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Consumer comfort rises: Good news for builders like D.R. Horton

Brent Nyitray, CFA, MBA

The Bloomberg Consumer Comfort Index

The Bloomberg Consumer Comfort Index is a weekly sentiment index that covers three critical variables:

  1. Respondents’ perception of the state of the economy
  2. Their evaluation of their personal finances
  3. Whether it’s a good time to purchase goods and services

The index is a random sample of data from 1,000 people collected through telephone interviews using relatively straightforward questions. Are the state of the economy, personal finances, and time to buy goods and services excellent, good, not so good, or poor? Since the index started in 1985, it has averaged 42, so “neutrality” isn’t necessarily 50. The highest reading the index ever recorded was +66.3 in early 2000. The index bottomed at 23 in 2009.

Note that the index was recently rescaled from a scale of -50 to 50 to a scale of 0 to 100.

Views of the economy are still highly negative

The index finished the week at 36.8—a small increase from the prior week. The report is on balance negative. This isn’t surprising, given that the index itself is below 50. Perceptions of the economy are highly negative, at 27% positive versus 73% negative. The perception of whether it’s a good time to buy is also highly negative, at 32% positive versus 68% negative. As to personal finances, the index ticked up to 51% positive versus 49% negative.

So when you ask consumers about the world around them, they tend to be more negative. But when you ask about their own personal situation, they’re more neutral.

Implications for homebuilders

Consumer sentiment is a critical factor in risk-taking. In fact, KB Home (KBH) in a recent earnings conference call cited consumer confidence as a more important variable than interest rates.

Rising real estate prices had been driving increases in orders. However, order growth has been slipping for builders. Student loan debt remains a problem for the first-time homebuyer. But even the first-time homebuyer seems to be reappearing.  Given that the cost of renting is way higher than the cost of owning, a change in sentiment should cause a big spike in new orders.

Housing starts have been highly depressed since the real estate collapse. Even a marginal increase in demand should drive homebuilders forward. Specific homebuilder stocks that will be positively affected by changes in consumer sentiment include Lennar (LEN), PulteGroup (PHM), D.R. Horton (DHI), and Toll Brothers (TOL). You can also invest in the sector via an ETF like the SPDR S&P Homebuilders ETF (XHB).

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