Consumer sentiment falls to 10 year low; not for what the media is saying. Impact on real estate?

U.S. consumer sentiment fell in early August to the lowest level in nearly a decade as Americans grew more concerned about the economy’s prospects. It was the lowest reading for the measure since 2011. A sudden drop of this magnitude is extremely rare for the index. What caused the sudden drop? What does this mean for real estate?

What was in the Consumer Sentiment Data?

The Consumer Sentiment Index tumbled to 70.2 in its preliminary August reading. That is down more than 13% from July’s result of 81.2 and below the April 2020 mark of 71.8 that was lowest of the pandemic era.

It was the lowest reading for the measure since 2011. Economists surveyed by Dow Jones were expecting a reading of 81.3 for August.

And a sudden drop of that magnitude is extremely rare for the index.

“Over the past half century, the Sentiment Index has only recorded larger losses in six other surveys, all connected to sudden negative changes in the economy,” Richard Curtin, the chief economist for Michigan’s Surveys of Consumers, said in a release. Two of those larger month-over-month movers were April 2020 amid the pandemic and October 2008, during the financial crisis.

What caused the large drop in Consumer Sentiment?

Depending on which news source you frequent, the cause could be radically different. Many are blaming the drop primarily on Covid and the new Delta Variant. Unfortunately I think this explanation is a bit misguided to say the least. Planes are still booked, DisneyWorld is seeing record attendance, and resort towns are full. The Market is saying something drastically different than the media.

The real cause for the drop is a bit more complex than just Covid. Consumers are getting frustrated with lack of supply and higher prices. Let’s look at a few examples:

Cars: if you have tried to buy a new or used car, you likely want to pull your hair out, prices are up and inventory is way down leading to enormous frustrations.
Travel: If you have tried going to any resort area it is packed; it seems like nobody is working and you can’t get into restaurants, get rental cars, etc… while at the same time prices have skyrocketed, I was out to eat last week and the restaurant was packed and prices were up over 25% for most menu items. On top of that the service was terrible as they couldn’t get enough servers or cooks.
Housing: housing prices throughout the country are up by double digits thereby increasing payments and pricing many would be buyers out of the market. Furthermore rents are also increasing considerably due to the high housing costs.

All the above items are weighing on consumer sentiment as inflation increases “friction” within the economy. This “friction” is leading to considerably higher prices on items from cars to electronics to food and housing.

Real wages are declining:

According to CNN, companies big and small are raising wages to attract workers and hold onto employees as the economy revs back into gear. But those fatter paychecks aren’t going as far, thanks to rising inflation.

In fact, compensation is now lower than it was in December 2019, when adjusted for inflation, according to an analysis by Jason Furman, an economics professor at Harvard University.

The Employment Cost Index — which measures wages and salaries, along with health, retirement and other benefits — fell in the last quarter and is 2% below its pre-pandemic trend, when taking inflation into account. (Wages and salaries are growing at a faster pace than benefits.)

In essence, Americans are showing in the recent consumer sentiment index that rising prices are the key driver of a drop in optimism.

What does a drop in Consumer Sentiment mean for real estate?

According to a Well’s Fargo report, Inflation is still on consumers’ minds. Once again, a record high number of respondents found that it is a good time to sell a house while a record low share of respondents felt it was a good time to buy a home. While the median expectation for 12-month inflation eased to 4.6% from 4.7% previously, the expected inflation rate for the next 5-10 years rose to match the highest reported since 2013.

One notable item in the report that continued to surface was inflation expectations. As these expectations become entrenched, it will force the Federal Reserve’s hand to break this cycle by raising rates. In turn, rising rates will put a damper on real estate activity.

Summary:

Like many economic reports this year, the recent drop in consumer sentiment was unexpected. The consumer is showing that they are becoming worried about inflation and friction in the economy as a result. Furthermore, real wages are down after factoring in wage gains and inflationary pressures. The recent consumer sentiment index will put the federal reserve in a chicken vs. egg scenario. As consumers are less confident, they will spend less which would mean the federal reserve should keep more economic support via a loose monetary policy. On the other hand, the driver of the reduced consumer sentiment is inflation/higher prices which should prompt the federal reserve to act.

Unfortunately, the federal reserve is tilting towards keeping looser economic policy longer that could have disastrous consequences. Consumers are showing pessimism because of higher prices, yet if the federal reserve does not act to tamp down inflation via higher rates, the inflation march will continue. We are already seeing this in housing as low interest rates continue to spur higher purchase prices and rental rates. The recent consumer sentiment index should be a warning to the federal reserve that action must be taken sooner rather than later.

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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