Budget-tightening constraints of inflation, higher mortgage rates, and housing price gains are constraining consumers from buying houses. Fannie Mae‘s Home Purchase Sentiment Index, which tracks the housing market and consumer confidence to sell or buy a home, dropped by 4.7 points to 68.5 in April, marking the lowest level since May 2020. Compared with the same period in 2021, the HPSI is down 10.5 points.
All six of the index’s components, which ask consumers whether it’s a good time to buy, sell, and in what direction mortgage rates will move, decreased from last month. A survey-high of 76% of consumers believe it’s a bad time to buy a home. About 73% of the survey respondents expect mortgage rates to climb over the next 12 months, also marking a survey-high.
“The current lack of entry-level supply and the rapid uptick in mortgage rates appear to be adversely impacting potential first-time homebuyers in particular, evidenced by the larger share of younger correspondents aged 18 to 34 reporting that it’s a ‘bad time to buy a home,’ Doug Duncan, senior vice president of Fannie Mae, said in a statement.
The benefit of the historically low mortgage rate environment appears to have diminished and affordability is poised to become an even greater constraint going forward, Duncan added.
Mortgage rates, following the Federal Reserve’s inflation-fighting monetary policy, surged to 5.27% as of May 5, the highest average since 2009, according to Freddie Mac‘s PMMS. The Fed raised the interest rate by a half percentage point on Wednesday and signaled further hikes in efforts to cool inflation and the overheated housing market. Higher mortgage costs may push out prospective homebuyers and ease competition for a scarce supply of home listings.
While less people were worried about losing their jobs, more households expected their income to drop in April. About 84% of those surveyed said they are not concerned about losing their job in the next 12 months, a drop from 86% in March. About 26% of the respondents said their income is significantly higher than it was 12 months ago, a decrease from 29% month over month.
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The Fannie Mae Economic and Strategic Research Group in a separate commentary said the Fed’s aggressive monetary policy tightening through 2023 will likely slow housing activity. In April, the ESR Group said home sales, house prices, and mortgage volumes are expected to cool over the next two years.
“If mortgage rates remain relatively elevated, we expect the added affordability constraint to price out some would-be first-time homebuyers and contribute to the slowing of demand,” Duncan said in a statement.
The ESR Group noted factors including strong mortgage credit quality and a far less-leveraged residential real estate and mortgage finance system are what sets apart the projected downturn from resembling the severity of the duration of the Great Recession.