Home Prices Drop, Boosting Consumer Confidence in Housing Market

Mortgage rates are still relatively high compared to a year ago, but home prices have been falling since June. This has made consumers feel more confident about the housing market, which had been overheated and highly competitive.

The Fannie Mae housing sentiment index showed an improvement from November to December, though it remains lower than it was a year ago. The index dipped to a record low in October and November, but has since recovered slightly.

The percentage of respondents who say now is a good time to buy a home is still low, at just 21%. However, this is up from 16% in October. The percentage of those saying now is a bad time to buy a home has decreased.

The sentiment among respondents regarding selling continued to drop. The percentage of those saying now is a good time to sell decreased to 51% from 54%, while the percentage saying now is a bad time to sell increased.

More consumers now believe that home prices will fall in the next 12 months, and more also said they believe that mortgage rates will come down. This change in sentiment may be due to the current state of the economy and the housing market.

Prices in November were 2.5% lower than the spring 2022 peak, according to CoreLogic. They were still over 8% higher year over year, but that annual comparison is now half of what it was in June.

The average rate on the popular 30-year fixed mortgage has been fluctuating in recent months, hitting a high of 7.37% in October before falling back into the mid-6% range in November and December. As of last Friday, the average rate had dropped to 6.2%, according to Mortgage News Daily.

As we enter 2023, affordability is expected to remain the top challenge for potential homebuyers. Even small declines in rates and home prices may not produce sufficient purchasing power from the perspective of the buyer. At the same time, existing homeowners may continue to wait to list their properties. Many have already locked in lower mortgage rates, creating minimal incentive to sell and buy again until rates are more favorable.

Duncan said that the tension will continue to drive home sales lower in the coming months.

The confidence in housing is further bolstered by the fact that fewer consumers are concerned about losing their jobs in the next 12 months. However, fewer people are also reporting that their household income is significantly higher than it was a year ago.

As the housing market enters its historically slow winter season, some agents are reporting that activity has slowed down significantly. Pending home sales, which represent signed contracts on existing homes, dropped more than expected in November, suggesting that closed sales in January will be lower as well. This slowdown in activity is likely to continue throughout the winter months.

Sellers who are still trying to sell their homes are offering more and more concessions in order to entice buyers. According to Redfin, a real estate brokerage, 42% of sellers did so in the fourth quarter, the highest share in recent years. This is up from just over 30% in both the previous quarter and the fourth quarter of 2021, and is higher than the previous high of 40.8%, notched during the three months ending July 2020, at the start of the Covid pandemic.