Purchase sentiment is up but affordability remains a challenge in 2023

Small declines in rates and home prices may not produce sufficient purchasing power: Fannie Mae

Potential homebuyers’ purchase sentiment improved slightly in December, but that still remains well below pre-pandemic highs, according to new data from Fannie Mae. Ongoing affordability challenges are expected to limit buyers from entering the market in 2023, according to Fannie Mae, which will result in continued decline in home sales in coming months.

But despite the affordability hurdles, Fannie Mae’s Home Purchase Sentiment Index (HPSI), which tracks the housing market and consumer confidence to sell or buy a home, rose in December by 3.7 points to 61 due to consumers reporting expectations that mortgage rates and home prices may decrease over the year, the agency said. 

“However, the HPSI remains very low by historical standards, particularly the ‘good time to buy’ component, and respondents continue to cite high home prices and unfavorable mortgage rates as the primary reasons for their pessimism,” said Doug Duncan, senior vice president and chief economist at Fannie Mae.

December’s HPSI is slightly above the all-time low of 56.7 recorded in October 2022.

On the buyer side, 21% said it was a good time to buy, an increase from 16% in November. The majority of buyers — about 76% — said it was a bad time to buy, a decline from the previous month’s 79%. 

On the seller side, 51% said it was a good time to sell, dropping from 54% in November. About 42% said it’s a bad time to sell, increasing from 39% in the previous month.

Consumers were not optimistic about mortgage rates. About 14% of respondents said that mortgage rates will go down in the next 12 months, while 51% stated that mortgage rates will go up.

The agency expects the average 30-year fixed rate mortgage rate in 2023 to rise to 6.3% from last year’s 5.3%, while the Mortgage Bankers Association (MBA) forecasts rates to decline to 5.2% from 6.6% in the same period. 

In addition to the high mortgage rates compared to two years ago, lending standards have also tightened, as indicated in the MBA’s latest Mortgage Credit Availability Index. The MCAI – benchmarked to 100 – fell marginally by 0.1% to 103.3 in December, led by a decrease in both conventional and government MCAIs. 

The pivot in the market led numerous lenders to exit certain origination channels to manage their operational costs or to stop lending altogether. This was a main driver in the decrease in credit supply, the MBA noted. 

The small declines in rates and home prices may not produce sufficient buying power for buyers, Fannie Mae said, adding that it expects affordability to remain the top challenge for potential homebuyers throughout 2023.

The MBA expects the median price of existing homes to drop to $371,400 in 2023 from last year’s $384,600 and the median price of new homes to fall to $440,100 from $452,900 in 2022. 

“Existing homeowners may continue to wait to list their properties, since many have already locked in lower mortgage rates, creating minimal incentive to sell and buy again until rates are more favorable. We think the resulting tension will contribute to a continued decline in home sales in the coming months,” Duncan said. 

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