Most Americans weren’t expecting the big drop in mortgage rates

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Would-be homebuyers grew even more frustrated with elevated home prices and mortgage rates in July, but most didn’t see last week’s big drop in mortgage rates coming, according to a monthly survey of consumers by mortgage giant Fannie Mae.

Fannie Mae’s Home Purchase Sentiment Index (HPSI), which had been climbing back from an all-time low of 56.7 registered in October 2022, fell 1.1 points in July to 71.5.

The HPSI distills six questions from Fannie Mae’s monthly National Housing Survey into a single number, and four of those questions showed consumer sentiment worsening in July: buying conditions, selling conditions, home price outlook and job loss concern.

More than eight in 10 household financial decision makers surveyed by Fannie Mae in July said it was a bad time to buy — a share that’s remained consistent since January 2023, Fannie Mae Chief Economist Doug Duncan said in a statement.

Those who said it was a bad time to buy “continue to point to elevated prices and mortgage rates as the primary reasons for that belief,” Duncan said. “Meanwhile, there seems to be little expectation among the general population that homebuying conditions will improve in the near future: More consumers than not see home prices rising further; and slightly more consumers think mortgage rates will increase, rather than decrease, over the next 12 months.”

The two HPSI components that improved from June to July were mortgage rate outlook and change in household income.

Although the percentage of respondents who expected mortgage rates to ease in the next 12 months increased from 24 percent in June to 29 percent in July, most would-be homebuyers did not see last week’s big drop in rates coming.

Seven in 10 of the 1,055 household financial decision makers surveyed in July (69 percent) thought mortgage rates would either stay the same (38 percent) or go up (31 percent).

In fact, rates on 30-year fixed-rate conforming mortgages hit their 2024 peak of 7.27 percent on April 25, and have been coming down gradually ever since, according to rate lock data tracked by Optimal Blue.

The latest National Housing Survey was conducted between July 1, 2024, and July 19, 2024. During that period, rates on 30-year fixed-rate conforming mortgages averaged 6.84 percent, falling from 7 percent on July 1 to 6.78 percent on July 19, according to Optimal Blue

Last week’s release of two surprisingly weak jobs reports accelerated the decline in mortgage rates, with investors who fund most mortgages now convinced the Federal Reserve will bring short-term interest rates down more quickly this year than previously anticipated.

Rates on 30-year fixed-rate loans hit a new 2024 low of 6.40 percent on Monday, meaning rates have come down by more than half a percentage point since Fannie Mae fielded the latest National Housing Survey.

While mortgage rates have come down, Americans think it’s harder to get a mortgage than it was three years ago, when rates were at historic lows.

Although the question is not factored into the HPSI, 58 percent of those surveyed in July said they thought it would be difficult to get a mortgage, up from 54 percent in June and 37 percent in 2021.

Only 42 percent said it would be easy to get a mortgage in July, down from 46 percent in June and 60 percent in 2021.

While lending has tightened since 2021, mortgage credit availability increased in June for the sixth consecutive month, according to the Mortgage Bankers Association’s most recent Mortgage Credit Availability Index (MCAI).

But the increase in the MCAI was due largely to lenders expanding their offerings of cash-out refinance loan programs, and the index is still hovering near 2012 lows, the MBA said.

As seems to be the case with mortgage rates, many Americans who expect home prices to keep rising may be behind the curve of recent events.

Fannie Mae and MBA economists predict that national home price appreciation will fall to about 3 percent annually by the fourth quarter of next year, which is less than half the current rate. Many local markets could see price declines, as has already been the case in some Sunbelt metros where supply exceeds demand.

But most of those surveyed by Fannie Mae in July (78 percent) think home prices will either go up (41 percent) over the next 12 months or stay the same (37 percent).

While only 21 percent of those surveyed in July expected home prices to fall in the year ahead, that’s up from 17 percent in June. With the percentage of respondents who expect home prices to rise also falling 4 percentage points from June to July, the net share of those who say home prices will go up in the year ahead decreased 7 percentage points from June to July.

Perceptions that mortgage rates and home prices are too high meant 82 percent of those surveyed by Fannie Mae in July said it was a bad time to buy, up from 81 percent in June. With the percentage saying it was a good time to buy falling from 19 percent in June to 17 percent in July, the net share of those who said it was a good time to buy decreased by one percentage point from June to July.

While close to two-thirds (64 percent) of those surveyed said they would buy rather than rent if they were going to move, that’s down from 68 percent in April and 71 percent a year ago.

Duncan said that’s a trend that bears watching.

“The share of respondents who say they would rent, rather than buy, on their next move has been trending slowly upward of late,” Duncan said. “Right now, it’s difficult to tell if this reflects simple buyer fatigue or a greater sense of disenchantment with the market, but we think it could have important implications should the trend continue.”

Duncan pointed to another recent Fannie Mae survey that found 92 percent of consumers said owning a home is important, but many are overestimating minimum down payment and credit score underwriting requirements.

Nine out of 10 consumers overstated or didn’t know the minimum down payment required for most mortgages, and many were also confused about underwriting criteria like minimum credit scores and maximum debt-to-income ratios, Fannie Mae’s Mortgage Understanding Study found.

While July might have been a bad time to buy, most Americans (65 percent) agreed it was a good time to sell — although the net percentage who said it was a good time to sell dropped 2 percentage points from June to July.

One explanation could be that inventories are swelling in some markets as would-be homebuyers balk at asking prices and homes spend more days on market.

Almost two-thirds (64.7 percent) of homes for sale in June had been listed for at least 30 days without going under contract, with the share of “stale” listings up in 44 out of the 50 most populous U.S. metros, Redfin reported last month.

Speaking at Inman Connect Las Vegas last week, Zillow Senior Economist Orphe Divounguy said it will be up to agents to bring sellers back down to Earth, if they have unrealistic expectations about what prices the market will bear.

“While we’re seeing signs that affordability may be improving in certain parts of the country as supply slowly comes online, household incomes remain stretched relative to would-be mortgage or rent payments, and our latest survey once again reflects real consumer frustration with the housing market,” Duncan said.

The HPSI is up 4.7 points compared to the same time last year. While the index has a long way to go to get back to pre-pandemic levels, it’s only dipped below 70 once this year — in May, when it hit 69.4.

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Email Matt Carter