Prepare now for slower growth, consumer headwinds

A traffic jam of uncertainty lies ahead

When consumers feel good about their financial future, it tends to be reflected in the housing market. For that reason, it’s hard not to see good things in the recent Consumer Sentiment and Consumer Confidence indices, two key barometers used to gauge the direction of the economy. Yet while the view from the windshield of the economy seems clear, the traffic maps show a good deal of congestion and uncertainty ahead.

Further, the U.S. economy grew by 2.9% in the fourth quarter of 2017, a faster pace than the originally forecasted 2.6%, but slowed somewhat during the first quarter of 2018 to 2.3%. On the surface, these numbers are bright when compared to growth elsewhere in the world. But when we look more deeply at how consumers feel about the economy; the picture starts to dim.

In June, the U.S. Consumer Confidence rate remained near an 18-year high at 126.4, where it has been hovering for some time. The consumer sentiment index, reported by the University of Michigan, dipped only slightly in July to 97.1% and has remained favorably steady over the past months. However, high-income earners and low-income earners don’t seem to share the same outlook.  

Recent gains in consumer sentiment have been driven by households with incomes in the bottom third, which saw double digit increases, while the rate for households with incomes in the top third actually fell. One explanation is that low- and mid-income earners are feeling a bigger impact from the recent tax reform and one-time take home bonuses, and they are buoyed in their optimism by an unemployment rate and interest rates that are remaining low—for now.

High-earners, on the other hand, see things differently. This group is more likely to be focused on long-term investments. And right now, a volatile stock market, the prospect of higher interest rates and a possible trade war paint a much less rosy picture of the future.

Sometime this year, these two groups are going to meet. For the lower earners, the short term high of tax relief will wear off, and higher rates and potential inflation will start to impact their decisions to borrow money. As we near the mid-term elections, we can expect a barrage of negative political coverage both locally and nationally. To be certain, much of the attacks will be centered on the economy, and the mood of the nation will dip.  

Currently, the sentiment in the housing industry is one of frustration. Low inventory and increasing prices are hurting affordability, and the 1.6% wage growth in June isn’t keeping up with the increase in housing costs. This is especially troubling for low- and mid-income earners, as it prohibits upward mobility. Except for the internal dismantling of the federal agencies like the Consumer Financial Protection Bureau, further efforts to deregulate the industry will grind to a halt by August or September as we enter the mid-term election season.

Looking ahead to 2019, we only see more uncertainty. Some economists are projecting a flat consumer spending rate and flat unemployment next year, but a faster increase in rates under Fed Chairman Jerome Powell. Another potentially huge factor on the economy is the onset and outcome of the trade war with China, Canada and other nations, which will impact businesses and consumers.

The housing industry is traditionally seen as the machine that drives overall economic growth in the U.S., but that machine is starting to wear down. For the remainder of 2018, the housing industry will be plagued by low inventory, the Fed likely increasing interest rates and a challenging labor market. Home purchases and home equity lines will continue to lead production, with refinancing continuing its dramatic retreat into 2019.

All things considered, the consumer outlook may be peaking. We are looking at a U.S. economy that is in the late stages of expansion and is moving toward inflation management and even a potential recession in late 2019 and 2020. The uncertainty of U.S. regulatory changes will continue to create spastic volatility in our market, which will complicate near-term and long-term management decisions. As industry participants, we need to recognize what is happening and think strategically about how to manage through a market affected by a broader set of triggers.

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