Home Purchase Sentiment Drops in December amid Rising Mortgage Rates

In December the Fannie Mae Home Purchase Sentiment Index decreased for the first time after four months of improvement. It ends the year at 73.1, well above the 67.2 mark it posted in December of 2023 and a bit higher than where it started the year at 70.7 in January, but it lost some of its positive momentum that had been growing through the end of 2024. Mortgage rates, which grew through December, are likely to blame. Affordability remains the primary concern for prospective buyers, who keep a close eye on rates and base their decisions and survey responses on the cost of financing a home purchase. 78% of respondents to this survey said now is a bad time to buy a home, compared to just 22% who said now is a good time, compared to 77% and 23% last month. Similarly, 63% said now is a good time to sell and 36% said now is a bad time to sell, compared to 64% and 35% in November. The slight uptick in seller pessimism may also be attributed to mortgage rates, but probably has more to do with the retreat in listing prices during December.

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When asked specifically about their expectations for home prices and mortgage rates, survey respondents showed considerable movement in their predictions this month. 27% believe home prices will go down in the next 12 months, which marks the highest share since early 2023, 2 percentage points higher than November, and 10 percentage points more than in June of 2024. 42% believe mortgage rates will go down, a quick drop from the 45% peak in November as those 3 percentage points went instead to the “stay the same” response, which grew from 29% to 32% month-over-month. Normally, mortgage rates staying the same wouldn’t necessarily be a pessimistic outlook, but with rates hovering around 7%, it means more of the same doldrums in the housing market that we saw for most of 2024. 

On top of rates being high, survey respondents anticipate some difficulty obtaining a mortgage. 57% said it would be difficult to get a home mortgage today, up from 55% in November and matching the highest share of that response in surveys throughout 2024. This feeling likely contributed to the course correction in responses to the question of whether respondents would buy or rent their next home. 65% said they would buy a home if they were going to move, down from a peak of 69% in November; and 34% said they would rent if they were going to move, up November’s dip to 30%. The surge of confidence we saw among prospective buyers on the margin of making a home purchase last month has dissipated back to where we saw it for most of the year.

Though respondents seemed wary of homebuying in December, their perspectives on their own financial situations and the outlook of the economy as a whole were much more optimistic. 45% expect their personal finances to get better over the next 12 months, a slight retreat from the post-election spike to 46% in November, but still significantly higher than the 30-35% range the survey saw through most of 2023 and 2024. The share expecting their financial situation to get worse fell to 15%, the lowest in at least 3 years. Similarly, the percentage of respondents who believe the economy at large is on the wrong track fell to 66%, the lowest since December 2021; and the percentage who believe the economy is on the right track grew to 33%, the highest over that timespan. If this general confidence is well-founded, it will be able to overcome the current challenges of the housing market. We hear a lot about the “lock-in effect” in which owners of homes with low mortgage rates are reluctant to sell them and buy a new home with less favorable financing, but if the economy continues to chug along while buyers and sellers feel good about the state of their wallets, time will chip away at the inventory and demand constraints created by today’s high mortgage rates. People will grow their families, take new jobs in different cities, and feel empowered to buy new homes even if rates never make it back to the 2-3% range we saw a few years ago.

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