Perception, Sentiment Loom Large

With good reason, the financial markets hang on any utterance from Ben Bernanke, the current chairman of the Federal Reserve. His No. 1 job is to keep inflation low, which helps keep capital flowing at a macro level.

Over the last several years, he and his predecessor Alan Greenspan have done remarkably well. These days, inflation generally tracks in the 3 percent range. As a direct consequence, American consumers at the micro level have felt confident enough in the future value of their earnings (among other factors) to spend money and even borrow money to buy what they want. Needless to say, consumer confidence figures prominently in professional home improvement purchases.

Lately, I’ve taken to monitoring the leading indicator of consumer confidence as a way to help explain the various levels of remodeling activity that you have been telling us about. The remodeling market is generally good. But certain markets are experiencing slower growth. It makes sense then, that consumer confidence dipped significantly at the end of 2006. On the upside, the same indicator (The Reuters/University of Michigan Surveys of Consumers) yielded some gains in 2007.

Right now, consumer sentiment remains iffy for a multitude of reasons. Prices for core commodities like oil are high, which means that gas prices are really high. Real estate price appreciation has slowed. Good jobs are less plentiful than they’ve been of late. Taken together, these factors create a cocktail of uncertainty. This uncertainty impacts remodeling spending on a job-by-job basis. So even though core inflation is low, at the street level perceptions trump all.

At the April 10 Remodeling Futures Steering Committee meeting at Harvard, a side discussion (not on the agenda) focused on this perception vs. reality syndrome. One remodeler pointed out that, in his area, spending had slowed despite a good economy and decent job growth. He pinned it on the softening market for existing-home sales. “If people see real estate signs go up on their block and see those signs stay there beyond a couple weeks, it gives them pause. It makes them adjust the value of their home and causes them to hold off on remodeling, even if they have the money to spend.”

Sentiment and perception often work to the benefit of remodelers. High income earners in the U.S. have seen their fortunes rise in recent years. Maybe their homes aren’t worth as much as they once were (on paper), but their annual increases in income have far outstripped inflation and along with a rising stock market have generally contributed to a bullish outlook. As a result, high-income earners are spending, and spending big. As a result, plenty of remodelers have geared their companies toward serving the higher end.

Look for ways to gauge consumer confidence in your market. In the present climate of slower growth, your clients’ perception of market conditions looms large over their decision-making processes.