaining 44% were split evenly between “jobs plentiful” and “jobs hard to get.”

Expectations for the coming six months for business and employment conditions were dominated (70+%) by “same” responses, with small increases in “better” and small declines in “worse.” Similarly, most respondents (74%) expected their income to remain the same over the next six months.

The Conference Board report also indicated a sharp decline in the share of respondents planning to buy a home within six months, from 5.9% in July to 4.1% in August, as well as that 60% of respondents expect interest rates to be higher twelve months from now. It is tempting to conclude that expectations of higher interest rates will dampen home buying but the relationship is not so clear.

Expectations of higher interest rates took a clear step up in mid-2013 when then Federal Reserve Chairman Ben Bernanke’s remarks regarding the eventual end of monetary stimulus were misunderstood. Interest rates spiked by more than 1 percentage point and the share of respondents expecting higher rates rose from an average of 46% in 2012 to 68% in August 2013. The share of respondents planning to buy a home didn’t decline but rather rose with the share expecting higher rates. Expectations of higher rates have persisted while there has been no discernible change in the trend in home buying plans.

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Given subsequent Federal Reserve actions as well as current statements, expectations of higher interest rates should and will persist (Fed). But should this have a negative impact on home buying? A statistical analysis of the relationship reveals a weak but positive correlation. One possible interpretation of this result is that rather than a depressing effect rising interest rates will spur likely buyers to expedite their purchases before rates move higher. In the current environment of very low interest rates this positive motivational factor may be outweighing the expected negative affordability factor.

Interest rates will move higher over the next twelve months but still remain affordable by historical standards. The August decline in home buying plans is one dip in a volatile data series, not an early warning signal.

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