Nearly 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 boost, many are getting much-needed help. All of these factors pushed consumer confidence to its highest level since the start of the pandemic last month.
That sounds good on paper. But if prices continue to rise in a real estate market that has already peaked with buyer demand, will a new influx of willing and skilled buyers make matters worse? Or will more sellers enter the market as those who have held out regain confidence in the economy?
Consumer confidence rises sharply in April
After a strong performance in March, The Conference Board’s Consumer Confidence Index reached a score of 121.7 in April, against 109.
The rapidly increasing confidence in the economy is largely due to the roll-out of vaccines and the improving labor market. The short-term business outlook also improved slightly. The Expectations Index now stands at 109.8, an increase of 1.5 points since the previous month.
“Consumers’ assessment of current conditions improved significantly in April, suggesting that the economic recovery further strengthened in the early second quarter,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. Consumers “were more optimistic about their income prospects, perhaps because of the improving labor market and the recent round of stimulus measures.”
What does this mean for real estate?
While it’s positive to see a growth in consumer confidence, its effects on the current real estate market could make things even more interesting. Right now, house prices are rising much faster than expected, despite the price being higher than ever before. The S&P/Case-Shiller US National Home Price Index stands at 238 points as of February 2021.
The overall increase in house prices has increased by 12% year-on-year. The tight housing supply in all markets and the maximum demand from buyers have sent house prices through the roof. In April, houses were sold on average in just 43 days, 20 days faster than in April 2020.
It is important to take into account the context of last April. It was messy. Recall that it was the first full month of the COVID-19 pandemic in the United States. Many brokers were considered “non-essential workers” and some markets were frozen. But the contrast in the average days on the market remains large.
Now that buyer demand is as high as it is, bidding wars have led to massive price increases. About half of the homes on the market get multiple offers, and most sell well above list price. As consumer confidence continues to grow, basic economics would tell us that more buyers will enter the market due to stronger income growth, less anxiety and greater mobility. And sellers who have held out because of the uncertainty over COVID-19 can finally list their homes in hopes of taking advantage of market prices before they level off.
The next question: will enough sellers enter the market to give buyers and house prices more leeway? Or will the supply get tighter, all of which will lead to a possible market crash?
The internet seems to think the latter is possible.
Online searches for “when will the housing market crash” have skyrocketed
Despite growing consumer confidence, there is a lingering feeling that the housing market could collapse.
Data from Google suggests that searches for the keyword “when will the housing market collapse” jumped 2,450% through April. Of course, these searches are taking place amid massive surges in home prices, leaving many Americans begrudgingly recalling a not long time ago, 2006.
In 2006, the Case-Shiller Index had peaked at 184 points, a historic price point. Fifteen years later, we’ve left that number in the dust.
JP Morgan Research weighed in, saying: “After solid gains over the past five years, the nationwide nominal house price index is now 40% above its 2012 low and 4% above its 2006 peak. If 2006 were a historic bubble, then current price levels need to be looked at more closely.”
But is too much care required? Experts think not. Credit rating agency Fitch Ratings estimates that homes are currently overvalued by as much as 5.5%. Despite our recent gains, we are still experiencing higher than normal 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 that a mild correction is much more likely than a crash. Buyer demand remains high, especially for single-family homes. The economics of this housing market is inherently different from that in 2006.
“We’re not going to see a crash in the housing market, but we expect some cooling from the really unsustainable growth rates we’ve seen, particularly in 2020,” said Robert Dietz, chief economist at the National Association of Home Builders. “If house prices grow faster than incomes, that is ultimately an unsustainable trend.”
2020 ushered in one of the strangest years in economics and real estate ever, but the fundamentals point to the possibility of calming winds on the horizon. Business as usual may return soon.
Whether that turns out to be the case is left to the jury.
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