Homebuyer Confidence Increases — Is The Housing Market Rebounding? Fannie Mae's Home Purchase Sentiment Index increased by 3.7 points last month. While still low overall, it raises questions about the direction of home prices this year.

In This Article

Prospective homebuyers are getting a little more hopeful that mortgage rates will come down, and a greater share is feeling confident that it’s a good time to buy a home, according to the Fannie Mae Home Purchase Sentiment Index, which has recovered slightly from its all-time low in October. The data comes from a survey of about 1,000 homeowners and renters who were asked more than 100 questions about their attitudes toward home buying and the economy. 

The Fed has indicated that slower rate hikes are on the way and may even cease once rates reach just over 5% since December data shows inflation is moderating. Meanwhile, many markets are already shifting into the hands of the buyer, with sellers offering more concessions, and the Case-Shiller Index shows home prices declining month-over-month, though they’re still elevated compared to a year ago. More prospective homebuyers are betting that the affordability crunch will ease, likely as a result of these changes. But if their optimism translates to increased demand, that could cause prices to rise again. 

More Respondents Believe It’s a Good Time to Buy

When the Home Purchase Sentiment was at its lowest, only 16% of respondents believed it was a good time to buy a home. But in December of 2022, 21% of respondents said it was a good time to purchase real estate. Meanwhile, the share of respondents who said it was a bad time to buy fell from 79% to 76% in December. 

Redfin reports there are early indicators of improving homebuying sentiment — both home tour requests and mortgage purchase applications have increased since October. Declining mortgage rates have reduced the typical homebuyer’s mortgage rate by nearly $300, making homebuying possible again for more families. But the uptick in demand hasn’t yet resulted in more pending home sales. 

Is the rising Home Purchase Sentiment Index reflective of market conditions, or are homebuyers just relieved that mortgage payments have become more affordable? The availability of an affordable mortgage payment doesn’t itself indicate a wise time to invest. It’s typically best to invest when there’s plenty of inventory, and home prices are at their lowest. If you can simultaneously capture low mortgage rates, that’s the icing on the cake. But of course, low mortgage rates can increase the demand for homes, which can cause prices to rise. Similarly, if most homeowners believe prices have hit their trough and decide it’s a good time to enter the market, that can cause price increases. 

Analysts from top firms agree home prices are still poised to decline in many markets, but if homebuying confidence grows, the demand could act as a floor for price drops or even cause prices to rise. Meanwhile, most economists don’t expect the Fed to cut rates until the end of 2023, so mortgage affordability is still a problem for prospective homebuyers. 

The best time to buy may be in the future — but whether prospective homebuyers should wait is highly location-dependent. For example, Redfin Economics Research Lead Chen Zhao says prices in certain cities, like San Francisco and Austin, have already fallen from a year ago. Now could be the right time to act in these markets since prices could turn around as demand picks up. 

Fewer Respondents Believe It’s a Good Time to Sell

The shift to a buyer’s market is reflected in seller sentiment as well. 51% of homeowners now think it’s a good time to sell, down from 54% in November of 2022. By contrast, in December of 2021, 76% of respondents said it was a good time to sell — what a difference a year can make. The share of homeowners who said it was a bad time to sell also increased from 39% in November to 42% in December. 

Most sellers probably wish they could time-travel to when mortgage rates were low and demand was sky-high. At that time, sellers could expect multiple over-asking offers. Now, many sellers are offering mortgage-rate buydowns or even lowering their listing prices as homes remain on the market longer. It’s not an ideal time to move, especially since home sellers face high mortgage rates on a new property. But sellers who can wait to sell can look forward to a predicted recovery in 2024 or 2025, along with more affordable rates. 

More Respondents Expect Mortgage Rates and Home Prices to Drop

While the percentage of respondents who said home prices would go up in the next 12 months remained unchanged from November at 30%, 37% of respondents now expect prices to go down, an increase from 34% in November. Meanwhile, 29% of respondents expect prices to stay the same, down from 30% in November. The split in consumer expectations may partially be due to differences in home price predictions for different markets.

The share of respondents who expected mortgage rates to come down in the next 12 months increased from 10% to 14%, while the percentage of respondents who believed mortgage rates would rise further decreased from 62% to 51%. 31% of respondents expect mortgage rates to stay the same over the next year. Many economists are also split in this case. For example, Morningstar expects the Fed to cut the federal funds rate in 2023, which would cause mortgage rates to drop. But Goldman Sachs predicts that there won’t be a rate cut until 2024. 

Job Confidence Is Growing

The civilian unemployment rate was 3.5% in December, a slight decrease from 3.7% in November. Job gains were significant in hospitality and healthcare, while industries that exhibited declines showed only a slight change. Consumer sentiment reflects the robust job market. The Home Purchase Sentiment Index reveals 82% of respondents are not concerned about job loss, up from 78% in November, while the share that are concerned about unemployment dropped from 21% to 17%. Still, many economists believe there’s cause for concern that the unemployment rate will creep up. 

Why It Matters

The Fannie Mae Home Purchase Sentiment Index only increased by 3.7 points in December, and at 61 points, it’s only slightly higher than the all-time low. Consumers do not favor homebuying nearly as much as they did during the first half of 2022. Still, even a slight reversal in sentiment could be an early sign of recovery. For example, the Home Purchase Sentiment Index increased slightly in May of 2020, a month before existing home sales began to rebound. 

Recovery Means Trouble for Homebuyers

If prospective buyers who had previously decided to wait have more confidence now, that could mean a slight rebound in demand. A growing number of prospective homebuyers would mean renewed competition for the supply of available homes. If homebuyer sentiment ramps up enough, the bidding wars that became common during the pandemic could return, causing prices to wriggle out of reach for buyers at a time when mortgage rates remain relatively high.

 

Still, the outlook for the housing market remains unpredictable. Investors are getting more hopeful that the Fed may achieve a soft landing. But if unemployment were to rise and consumer spending were to pull back, it’s still possible the U.S. could land in a recession. In fact, economists are now predicting the probability of a recession in 2023 at 70%, an increase from previous months, according to a Bloomberg poll. 

That uncertainty may divide prospective homebuyers. Some may rush back into the market as mortgage rates become more affordable, while others may be more cautious, anticipating future price drops. Where the majority falls may, in part, determine the future direction of housing prices. 

To be uniquely aware that a market has hit bottom would be the ideal situation for an individual homebuyer. That individual could buy without competition and capture the lowest price. The problem is most market indicators accessible to an individual homebuyer are available to everyone else, too. 

It’s important for investors to use as much data as possible to stay ahead of the curb. If you can beat the trend and buy just before buying gets popular again, you can reap the rewards. The Home Purchase Sentiment Index is merely one measure of demand, and so far, its uptick hasn’t impacted sales activity. But as an early indicator, it’s important to pay attention to, especially in those markets that have cooled the fastest. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.