Americans haven’t felt this optimistic about the housing market in 20 months, a new survey found, but still-high home prices may threaten to blunt that re-emerging confidence.
Fannie Mae’s gauge of housing sentiment jumped 2.9 points in December to 67.2, its highest level since April 2022. The boost was driven by increased optimism that mortgage rates will soften over the course of the new year.
In December, a survey-high 31% of consumers said they expect rates to fall within the next 12 months, up from 22% the month prior and 16% in October. Overall, the full confidence index was up 6.2 points year over year.
While both buyers and sellers felt more optimistic due to declining rates, affordability challenges remain a top concern going into 2024, as experts cited limited inventory that could threaten to push home prices higher.
“Even if rates fall further, we continue to believe that affordability will be tempered in part by elevated home prices, especially for first-time buyers,” Mark Palim, vice president and deputy chief economist at Fannie Mae, said in a statement.
Read more: Mortgage rates decline. Is 2024 a good time to buy a house?
A third of Americans expect rates to drop further this year
After reaching its peak of 7.79% in October, the average on the popular 30-year fixed rate mortgage plunged more than a full point by December and now stands at 6.62%, per Freddie Mac.
The dramatic decline in rates occurred as signs of cooling inflation in recent months fueled market expectations that the Federal Reserve would lower its fed funds rate, which has held at a 22-year high since July to combat inflation.
In December, the central bank signaled up to three rate cuts in 2024, which would bring the Fed’s target interest down to 4.6% — compared to its current 5.25% to 5.5% range.
Read more: What the Fed rate-hike pause means for mortgage rates and loans
While the market’s improved economic outlook has helped ease pressure on mortgage rates, consumers remain stiffly divided on where rates will end up by the end of 2024.
Last month, a third of Americans said they expected rates to drop further within the year, while 31% said they expected rates to lurch higher — and 36% predicted rates would remain the same.
Renters — likely in that first-time buyer pool — expressed far less optimism than homeowners regarding the direction of rates, Fannie Mae found.
“Notably, homeowners and higher-income groups reported greater optimism than renters,” Palim said. “For the first time in our National Housing Survey’s history, more homeowners, on net, believe mortgage rates will go down than go up.”
That optimism among homeowners may finally convince some to list, though sellers have mostly remained hesitant despite sinking rates.
According to Realtor.com, the top reason homeowners refuse to sell unless they need to is because they don’t want to let go of their existing low-rate mortgage. Realtor.com is projecting rates to average 6.5% this year.
By comparison, as of November, roughly two-thirds of homeowners have a rate under 4%, and more than 90% carried a rate less than 6%. That puts the threshold for some homeowners to list pretty high — which may continue to keep inventory tight and home prices elevated for the foreseeable future.
“Homeowners have told us repeatedly of late that high mortgage rates are the top reason why it’s a bad time to buy and sell a home,” Palim said. “And so a more positive mortgage rate outlook may incent some to list their homes for sale, helping increase the supply of existing homes in the new year.”
Palim added: “Of course, that’s likely dependent on the extent to which mortgage rate expectations are met with actual mortgage rate declines.”
Read more: How to buy a house in 2024
Majority of buyers are still pessimistic
Though mortgage rates seem to be on track to continue to decrease, that hasn’t been enough to bolster most would-be buyers’ spirits. Some 83% of consumers surveyed indicated that it’s a bad time to buy.
For many, limited inventory has crushed affordability — keeping home prices elevated despite any relief on the rates side. That much was evident in the latest reading by Realtor.com.
Even though newly listed homes in November were 7.5% above 2022 levels — breaking a 17-month streak of declining listing activity — home prices still grew 1% year over year at a median sale price of $420,000.
While construction activity has been ramping up, that hasn’t been enough to bridge the low inventory gap sustained by the lack of previously owned homes on the market. Overall, inventory is still 37.8% below typical 2017 to 2019 levels, Realtor.com noted.
Potential buyers have narrowed in on this trend, according to Fannie Mae. As for their outlook on home prices, 41% of those surveyed expect prices to go up within the next 12 months, while only 24% expect home prices to decrease.
Still, affordability challenges may not be as bad as last year, economists have noted.
“A bright spot for buyers, many of whom are probably worn out from the persistent theme of a lack of affordability, is that we do expect affordability to start to improve in 2024,” Danielle Hale, chief economist at Realtor.com, said in a press call. “We’re not going to see a big turnaround… but I do think we’re going to see a baby step in the right direction.”
Gabriella is a personal finance and housing reporter at Yahoo Finance. Follow her on X @__gabriellacruz.
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