The unusual housing market dynamics kept the Fannie Mae Home Purchase Sentiment Index (HPSI) effectively unchanged with a 0.1-point increase in August to 66.9. Three of the six HPSI components increased month over month, including perceived home selling conditions, while the full index is up 4.9 points year over year.
“Mortgage rates once again breached the 7% mark in August, hitting a 22-year high and doing no favors for consumer sentiment,” says Doug Duncan, Fannie Mae senior vice president and chief economist. “Consumers remain pessimistic toward the housing market in general and home buying conditions in particular. The overall HPSI is maintaining the low-level plateau set a few months back, and we don’t see much upside to the index in the near future, barring significant improvements to home affordability, which we also don’t expect.”
Unchanged from July, 82% of respondents said it was a bad time to buy a house, while respondents who said it was a bad time to sell a house decreased from 36% to 34%. Respondents who said they think it is a good time to sell increased from 64% to 66%. Month over month, the net share of those who said it is a good time to sell increased 5 percentage points.
The percentage of respondents who said home prices will go up in the next 12 months remained unchanged at 41% in August. Respondents who said home prices will go down increased from 24% to 26%, while the share who think home prices will stay the same decreased from 34% to 33%. The resulting net share of those who said home prices will go up in the next 12 months decreased 2 percentage points month over month.
“If mortgage rates remain elevated, many existing homeowners will likely continue to hold on to their current historically low mortgage rates, suppressing existing-home listings and providing support for home prices—assuming mortgage demand maintains resilience despite the higher rate environment. Considering that existing-home sales have traditionally represented approximately 85% to 90% of total home sales, even substantial quantities of new-home production are unlikely to produce the inventory needed to meaningfully improve affordability,” Duncan says.
Respondents who said they think mortgage rates will go down in the next 12 months increased from 16% to 18%, while the percentage who expect mortgage rates to go up increased from 45% to 46%. The percentage who believes mortgage rates will stay the same decreased from 38% to 34%. Month over month, the net share of those who said mortgage rates will go down over the next 12 months increased 1 percentage point.
In terms of income, respondents who said their income is significantly higher than it was 12 months ago increased from 19% to 22%, while the percentage who said their household income is significantly lower increased from 10% to 12%. Those who said their household income is about the same decreased from 71% to 65%. The net share of those who said their household income is significantly higher than it was 12 months ago increased 1 percentage point month over month.
Duncan continues: “From a historical perspective, the current housing market is unusual, as demonstrated in part by the HPSI and its recent plateauing. Given the significant home price appreciation and rapid rise in mortgage rates, it is very much a tale of two markets, at least from a consumer perspective. Of course, a third perspective exists among home builders, who are currently thriving amid the surge in demand for new-home construction, a function of the unusual dynamics at play in the existing-home space between would-be sellers and would-be buyers, as well as changing labor market dynamics owing to the ongoing prevalence of remote work.
“In the past, first-time home buyers typically sought to purchase existing homes, which were generally more affordable than new homes. They then invested sweat equity before moving further up the housing ladder, often in response to an expanding family or another significant life event. However, baby boomers’ desire to age in place and the impact of the ‘lock-in effect,’ in which existing homeowners are disincentivized from listing their homes for sale because their existing mortgage rate is well below current market rates, across demographic groups—but particularly among Gen Xers—has thrown a wrench into this historical cycle, making it more difficult for would-be home buyers to find affordable existing-home purchase options. This is driving demand toward newly constructed homes, which, again, has been great news for home builders and the larger economy, at least to this point.”