Consumers Are Gaining Confidence That The Housing Market Will Turn In Their Favor

Consumers are becoming more optimistic that the housing market will turn in their favor in the coming year, though affordability concerns continue to weigh them down.

Fannie Mae’s Home Purchase Sentiment Index (HPSI) jumped to its highest level since May 2022 in April, up 5.5 points to 66.8. This is the largest increase in more than two years.

Every component increased month-over-month as consumers start to see the light at the end of the tunnel for their homebuying struggles.

As the market is still seized by affordability concerns, the components remained negative, with the full index down 1.7 points YOY. However, more respondents say they expect the tide to turn in their favor.

The component associated with mortgage rate expectations saw a huge change, with 22% of consumers saying they expect rates to decline. While this is still a small portion of respondents, it is a leap from last month, when only 12% felt the same.

“An increased number of respondents indicated they think mortgage rates will go down over the next year, a belief that could be due to a combination of factors, including an awareness of decelerating inflation, market suggestions that monetary conditions will ease in the not-too-distant future, and, of course, actual mortgage rate declines during the month,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist.

But Duncan emphasized that uncertainty remains high and this month’s optimism could peter out.

Home prices are the main sticking point for potential homebuyers, even in a rate-sensitive environment. More respondents said they expect home prices to rise in the next year–37%, up from 32% in March– than think they will deflate.

Home prices appear to have bucked their downward trend, rising across the country for a third consecutive month, according to data from Black Knight.

“[J]ust five months ago, prices were declining on a seasonally adjusted month-over-month basis in 92% of all major U.S. markets. Fast forward to March, and the situation has done a literal 180,” said Black Knight Vice President of Enterprise Research Andy Walden.

Stock shortages are expected to keep prices elevated, especially for starter and lower-priced homes, while the most expensive homes on the market see price declines.

“Until affordability improves for a larger swath of the homebuying public, we believe home sales will remain subdued compared to previous years,” Duncan said.

Part of the problem is a lack of small, inexpensive homes that could be reasonably sold for cheap. Increasing land and material prices – combined with picky community rules requiring things like two-car garages or homes of a certain size – have made it impossible to build a small, bare-bones house that could sell for $200,000 or less.