Consumers expect home prices to continue rising in 2021

With rapidly rising prices transpiring throughout the beginning of 2021, consumers overwhelmingly anticipate the trend to continue for the next year.

Consumer opinions and sentiments may not always be the most accurate assessments, as they mostly mirror past experiences. However, they are useful because they gauge how likely consumers are to make purchases, especially big-ticket purchases like homes – something of interest to real estate professionals since it allows them to prepare for future sales numbers. Of course, buyers do change their minds when they are exposed to additional information, so other factors need to be taken into account when anticipating future sales volume.

A record 71% of U.S. adults expect the average price of houses in their area will increase over the next year, according to an April 2021 Gallup poll.

Only 10% of those surveyed expect home prices will decrease in the next year. The remaining 18% think there will be no change in housing prices.

This year’s expectations come in stark contrast to a year ago, when economic uncertainty provoked by the beginning of the COVID-19 pandemic deflated consumer confidence. Last year, just 40% of surveyed U.S. adults anticipated a rise in home prices.

Until 2020, most polled respondents expected home prices to rise each year since 2013. For reference, the 71% positive response for 2021 is a new high, though it is similar to 2005 levels—when prices were just about at their Millennium Boom peak.

Consumer expectations for home values are influenced by the health of the current housing market. The prior high of 70% in 2005 reflected the attitudes at the height of the housing bubble, which eventually burst during the Great Recession of 2007-2009. From 2008 through 2012, no more than 34% of Americans believed home prices were going to rise.

While public perceptions of home prices are a helpful indicator of consumers’ expectations of the real estate market, they are not the best metric for gauging real estate trends. This is because consumers report on conditions as they currently perceive them.

Future expectations are largely unreliable because they mostly mirror past experiences. Homebuyer sentiment has a lag time of approximately one year before a buyer initiates a sale. Though buyers may feel either optimistic or pessimistic today, they tend to change their opinions about their future when they are exposed to additional facts and information.

Homebuyer sentiment information is useful for brokers and agents to anticipate their future sales numbers, when paired with other housing data. Consumer attitudes are an indicator of future real estate sales volume since they track both:

where we have been, since sentiment reflects the experience of past events; and
where we are going, since optimism about the economy translates into willingness to make big-ticket purchases such as real estate.

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California consumer sentiment hits new lows in 2020, concerning for future home sales

Home prices this year and the bigger picture

Despite most polled respondents believing prices will increase this year – a reflection of current market factors – the prospects for home sales in the latter half of 2021-2022 are more complicated.

The reasons for a likely occurrence of home prices dropping in 2022 are:

rising 90+ day mortgage delinquencies, with the rate up to 6.4% in the first quarter (Q1) 2021; and
the impending expiration of the foreclosure moratorium, currently scheduled to occur in mid-2021, which will result in a wave of distressed sales to hit the market.

Additional factors to consider when evaluating the current state of the economy, and by extension, real estate market, include:

California jobs, which are still 1.7 million beneath the pre-recession December 2019 peak as of March 2021;
the yield spread, which indicates the likelihood of a recession one year forward is still low, indicating economic activity still has years to go before reaching a full recovery;
mortgage interest rates, which are gradually rising in 2021; and
the Buyer Purchasing Power Index (BPPI), which was +5.2 as of March 2021, meaning the typical homebuyer qualifies for 5.2% more mortgage principal than a year earlier. However, California home prices for mid-tier homes are 15% above the previous year as of March 2021.

The discrepancy between the BPPI and home prices will likely dampen homebuyer enthusiasm, pulling home prices downward later in 2021. Without the support of full employment or declining interest rates, expect prices to fall heading into 2022, bottoming around 2024.

The course of the next two-to-three years for the economy and housing market will partially depend on the extent and timing of government intervention in the form of further stimulus initiatives, programs and legislation aimed at addressing job creation and further extensions of the foreclosure moratorium.

Depending on how these potential stimulus programs are handled, expect a recovery to begin around 2024-2025.

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