10% mortgage rates? Consumers think we’re headed that way
In a recent survey by the New York Fed, consumers said they expect rates to hit 8.7% in a year and 9.7% in three years.
Key points:
- Consumer rate predictions were at an all-time high in the Fed's housing expectations survey.
- The households surveyed also expect home prices to increase at twice the rate they predicted a year ago.
- Fannie Mae's monthly consumer survey shows a similar trend, with sentiment remaining flat as rates remain elevated.
Even though average mortgage rates haven't topped 8% since the year 2000, today's consumers appear to be expecting the worst.
According to the Consumer Expectations Housing Survey put out by the Federal Reserve Bank of New York, the households surveyed expect 30-year mortgage rates to rise to 8.7% in the coming year and 9.7% in three years' time, and they predict housing prices will go up as well. The survey was done in February.
Both mortgage rate estimates are the highest in the survey's 10-year history. At the same time, households on average believe there is a 61% chance that mortgage rates will fall over the next 12 months, which is also a high for the survey.
A backdrop of persistent inflation: The Federal Reserve has signaled its intention to cut interest rates once it has confidence that inflation is moving toward its 2% target — but a surprisingly resilient economy has kept inflation elevated, setting up a situation where rates will remain "higher for longer."
Last week, the 30-year mortgage averaged 7.22%, resulting in steadily increasing inventory while keeping new mortgage application filings low. If mortgage rates were to rise to the levels predicted by consumers in the Fed survey, they would be the highest since 1995.
Homebuyer sentiment plateaus: The expectation that rates will remain elevated is also weighing on consumer sentiment about the housing market. In its monthly survey, Fannie Mae reported a sentiment index of 71.9, unchanged from February.
Sentiment had been steadily rising since November, when it was just 64.3, presumably on the expectation that the Federal Reserve would start cutting interest rates in early 2024, said Doug Duncan, Fannie Mae's chief economist.
"However, recent data showing stickier-than-expected inflation, rising mortgage rates, and continued home price appreciation, appear to have given consumers pause regarding the market's direction," Duncan said.
The sentiment survey also found that only 20% of respondents think it's a good time to buy, while 67% think it's a good time to sell.
Home prices expected to rise: Households in the Fed survey expect home prices to be 5.1% higher in February 2025 — nearly double the expectation reported in last year's survey. In February 2023, consumers believed prices would rise 2.6% over the year.
"The increase is broad based across demographic groups, but particularly large for respondents residing in the South," the report noted.
That perception is in spite of recent data from Realtor.com indicating that the South has seen the largest increase in price reductions over the past year.
Fewer people are moving: The Fed survey also found that only 13.4% of consumers expect to move in the next year, and 24.5% expect to move in the next three years — the lowest percentages ever reported in the survey. Declining mobility has been a trend for this survey for the past 10 years.
But more are hoping to refinance: The percentage of consumers expecting to refinance in the next year rose slightly to 6.3%, perhaps as some hold out hope for rate drops. Still, that figure remains well below the pre-pandemic average of 10.4%.