Americans are starting to
lose optimism in the housing market just as sentiments had been looking up. Fewer
people think now is a good time to buy or to sell a house, according to a monthly
survey in June from Fannie Mae. Additionally, the survey found 56 percent of
respondents expect rents to rise, up 8 percentage points in one month to a
survey high.
Consumer sentiment hit a high
in the May survey, boosted by rising home prices and record low mortgage rates.
With mortgage rates rising well over a full percentage point in the past two
months, 57 percent of survey respondents expect them to go even higher. That's
the highest level in the survey's three-year history.
Mortgage rates are up 45
percent in just the past six weeks. Consumers have enjoyed a long period of
government-induced complacency in the mortgage markets, because rates were so
low and there was very little volatility. In other words, there was virtually no
risk.
The rise in mortgage rates
and expectation of further jumps may have an impact in the short-term prompting
some individuals to feel an urgency to buy. According to Doug Duncan, chief
economist at Fannie Mae, "Consumers may recognize that today's still
favorable mortgage rates and homeownership affordability levels will recede
over time. Given rising home- and rental-price expectations and improving
personal financial attitudes, more prospective homebuyers may be deciding that
now is the time to get off the fence."
That could be why pending
home sales, that is, signed contracts to buy existing homes, rose dramatically
in May to the highest level in over six years, according to the National
Association of Realtors. Potential buyers don't want to suddenly be priced out
of the market by both rising prices and rising rates.
Another troubling indicator
in the housing sector is cancellations of new home orders. Buyers of new
construction homes sign contracts for homes that will not be delivered for three
to nine months. Since the closing is so far off, they do not lock in mortgage
rates when the contract is signed. Home builders may face significant
cancellation orders with the recent spike in rates.
A similar situation to the
expiration of the home buyer tax credit may emerge where home prices drop due
to the increase in rates. A drop in home prices comes at an inopportune time
when millions of mortgage-holders are finally coming out from being underwater
on their loans. The number of borrowers owing more than their homes are worth
dropped by 47 percent in first quarter versus the same time period last year. 7.2
million mortgages are still underwater, down from a high of 17 million in 2011.
Increased home equity has also
helped to push mortgage delinquencies down. They are down 15 percent in May
from Jan. 1, the biggest drop in 11 years, according to LPS. If home price
gains stall or if prices drop, that trend will reverse. Rising home equity has
allowed more borrowers to sell homes they don't want or can't afford.
The short-term benefit
of the lift in home sales due to rising rates and concerns of falling affordability
may be dampened by a long-term sag due in part to a drop in consumer sentiment.