Consumer sentiment in California rose slightly in the fourth quarter (Q4) of 2019, according to the Chapman University-Claremont McKenna College California Consumer Sentiment Index. This index rose to 96.9 from 91.6 in the prior quarter.
Changes in homebuyer opinion in California are tracked based on seven survey questions relating to:
- anticipation of future economic and business conditions;
- how consumers perceive current personal conditions compared to the prior year;
- how likely they are to find a job in the next year; and
- how likely they are to make a major purchase — specifically, an automobile — in the next year.
The greater the percentage of positive responses, the higher the index figure. An index of 100 means an equal number of positive and negative responses. Therefore, while overall consumer sentiment rose in Q4 2019, more people remained pessimistic about future conditions than positive.
Last quarter’s rising (but still overall pessimistic) results are a reversal of the trend experienced since 2018, which has seen consumer sentiment steadily falling, bottoming in Q3 2019.
The usefulness and (un)reliability of consumer sentiment
Keep in mind, future expectations are unreliable as they mostly mirror past experience. They are merely consumer projections, not forecasts of likely consumer purchases or behavior.
To become or remain professionally successful, brokers and agents need to accurately anticipate their future sales numbers. Information on homebuyer sentiment is predictive of future real estate sales volume for brokers and agents, since it tracks both:
- where we have been, as sentiment reflects the experience of past events; and
- where we are going, as optimism about the economy is translated into willingness to make large purchases, such as a home purchase. Further, the level of buyer optimism or pessimism determines the durability of sales volume.
Still, consumer sentiment can be useful for real estate professionals, as it offers a window into their clients’ perceptions of the economy. For example, a potential homebuyer who thinks a recession is imminent is less likely to take on the significant financial commitment of buying a new home.
But this information is only useful against the backdrop of real economic data. In 2020, these include:
- a yield spread that has recently emerged from several months of negative activity, which forecasts a recession to arrive 12 months hence (by late-2020);
- low interest rates, which began to decline in 2019 in anticipation of the Federal Reserve (the Fed) dropping rates heading into the next recession;
- declining home sales volume in California going into 2020;
- fewer residential construction starts in 2019; and
- flat or slightly rising home prices going into 2020.
Today’s lower interest rates are helpful in inducing homebuyer purchases and are responsible for home prices remaining buoyed going into 2020. But the inverted yield spread, along with consistently slowing sales volume and reduced construction, all signal that California’s housing market is on shaky ground.
Therefore, while consumer sentiment rose at the end of 2019, real estate professionals need to remain cautious. Signs point to a slowing housing market in 2020, though the decline is expected to be less severe than the 2008 recession. Still, real estate professionals who want to continue making the same type of living during the coming slowdown will need to:
- increase their marketing efforts and expand their FARM;
- consider taking on related jobs such as property manager or notary public;
- research distressed property sales to become an expert and increase their market share; and
- become an investment expert, assisting or even pulling together groups of investors called syndicates to purchase distressed property during the recession.
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