Home prices have started to drop, but the decline has not been significant enough to slow a growing pessimism about the housing market.
Fannie Mae’s Home Purchase Sentiment Index (HPSI), which tracks the housing market and consumer confidence to sell or buy a home, dropped by 0.8 points in August to 62, marking its sixth consecutive decline. The government-sponsored enterprise attributed high home prices and mortgage rates to the decline, particularly weighing on home-selling sentiment. Year over year, the index is down 13.7 points.
On the seller side, 35% said it was a bad time to sell, rising from 27% in July. About 59% said it’s a good time to sell, dropping from the previous month’s 67%.
“The share of consumers expecting home prices to go down over the next year increased substantially in August. Accompanying this, HPSI respondents reported a significant decrease in home-selling sentiment,” said Doug Duncan, Fannie Mae’s senior vice president and chief economist.
Following a slow down in home price appreciation, prices slipped 0.77% in July from June, marking the largest single-month decline in the housing market since January 2011, according to Black Knight. About 85% of major housing markets, mainly in the West Coast, saw prices pull back from their peak levels, and more price corrections are expected across the U.S.
“We also observed a large decline in consumers reporting high home prices as the primary reason for it being a good time to sell a home, suggesting that expectations of slowing or declining home prices have begun to negatively affect selling sentiment,” Duncan said.
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On the other hand, lower home prices would be welcome news for potential first-time homebuyers, who are disproportionately affected by high home prices and high mortgage rates.
Overall, 22% of respondents said it was a good time to buy a home in August, up from 17% a month prior, but 73% said it was a bad time to buy, down from 76% in July.
Consumers were not optimistic about mortgage rates. About 11% of respondents said that mortgage rates will go down in the next 12 months while 61% stated that mortgage rates will go up.
Mortgage rates have been on a rising trend in recent weeks ahead of another potential rate hike by the Federal Reserve later this month. Purchase mortgage rates rose to an average of 5.89% this week.
“With home prices expected to moderate over the forecast horizon and economic uncertainty heightened, both homebuyers and home-sellers may be incentivized to remain on the sidelines – homebuyers anticipating home price declines and potential home-sellers not keen to give up their lower, fixed mortgage rate – contributing to a further cooling in home sales through the end of the year,” Duncan said.
Goldman Sachs, in a paper titled “The Housing Downturn: Further to Fall,” forecasted that new and existing home sales are going to fall 22% and 17% respectively this year. Next year, the investment predicted new and existing home sales will drop another 8% and 14%.