We bought our first New Canaan house in 1980 at a time when interest rates spiked to 16.35% and then 18.53% in 1981. Combined with record inflation of 14% that year it could have resulted in a real estate crisis. It was reasonable to wonder if housing prices would crash. They didn’t, they rose for the next five years. It has me wondering what the sentiment is now, and how is it differentfrom 1980? Is there any correlation between housing prices and the interest rates and inflation? Is there a closer correlation with consumer confidence? And finally, how do the national graphs of housing prices differ from “luxury” and “regular” markets in Fairfield County. It’s a lot to cover in 800 words. Let’s dive in.

The first chart shows consumer confidence over the past 40 years measured two ways. The light blue line shows pocketbook confidence and the only two times it has been nearly this bad is that day in 1980 when we moved to town, and that month in January 2009 when zero houses were sold in New Canaan. It sounds hard to believe but yes, zero houses sold that month. Consumer confidence was terrible, but the New Canaan and national housing markets survived.

Low pocketbook confidence is usually linked to inflation in the grocery store and at the gas pump, the struggles to get through our daily lives. Apparently low pocketbook confidence is not causing a great many people to list their houses, here or anywhere. I’m suggesting that low pocketbook confidence may have some effect on the lack of inventory and low sales volume in the real estate market. Will people list their house and move if they don’t have confidence? I think that may be weighing on the minds of many who may be considering retirement. Low inventory levels (everywhere), rising prices (especially rents), and rising rates are contributing to these feelings and people tend to postpone these life decisions when the picture is not clear.

In contrast, the dark line shows business condition confidence is currently very strong. Rapid job growth, low unemployment, record stock prices and strong earnings contribute to business condition confidence. Never before have these graphs diverged so widely. We have to ask ourselves what does this divergence mean for the real estate market, both nationally and locally? If the beginning of Fed easing in the second half of 2024 comes as a result of lower inflation, and a generally weaker economy, can pocketbook confidence recover (low inflation) while business confidence (fewer jobs) falls?

What is the conclusion? Many economists say that the job market has the greatest inf luence on housing prices, that without a job and confidence in the job, buyers won’t qualify for a mortgage and they won’t buy, regardless of what the Fed and interest rates do. Current housing prices are buoyed by a strong job market, further supported by the massive amount of liquidity injected into the system during Covid. Poor consumer confidence notwithstanding, jobs reports remain strong.

The chart of national housing prices does not seem to move with the winds of consumer confidence, be it pocketbook or business confidence. Indeed, prices don’t seem to move much during recessions with one notable exception, the 2009 financial crisis, when prices fell. The only other time prices have fallen nationally has been in the last 18 months. This, despite the lack of inventory and sustained demand. The picture in Fairfield County is a bit different. The only town I can find in Fairfield County that has experienced a decrease in median price over the last 18 months is Greenwich (-3% YOY) New Canaan, Darien, Wilton, Ridgefield are all up substantially. Stamford and Norwalk are up modestly.

Buyers are asking me to rank the available properties based on my confidence they won’t lose money if they ever must sell. “Where will I not get hurt?” is a very defensive position, and it comes from the major shifts in the consumer confidence charts, not the national or regional charts of median housing prices. Based on the consumer confidence chart I would imagine agents all over town are being asked that question: am I going to get hurt competing for properties in an inflationary time? Is the music going to stop? Is the Greenwich “correction” of the last 18 months just a covid hangover, or the beginning of things to come? What these charts tell me is there is very little direct correlation between inflation, rates and the prices of homes in Fairfield County. While the rest of the country saw prices rise between 2015 and 2020 the prices in New Canaan declined at a consistent rate for five years. Neighboring towns were flat at best. (Greenwich, Ridgefield, Stamford).

Notes from the Morning Meeting. Inflation numbers came out last week for January and they were “not good” according to Chuck Threshie at Total Mortgage. Rates got hammered, rising to their November levels, today 7.93%. Jumbo rates are about a point less than conventional rates. We’ve gone from about an 80% chance of a rate cut in May to about 40%. We are also seeing more showing activity from renters who are entering the market after two years of significant rent increases.

John Engel is a Realtor with Douglas Elliman and he has a birthday coming up, February 25, the same day as his father. John has identical twins, a 1 in 333 probability. Fraternal twins are 1 in 250 and any twin is 1 in 84. Rarer still, John’s next two kids share a birthday 3 years and a minute apart (1 in 365). The birthday paradox is a phenomenon in probability theory dealing with the ikelihood of birthday sharing and has applications in cryptography calculating the probability of collisions.

Check out John Engel’s Podcast, Boroughs & Burbs, the National Real Estate Conversation here.