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Home Purchase Sentiment Stable But Remains Low

Consumer sentiment toward housing remained relatively stable in May, but is near lows not seen since the start of the  COVID-19 pandemic, as measured by the Fannie Mae Home Purchase Sentiment Index (HPSI). The index dropped 0.3 points to 68.2 and is 11.8 points lower than the same time last year. Previously, consumer sentiment toward housing hit a low of 63.0 in April 2020 as uncertainty about what the pandemic would mean for housing markets and the economy weighed on the outlook. More recently, buyer confidence has been impacted by rising home prices, increasing interest rates, and inflation. While both seller confidence and the inventory of homes for sale have improved, the number of homes for sale still remains 48.5% below early pandemic levels in May 2020. 

Homebuying Sentiment Continues to Decline

The share of survey respondents saying it is a bad time to buy outnumbered those saying it is a good time to buy almost five-to-one, leading to the largest net bad time to buy response recorded since 2010 (-62%). Homebuyers have been facing a large run-up in home prices, interest rates, and inflation, as well as limited inventory of homes for sale, for several months now. While recent housing data shows that the number of homes actively for sale has finally increased compared to last year (+8.0% year-over-year in May–the first such increase in 3 years), an increase in inventory won’t immediately boost homebuyer confidence as overall levels still remain low and affordability challenges persist. However, the increase in inventory may ultimately help moderate the double-digit home price growth we’ve seen for many months now.  

The HPSI survey reveals that the net share of Americans who believe home prices will go up over the next 12 months increased by another 5 percentage points compared to last month. Additionally, the net share of respondents who think mortgage rates will go down within the next 12 months also increased slightly by two percentage points. While declining rates would be good for long-term housing demand, if consumers believe they will go down in the future, they may delay purchases now, further moderating short-term housing demand. That said, while the net share expecting rates to go down increased, the vast majority (70%) still believes rates will go up. This means that mortgage rate expectations are more likely to be a boost to near-term housing demand as opposed to a drag. 

Seller Sentiment Bounces Back

According to the survey, the share of respondents saying it is a good time to sell outnumbered those saying it is a bad time by four-to-one in May. The net share of respondents saying now is a good time to sell increased by 6 percentage points compared to the previous month. In other words, consumers largely agree that the current housing market favors home sellers. These findings align with inventory data showing that homeowners may be acting on these conditions. Year-over-year inventory growth for the first time since mid-2019, with newly listed homes rising by 6.3% on a year-over-year basis. However, it is important to note that many sellers are themselves buyers, some of whom are locked-in to lower mortgage rates on their current home or are having trouble finding a new home amid still-low home inventory. 

Sentiment Toward Employment and Future Income Declines

In general, consumers have a positive view of the current labor market, but the survey results reveal that this month’s reading was less optimistic than in recent months. The number of respondents saying they are not concerned about losing their job in the next year outnumbered those saying that they are concerned by more than five-to-one. However, the net share who say they are not concerned about losing their job has decreased by 8 percentage points over last month. While employment rose by 390,000 and the unemployment rate remained at an unchanged low 3.6% rate in May, these survey numbers could reflect consumer concerns that the labor market will lose momentum later in the year, especially in light of the Federal Reserve’s planned tightening. Nonetheless, the Fed’s plan suggests they believe the labor market can withstand a couple more rate hikes to help tame inflation. Meanwhile, the net share of respondents who say their household income is significantly higher than it was 12 months ago decreased by 2 percentage points month over month as inflation begins to eat away at household budgets and real income growth. 

What This Means for Housing This Season

Consumers are still struggling with an affordability crunch as they juggle rising home prices, interest rates, and inflation outpacing income growth. While the housing market is showing signs of moderation through growing inventory and also an increase in price reductions, listing price growth overall remains sticky as sellers take time to adjust to market conditions. Home sales are expected to continue to moderate compared to last year’s historic pace. However, a pull-back in feverish demand and adjustment in seller expectations could start to tip the market back toward a more balanced state toward the end of the year. Homebuyers who are still hanging in there may find better options later in the year in what is typically considered the best time to buy.  

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