Homebuyers are gonna need a pep talk — here’s why 

Potential buyers are feeling pessimistic about their chances of closing a deal anytime soon.

Fannie Mae's latest Home Purchase Sentiment Index dropped 1.2 points from April to 65.5 in May as buyers continued to deal with affordability challenges. The "good time to buy" component was near the lowest level in the survey's 12-year history, with 80% of those surveyed stating it was a bad time to buy.

And consumers don't seem to think the situation will improve in the near term, reporting lowered expectations about where the market is going. A majority surveyed not only expect home prices to go up, but also believe mortgage interest rates will rise, making it even more difficult to buy a home. 

"Notably, the same factors impacting affordability may also be affecting the perceived ease of getting a mortgage. This was particularly true among renters: 81% believe it would be difficult to get a mortgage today, matching a survey high," said Mark Palm, Fannie Mae deputy chief economist.

Even with increasing pessimism about where prices and interest rates are going, some buyers are still willing to throw their hat in the ring. A recent survey from the National Association of Home Builders found that 18% of adults in the U.S. plan to buy a house in the next 12 months — the highest share ever for the survey, which began in 2018.

Why do consumers think interest rates will go up?

In Fannie Mae's survey, only 19% of respondents said they expect mortgage rates to fall in the next 12 months, a decrease from 22% the previous month, while the percentage who expect rates to go up increased from 47% to 50%.

That's in contrast to some real estate economists, who at the end of last year were predicting that mortgage interest rates would decline in the second half of 2023. As the months have ticked by, however, and rates have failed to sustain a downward trend, consumers may be feeling less inclined to expect a significant dip in the coming months. 

George Ratiu, chief economist for Keeping Current Matters, noted that while the Federal Reserve appears to be leaning toward pausing its interest rate hikes for June, "additional hikes are on the table for the second half of 2023" as inflation remains well above the target rate of 2%. More interest rate increases from the federal government could mean higher mortgage rates.

A recent article from The Mortgage Reports found a mix of forecasts among real estate economists, with several noting the uncertainty in the economy could make rates volatile in the coming weeks.

More consumers expect home prices to rise — but many still predict declines

The Fannie Mae survey found the percentage of respondents who say home prices will go up in the next 12 months increased from 37% to 39%, while the percentage who say home prices will go down decreased from 32% to 28%. Not surprisingly, more of those surveyed thought that it would be a good time to sell in the next year.

A Buyer Insights report from Auction.com found a similar distribution among distressed property buyers: 32% expect prices to go down (nearly double the percentage from a year ago), while 37% expect home prices to increase by more than 5%.

Like consumers in the two surveys, economists are split on the direction of home prices, with some expecting a decline of nearly 3% in the next year and others forecasting growth of more than 5% by the end of 2023.

Some industry observers believe that although growth is slowing, national price declines are unlikely — and wishful thinking on the part of hopeful buyers. In a tweet, Keeping Current Matters Founder Steve Harney offered a tongue-in-cheek response to the Fannie Mae findings: "More than 1 out of 4 of your family, friends, neighbors and people you see at church think prices are going to depreciate this year. Please talk to them…PLEASE!"

Although consumers may be feeling somewhat downbeat about the housing market, they remain bullish about the labor market. According to the Fannie Mae report, 77% of respondents said they are not concerned about losing their job in the next 12 months.