Football coaching legend Vince Lombardi once said, “Confidence is contagious and so is lack of confidence, and a customer will recognize both.”
Right now, home builders are facing what amounts to a crisis in potential home buyer confidence. The Conference Board Consumer Sentiment Index, after spiking in July, has decreased for two straight months, reaching its lowest point since November 2005. Consumer sentiment as measured by Reuters and the University of Michigan has also decreased since July.
Consumers see the flood of both new and existing homes on the market, falling prices, and mounting cancellations and foreclosures, and are asking themselves, Why buy now? They have no confidence that prices will increase, and in fact believe prices will fall. And, at least in the short term, they're right.
“I do understand why people are fearful. It's totally understandable,” says Bernard Markstein, NAHB staff vice president for forecasting and analysis.
While many published reports blame the media for covering the housing recession too negatively, and thus creating the confidence crisis, market conditions are the true cause of, and for, concern.
“We still have an adjustment to work through because there is a large inventory overhang, demand remains weak, and in the last few months we've seen tighter credit standards make it harder even for willing buyers to qualify for a mortgage, or at least the size of a mortgage they would want,” says Markstein.
Because there are fewer buyers, builder sentiment about the market is also in free fall. The Housing Market Index hit an all-time historical low of 18 in October, after steady month-over-month declines from February.
Builders have reacted to market conditions by pulling back on construction and taking out fewer building permits, moves that should help on the road to recovery.
Still, there is a long way to go before the market comes back into balance and prices see steady increases, says Ivy Zelman, CEO of Zelman and Associates.
“Volume stabilizes in the next 24 months, but we think pricing keeps falling, even if volume stabilizes,” Zelman says. “As long as pricing goes down, you're hard pressed to see confidence rebounding. You get low enough that [confidence] probably doesn't get much worse at the point where volume stabilizes, so you could be looking at confidence bottoming also in 2009.”
SOURCE: U.S. CENSUS BUREAU