The connection between consumer confidence and the economy is crucial. After all, consumers make up two-thirds of GDP. Our Director of Economic Research, Ali Wolf, explains how the media can influence reality for consumers and why it matters for housing.
Research from economists and academics has quantified the relationship between negative headlines and their impacts on consumer confidence*. Findings suggest that during changing or slowing times, consumers will pay more attention to the media. This allows news sources to influence the reader through both the tone and volume of articles on a given subject.
Bad news travels fast.
Articles are more often ignored when economic news is positive or lacks controversy. When there is an economic soft patch, the media generates a lot of buzz with catchy headlines.
The “headline effect” highlights the problem with titles that act as clickbait. Studies show that titles get imprinted into the consumers’ mind even if the text in the article tones down the initial shock. This is important as 60% of articles are shared without even being read.
Of Articles Are Shared Without Being Read
Frame of reference matters.
Sentiment is generally driven by a consumer’s reality (i.e. do they have a job, have they had a raise, are their friends staying employed, etc.).
The economy is currently firing on all cylinders, which can explain why the Consumer Confidence Index from the Conference Board is near a 20-year high. Lately, however, we have seen a divergence between self-reported confidence measures and Google searches (discussed below).
Headlines play an even bigger role for consumer goods like housing because individuals pay more attention to news that directly impacts their financial well-being.
CASE STUDY: CHICKEN OR EGG
July 24th, 2018 marked a big shift for housing sentiment when CNBC posted their article “Southern California Home Sales Crash, A Warning Sign To The Nation.” The story garnered America’s attention and was shared nearly 1,000 times on Facebook. For reference, of the roughly 400 posts on CNBC’s Facebook over the past two weeks, only 7% had a larger number of shares.
The article posted legitimate data highlighting that new and existing home sales slipped 12% in Southern California in June. Knowing the average reader will stay in the article for 15 seconds (thanks for sticking with us!), and assuming our team reads as quickly as the average American, that means that only the “key points” and the first paragraph will be read. A committed reader would need to get through 60% of the article before finding the real story – sales dropped 21% for homes priced under $500,000 because the supply is scarce rather than a uniform pullback across all price buckets.
Four months later, we are able to see a strong link between the article and search habits. We used Google Trends** to look at search activity before and after the week of July 22nd, during which these two articles were also published.
Searches for both “housing market” and “housing slowdown” peaked the week of the CNBC article and have not reverted to their pre-story levels
An index value of zero suggests there are few searches on the given topic during the respective week. Notice “housing slowdown” was not a common search until the second half of this year
Some of the softening in the housing market could be linked back to fear brought about by alarming headlines causing consumers to pause
THE TAIL WAGGING THE DOG
Today is unique in that the headlines are pulling consumers away from the economic reality. All the fundamentals are lined up (employment, GDP, population growth, etc.) making consumer (and builder) confidence the lifeblood of the housing market.
If confidence softens, consumers will spend less money. Fewer dollars spent means lower corporate earnings. Lower earnings translate into a shift away from hiring and capital expenditures. The combined effect can create a downturn alone, with negative confidence in the market becoming a self-fulfilling prophecy.
Moving forward, these media headwinds mean that the industry needs to create a reason for the consumer to buy, whether that is better marketing to highlight a “deal” for the buyer or a compelling product.