Consumers’ concerns about housing affordability are squeezing would-be homebuyers out of the market, according to Fannie Mae‘s Home Purchasing Sentiment Index, which tracks the housing market and consumer confidence to sell or buy a home. The index score dropped by 0.3 points to 68.2 in May, inching toward its 10-year and pandemic-low of 63, recorded in April 2020.
All six of the index’s components — which ask consumers to weigh in on whether it’s a good time to buy, sell, and in what direction mortgage rates will move — dropped 11.8 points from the same time last year. A survey-high of 79% of consumers believe it’s a bad time to buy a home. About 70% of survey respondents expect mortgage rates will continue climbing during the next 12 months.
“Respondents’ pessimism regarding home buying conditions carried forward into May, with the percentage of respondents reporting ‘it’s a bad time to buy a home,’ hitting a new survey high,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “The share reporting that it’s ‘easy to get a mortgage’ also decreased across almost all segments.”
Purchase mortgage rates, after hitting a 13-year high of 5.27% in May, fell for three consecutive weeks. Rates last week averaged 5.09%, essentially flat from the prior week, but significantly higher than the 2.99% rate during the same period last year, according to Freddie Mac PMMS.
The Federal Reserve raised the interest rate by a half percentage point on May 4 and repeatedly has signaled it will continue to raise rates this year and into 2023. The Fed’s interest rate does not directly affect mortgage rates, but higher interest rates steer market activity to create higher mortgage rates and reduce demand.
While fewer respondents than in previous surveys were worried about losing their jobs, more households expected their income to drop. About 81% of those surveyed in May said they weren’t concerned about job loss, fewer than the 84% the previous month. About 16% of respondents said their income was significantly lower in May than a year before, which was an increase from 14% of respondents in April.
In an effort to counter margin compression and satisfy a new generation of homebuyers, lenders are looking to offer loan options that better fit the average borrower. HousingWire recently spoke with John Keratsis, President and CEO of Deephaven Mortgage, about the potential benefits of non-QM lending in today’s tight housing market.
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“These results suggest to us that increased mortgage rates, high home prices and inflation will likely continue to squeeze would-be homebuyers — as well as those potential sellers with lower, locked-in mortgage rates — out of the market, supporting our forecast that home sales will slow meaningfully through the rest of this year and into next.”
Fannie Mae’s Economic and Strategic Research (ESR) Group had forecast a slowdown in home sales for the second and third quarters of 2022, followed by a softening in construction activity and a noticeable deceleration in home price growth.
While it expects the economy to have a modest recession in the second half of 2023, the agency said the constrained consumer spending power amid elevated inflation and a rapidly rising rate environment carries the risk of a contraction happening sooner.