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Will Increased Consumer Confidence Make Home-Buying Harder?

Matt Myre
3 min read
Will Increased Consumer Confidence Make Home-Buying Harder?

Almost 45% of the US population has been vaccinated with at least one dose of a COVID-19 vaccine, giving way to an improving job market and greater mobility. With the latest economic stimulus, many are receiving much-needed relief. With all these factors, consumer confidence spiked last month to its highest levels since the pandemic began.

On paper, that sounds good. But as prices continue to climb in a real estate market that’s already maxed out by buyer demand, will another influx of ready and able buyers make matters worse? Or will more sellers enter the market as the ones that have held out regain confidence in the economy?

Consumer confidence increases sharply in April

After a strong showing in March, The Conference Board’s Consumer Confidence Index reached a score of 121.7 in April, up from 109.

The rapidly increasing confidence in the economy is largely due to the vaccine rollout and the recovering job market. Short-term business outlooks also increased moderately. The Expectations Index now sits at 109.8, up 1.5 points since the previous month.

“Consumers’ assessment of current conditions improved significantly in April, suggesting the economic recovery strengthened further in early Q2,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. Consumers “were more upbeat about their income prospects, perhaps due to the improving job market and the recent round of stimulus checks.”

What does this mean for real estate?

While it’s positive to see growth in consumer confidence, its effects on the current real estate market could make things even more interesting. As of now, housing prices are increasing at a rate much faster than anticipated, despite already being at a price point higher than ever before. The S&P/Case-Shiller US National Home Price Index stands at 238 points as of February 2021.

The overall gain in home prices has increased 12% year-over-year. Tight housing supply across markets and maxed out buyer demand has sent home prices through the roof. In April, homes sold in just 43 days on average—20 days faster than in April 2020.

It’s important to keep the context of last April in mind. It was messy. Recall that it was the first full month of the COVID-19 pandemic in the United States. Many real estate agents were considered “nonessential workers” and some markets were frozen. But the contrast in the average days on market remains stark.

With buyer demand as high as it is, bidding wars have amounted into massive price increases. About half of the homes on the market are receiving multiple offers and most are selling well above list price. As consumer confidence continues to increase, basic economics would tell us that more buyers will enter the market because of stronger income growth, less anxiety, and increased mobility. And sellers who have held out due to COVID-19 uncertainty may finally list their home in hopes to take advantage of the market’s prices before they flatten out.

The question moving forward: Will there be enough sellers entering the market to give greater leeway to buyers and home prices? Or will supply get tighter and tighter, all leading up to an eventual market crash?

The internet seems to think the latter is possible.

Online searches for “when is the housing market going to crash” are up big

Despite growing consumer confidence, there’s a lingering feeling that the housing market could come tumbling down.

Data from Google suggests that searches of the keyphrase “when is the housing market going to crash” has increased 2,450% through April. Of course, these searches come amid massive gains in housing prices, which have made many Americans reluctantly recall a not-so-long-ago time—2006.

In 2006, the Case-Shiller Index had reached a high of 184 points, a historic price point. Fifteen years later, we’ve left that number in the dust.

J.P. Morgan Research weighed in, saying “After robust gains over the past five years, the nationwide nominal house price index is now 40% above its 2012 low-point and 4% above the peak reached in 2006. If 2006 was a historic bubble, then current price levels should be looked at more closely.”

But is there a need for too much concern? Experts don’t think so. Fitch Ratings, a credit rating agency, has estimated that homes are overvalued by as much as 5.5% at the moment. Despite our recent gains, we’re still dealing with higher than usual levels of unemployment and a recovering economy. This leads economists and other experts to believe that these prices are unsustainable in the long run.

However, many experts believe a mild correction is far more likely than a crash. Buyer demand remains high, especially for single-family homes. The economics of this housing market are inherently different than those found in 2006.

“We’re not going to see a crash in the housing market, but we are expecting some cooling on the really unsustainable growth rates that we saw, particularly in 2020,” said Robert Dietz, Chief Economist at the National Association of Home Builders. “When home prices are growing faster than incomes, ultimately that is an unsustainable trend.”

2020 ushered in one of the strangest years in economics and real estate ever, but the fundamentals indicate the possibility of a calming wind on the horizon. Business as usual may return soon.

Whether that turns out to be the case or not is still left to the jury.

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