More consumers are coming around to economists’ views that home prices and mortgage rates probably peaked last year, according to a monthly survey by Fannie Mae.

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Homebuyer sentiment ticked up slightly for the second month in a row in December as consumers began coming around to the views of economists that home prices and mortgage rates probably peaked last year, according to Fannie Mae’s monthly National Housing Survey.

Despite the improvement, at 61.0 Fannie Mae’s Home Purchase Sentiment Index (HPSI) remained near October’s all-time low of 56.7 after gaining 3.7 points from November to December, the mortgage giant said in releasing the latest survey results Monday.

Source: Fannie Mae National Housing Survey

Doug Duncan

“In December, the HPSI inched upward slightly, as consumers reported increased expectations that mortgage rates and home prices may decrease over the next year – perhaps reflecting recently observed declines in mortgage rates and average home prices,” said Fannie Mae Chief Economist Doug Duncan in a statement. “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.”

The HPSI is based on six questions from Fannie Mae’s monthly National Housing Survey of 1,000 homeowners and renters, distilling their answers into a single number. Factors include whether consumers think it’s a good or bad time to buy or to sell a house, what direction they expect home prices and mortgage interest rates to move, how concerned they are about losing their jobs and whether their incomes are higher than they were a year ago.

With the Federal Reserve signaling that it’s close to ending its campaign to fight inflation by raising short-term interest rates, economists at Fannie Mae and the Mortgage Bankers Association project mortgage rates will come down this year and next.

Fannie Mae forecasters project rates on 30-year fixed-rate loans peaked at 6.6 percent during the fourth quarter of 2022 and could dip below 6 percent by the first quarter of 2023. In a Dec. 19 forecast, economists at the Mortgage Bankers Association projected rates will fall below 6 percent by the second quarter of 2023 and back into the 4 percent range in 2024.

Source: Fannie Mae National Housing Survey

A small, but growing number of consumers are starting to come around to the view that mortgage rates have peaked and could continue to ease. While only 14 percent of consumers surveyed by Fannie Mae in December think mortgage rates will come down in the next 12 months, that’s up from 10 percent in November. And the share of respondents who think mortgage rates will go up in 2023 decreased to 51 percent, down from 62 percent in November.

With 31 percent expecting mortgage rates to stay the same, up from 24 percent in November, the net share of those who expect mortgage rates to go down over the next 12 months has increased dramatically – by 15 percentage points from November to December.

Source: Fannie Mae National Housing Survey

For would-be homebuyers, last year’s sharp run-up in mortgage rates was made even more painful by double-digit home price appreciation in many markets during the pandemic.

Fannie Mae economists project annual home price appreciation will cool to the single digits during the last three months of 2022 and turn slightly negative during the second quarter of 2023 and remain there through 2024.

Economists at the mortgage giant don’t expect annual home price declines to exceed 1.5 percent at the national level. But some local markets are expected to see sharper declines, while others could continue to see prices appreciate.

“As we enter 2023, we expect affordability to remain the top challenge for potential homebuyers, as even small declines in rates and home prices – from the perspective of the buyer – may not produce sufficient purchasing power,” Duncan said.

Only 30 percent of consumers surveyed in December think home prices will go up in the next 12 months, while 37 percent are expecting prices will come down, up from 34 percent in November. With the share who think home prices will stay the same decreasing to 29 percent, the net share of those who say home prices will go up decreased 3 percentage points from November.

Source: Fannie Mae National Housing Survey

While only 21 percent of those surveyed in December said it was a good time to buy, that’s up from 16 percent in November. And the percentage who said it’s a bad time to buy decreased to 76 percent, down from 76 percent the month before. The net share of those who said it was a good time to buy increased 8 percentage points month over month.

Consumers see improving conditions for buyers coming at the expense of sellers. While a slight majority (51 percent) of those surveyed in December thought it was a good time to sell a house, that’s down from 54 percent in November. With 42 percent saying December was a bad time to sell, up from 39 percent in November, the net share of those who said it was a good time to sell decreased 6 percentage points month over month.

Duncan said 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.”

Source: Fannie Mae National Housing Survey

Asked whether they’d buy or rent if they were going to move, 62 percent of consumers said they’d buy — a 6 percentage point decline from November and the lowest reading since December 2020.

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Email Matt Carter

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