Housing Sentiment

Is housing sentiment turning down?

IS HOUSING SENTIMENT TURNING DOWN?

According to i360’s Consumer Pulse, most homeowners think the value of their house will rise over the next 12 months. This is consistent with our last post where we highlighted that although consumer sentiment was dreadful US consumers continue to feel relatively bullish on the housing and jobs markets, and, if the housing and jobs market hold up, any recession would likely be shallow. While some negative changes are apparent in their responses as we see from the chart below, we do not yet see the deep pessimism about housing expectations. According to our surveys, consumers are very depressed about the overall economic outlook but relatively optimistic regarding their own home values. Those who no longer expect to see their home appreciate over the next year, for the most part, anticipate seeing the value of their home remain the same and not decline.

If we look at this response, broken down by census division, we see that the Mountain and Pacific regions seem to have witnessed the biggest changes in sentiment toward expected price increases, with attitudes in the East South Central (which consist of Alabama, Kentucky, Mississippi, and Tennessee) having consistently the lowest expectations of house price increases. However, the negative change in sentiment toward house price appreciation is pervasive nationwide.

Concurrently, the Federal Reserve has enacted a series of interest rates hikes and ended quantitative easing because of high inflation rates, sending mortgage rates up.

In the chart above, we see that i360’s Consumer Pulse panelists expectations for housing prices are slowly adjusting to the higher price of borrowing to purchase a home. The red line is the percent of US Homeowners that are expecting their home value to go up minus the percent who expect it to go down in 12 months, inverted to track the relationship with mortgage rates.

Another home valuation indicator is remodeling and renovations. One of i360’s Consumer Pulse questions asks if homeowners are thinking of doing a major home renovation in the next twelve months. The results are telling. Consumer Pulse shows a steady decline in consumers expecting to do major home renovations. As you can see from the chart, this question response tends to lead the returns of the S&P Homebuilders ETF, symbol XHB, relative to the S&P 500 ETF, symbol SPY . While we are currently witnessing erosion in major renovation planning, XHB performance stabilized relative to the S&P. Based on the continued deterioration in the response to this question, we would not be surprised to see XHB resume its decline relative to the S&P in the coming months.

In conclusion, sentiment toward house price appreciation has moderated but is not nearly as pessimistic as consumer views of the overall economy. However, expected major renovations are as low as during the depths of Covid lockdowns, and this more closely tracks the views of consumers toward the economy overall. Hope may drive individual home price outlooks, but major renovation planning may be closer to reality when it comes to the outlook for residential construction activity.