Today’s release of the Reuters/University of Michigan Survey of Consumers for November showed in unequivocal terms that the US consumer is feeling the burn from declining home values, increased fuel costs and a general uncertainty about the future of the economy.In fact, short of a brief plunge in the wake of Hurricane Katrina, the current levels for the Index of Consumer Sentiment and the Index of Consumer Expectations are at lows not seen since the early 1990’s.
The Index of Consumer Sentiment fell 17.37% as compared to November 2006 mostly as a result of consumers’ expectations of future economic prospects.
The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) fell a whopping 20.43% below the result seen in November 2006.
As for the current circumstances, the Current Economic Conditions Index fell 13.68% as compared to the result seen in November 2006.
As you can see from the chart below (click for larger), the consumer sentiment data is a pretty good leading indicator of oncoming recessions leaving the recent declines possibly foretelling rough times ahead.
Furthermore, the historical survey data provides a wealth of information for anyone looking to better understand how consumer sentiment has effected or has been affected by the housing bust.Let’s face it, something significant must have changed in the minds of consumers between the spring and fall of 2005 that led the unwinding we see today.
With the historically low interest rates, solid employment, the loose lending situation and all the news and media coverage of the “flipping” mania, the times couldn’t have been better for home buying if ease of qualification and expectations of near term appreciation were to be the deciding factors.
But yet, something major did change and well in advance of the actual economic pullback or turmoil we are seeing now.
As I believe we will see more clearly in years to come, the housing boom was simply a classic, though enormous, asset bubble fueled primarily by the unprecedented availability of cheap money combined with the totally human response of popular delusion.
The following charts (click for huge versions) show the result of the Survey of Consumers and some components that are specifically related to housing.
The first chart shows the Consumer Sentiment Index, Index of Consumer Expectations, and the Current Economic Conditions Index from 2000 to the present.
The next five charts shows key housing related components of the Consumer Sentiment Index divided between “Good Time to Buy a Home” and “Bad Time to Buy a Home” plotted against the S&P/Case-Shiller Composite Index (CSI) from 1987 to April 2007, the latest historical data available.
I will provide some more thorough analysis in a later post but for now a cursory look at the housing related charts seems to reveal some fairly interesting insight into how consumers interpreted basic aspects of the housing situation throughout the run-up and now the decline.
