Fed PolicyMortgage

Consumers pull back the reins on housing confidence

Rising rates, Fed tapering push them to the sidelines

Consumer attitudes are in line with a recent lull in housing activity, suggesting homebuyer sentiment is declining as interest rates rise and fears over QE3's demise shake the entire economy.

Why is confidence down? Fannie Mae attempts to answer this question in its latest housing survey, reporting that the Fed's plans to eventually taper asset purchases and rising mortgage rates are finally taking a toll on housing.

"The spike in mortgage rates associated with the possibility that the Fed will begin to wind down its asset purchase program later this month has dampened the improving trend in consumer sentiment regarding housing witnessed in our survey since the start of this year," said Fannie Mae senior vice president and chief economist Doug Duncan.

He added, "The pause in positive momentum is consistent with slowing trends in home purchase contract signings and mortgage applications. Interest rate volatility will likely remain elevated, even after we have more clarity on the pace of the Fed's tapering, due to concerns over the upcoming budget and debt ceiling debates as well as the crisis in Syria."

Consumers expect home prices to continue to grow on average during the next year, but at a reduced pace of 3.4%.

However, Capital Economics market analysts say overall, the recent lull in housing market activity is not enough to knock the recovery off course.

"With the inventory of homes for sale already nudging upwards, and set to rise much further over the next year, the pace of house price gains will now slow to a more sustainable place," explained Compass Point senior U.S. economist Paul Diggle.

He added, "Speculation that the Fed will begin to taper its monthly asset purchases later this year has triggered a steady rise in long-term interest rates, including 30-year mortgage rates. While this has slashed remortgaging volumes, mortgage applications for home purchase and home sales have dropped only slightly."

The share of people who say home prices will go up in the next 12 months rose 2 percentage points to 55% in August. Additionally, those who believe home prices will go down increased slightly to 7% month-over-month, according to Fannie.

On the reverse side, Quicken Loans chief economist Bob Walters explained that potential buyers are showing an increase enthusiasm and confidence in the housing market.

"While there's been a short rise in mortgage rates, rather than dampen enthusiasm, it has increased consumers' urgency to realize that rates won't remain this lower forever," Walters noted.

He continued, "The cycle has broken, and t's playing out in the home price arena and folks who found themselves underwater aren't anymore." 

Meanwhile, the average 12-month rental price change expectation fell to 4.1%, a slight decrease from last month.

Additionally, 53% of consumers agreed home rental prices will go up in the next 12 months.

The recent concern in rental interest may be due to the fact that single-family rental opportunities are now harder to find, Capital Economics pointed out.

Earlier price gains have weakened the case for institutional investors to invest additional funds into the single-family market.

Nevertheless, the total return from housing will continue comfortably to beat risk-free rates, attracting ‘ma and pop’ investors back into the market, according to Capital Economics.

"The slowdown in rental value growth is consistent with the increasing supply of homes brought to the rental market by investors," Diggle said.

He concluded, "Alongside the continued decline in the price discount available for distressed homes, this means that the role of institutional investors in the housing market is set to wane."

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