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Why consumers are still highly pessimistic about the economy

Brent Nyitray, CFA, MBA

Fannie Mae National Housing Survey: May 2014 takeaways (Part 4 of 4)

(Continued from Part 3)

Fannie Mae’s survey shows most people believe the economy is on the wrong track

In the latest survey, 58% of respondents said the economy is on the wrong track—an increase of 1% from last month and an increase of 5% over the past year. The number of people who believe the economy is on the right track is down 2 percentage points over the past year. Interestingly, the Conference Board Consumer Confidence Index has increased from 74 to 83 over the past year. So, even though attitudes about the economy are improving, there’s been an increase in the number of people who believe the economy is on the wrong track.

The virtuous cycle needs to begin

The economic recovery has been tepid because housing construction has lagged. Typically, housing construction leads the economy out of recessions, and it’s not unusual to see housing starts fall to about 1 million during the depth of the recession and then rebound close to 2 million early in the recovery. A normal level for housing starts is about 1.5 million per year.

This time around, we’ve had housing starts below 1 million for four years. Even now, four years into the recovery, starts are still about where they bottomed in prior recessions. To get the economy out of first gear, we need to start building more houses, as homebuilding employs a lot of people. Increasing construction hiring will increase aggregate demand, which will increase confidence. Unfortunately, the first-time homebuyer is struggling with student loan debt and isn’t confident enough in their financial situation to buy.

What breaks the cycle?

We’re in a bit of an economic catch-22. We need confidence for homebuilding to rebound, and we need homebuilding to rebound in order to increase confidence. What will change things? Life changes. Despite a lousy economy, people still get married, have kids, ditch the roommates, and move out of their parents’ basement. Low household formation over the past four years hasn’t been due to fertility rates 30 years ago. It’s been due to the lousy economy and it represents pent-up demand. Once that changes, that pent-up demand will drive earnings for builders like Lennar (LEN), PulteGroup (PHM), D.R. Horton (DHI), Toll Brothers (TOL), and KB Home (KBH) for years to come.

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