The Once Feel-Good Consumer is Starting to Not Feel So Good

Yesterday, my article “Why I Believe We are Headed for Harder Times Ahead” touched briefly on the importance of consumer confidence. In a nutshell, a consumer who feels good about the economy in their mind will be more likely to spend. The reverse is also true. Get a consumer who is starting to feel negative about the economy and that consumer will tighten his/her purse strings.

Remember how good consumers were feeling about the stock market in 1998 and 1999? The NASDAQ was at 5,000 and consumers, many who had never bought a stock up until then, were making their first stock purchases on the NASDAQ. Consumers felt good about tech stocks based on what they read in the paper and heard on the news. In 2000, the tech bubble burst and the NASDAQ dropped 50%. Consumer confidence in tech stocks crashed with the market. It’s been six long years since and consumer confidence in tech stocks hasn’t come back. Neither has the NASDAQ.

Today, I see the same thing in the housing market. A couple of years ago when interest rates reached such low levels, consumer confidence in the U.S. housing market was very strong. You had American consumers buying bigger houses and about 40% of them buying second homes for vacation or investment. Consumer confidence was strong in housing, which led to demand, which ultimately led to higher prices.

Fast forward to 2006 and after 17 interest rate hikes by the Fed, consumer confidence in the housing market is going the other way. Yesterday’s report on the pathetic U.S. resale housing numbers definitely caught the attention of American consumers: The report was front cover on most U.S. newspapers and all over the news.

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2000 was the turning point of consumer confidence in tech stocks. 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory and eventually lower prices for homes.

But this time, the turnaround in consumer confidence will have a bigger impact on the economy. That’s because housing is a much larger proportion of the economy than the NASDAQ. Once American consumer confidence in real estate is gone, it could take years to get back. And all along, our economy will suffer. I really don’t think lowering interest rates is going to help this time. Hold onto to your seats. this one’s going to be a nail biter!