Consumers cast a strong vote of confidence in the Trump administration as they pushed housing prices up with prospects of a growing economy.
The Case Shiller National Home Price index, released on February 28, reported a 5.8 percent annual gain from November, faster than last month’s robust gain. Prices increased 7.7 percent from a year ago.
Confidence in Donald Trump’s policies and a favorable outlook for business and labor market conditions has driven consumer confidence higher. The consumer confidence index rose to 114.8 in February from 111.8 in January, making it the best reading since July 2001, according to the Conference Board, a research group that puts out the monthly survey.
“The fact of the matter is that he’s [Trump] had a tremendous positive impact on confidence, both by households and by businesses,” said Michael Englund, chief economist at Action Economics, an intra-day commentary provider. “And what might be a positive for the economy is that people are willing to take more risk.”
Faster economic growth spurs consumers’ willingness to invest in big ticket items such as real estate and autos. With the economy picking up, people are more willing to moving around, switch jobs and invest in their future home.
Home sales have picked up along with housing prices (see chart). Sales were at a seasonally adjusted annual rate of 555,000 in January, a 3.7 percent increase above the revised December rate of 535,000 and a 5.5 percent rise since January 2016.
Strong demand for housing and inventory shortages combined with falling unemployment and gains in jobs and wages are an encouraging sign that the housing market is beginning to normalize.
“We are right now basically returning to a level of existing home sales that was pretty normal to the housing boom,” Robert Denk, a senior economist at the National Association of Home Builders, said, referring to the overheated housing market before 2008.
Rising home prices could become a problem as incomes continue to increase only slowly. Plans by the Federal Reserve Board to raise mortgage rates could also increase the cost of housing.
Federal Reserve Bank Chair Janet Yellen signaled that there could be at least two more rate hikes in the year.
Thirty-year fixed rate mortgages have for the most part been on the rise, averaging 4.10 percent from 3.64 percent a year ago, according to Freddie Mac. Economists believe that the Fed hikes will have little impact on mortgage rates. The Fed affects the federal funds rate, which has more influence over short-term rates than long term rates like the 30-year fixed rate.
Some economists see rising rates as a good sign. Although people will be paying more to borrow money, people who have income based on interest earnings will see their accounts climb, encouraging them to spend more.
“By normalizing interest rates, we may generate more of the illusion that the markets are an OK place to invest,” Englund said.