How Rising Consumer Sentiment Is Linked To Higher Home Prices

Consumer Sentiment has been on the rise since last February and it's something to which home buyers should pay attention.

The affordability of your next home may hinge on consumer confidence.

As the economy recovers from a near-the-brink recession, many of the elements of a full recovery are in place. Business investment is returning, household spending is expanding, and financial systems are gaining strength.

Consumer confidence is at a 2-year high.

What's missing from the recovery, though, is jobs growth. Another net 20,000 jobs were lost in January. Data like that hinders economic growth.

That said, twenty-thousand jobs lost is a much better figure than the several hundred thousand that were shed per month throughout early-2009, but it's still a net negative number. Not only does household income drop when Americans lose jobs but so does the average American's confidence in his or her own economic future.

This is one reason why jobs growth is so closely watched by Wall Street -- jobs are linked to higher confidence levels which, in turn, is believed to spur consumer spending.

Consumer spending represents 70% of the U.S. economy.

As confidence rises, it could be good news for the economy, but bad news for home buyers. More spending expands the economy and, all things equal, that leads mortgage rates higher.

Same for home prices. More confidence means more buyers which, in turn, squeezes the supply-and-demand curve in favor of sellers.

Later this morning, the University of Michigan will release its February Consumer Sentiment survey. If the reading is higher-than-expected, prepare for mortgage rates to rise and home affordability to worsen.