Americans bracing for mortgage rates as high as 10%

Americans bracing for mortgage rates as high as 10%.

Americans are once again preparing for another round of increased housing costs, as renters increasingly believe they may never be able to afford a home, according to the Federal Reserve Bank of New York on Monday.

In its latest Survey of Consumer Expectations, the regional Fed bank found that respondents at the beginning of the year anticipated higher near-term increases in both rent and home prices, although they did foresee some relief in the longer term for home prices. Households also expect no relief in home borrowing costs and are actually bracing for the highest levels of mortgage rates in a survey that dates back to 2014.

The New York Fed reported that in February, respondents predicted home prices would rise by 5.1% in a year, up from the 2.6% predicted a year ago. However, five years from now, respondents anticipate home prices to rise by 2.7%, down from 2.8% in last year's poll.

Regarding rentals, respondents expect costs to rise by 9.7% in a year, the second-highest reading in the survey's history, up from 8.2% in the poll conducted in February 2023. Five years from now, survey respondents anticipate rent to remain "essentially flat," at 5.1%, according to the New York Fed.

The report also found that respondents still hold a "strongly positive" outlook on housing as an investment.

Furthermore, they expect mortgage rates, already high, to increase further. Respondents predict that the average mortgage rate will be 8.7% in a year and 9.7% in three years, both at record levels. As of May 2, home lender Fannie Mae reported that the average 30-year fixed mortgage rate stood at 7.22%, significantly higher than the sub-3% levels available just a few years ago.

However, renters are becoming less optimistic about ever owning a home. The report noted a record low of respondents who see good odds of buying a house in the future.

The New York Fed report suggests that the U.S. central bank may face new challenges in bringing inflation back down to its 2% target, with the expected cost of housing still rising strongly. The Fed has been surprised by strong price pressures in the first months of this year, raising questions about whether it will be able to lower interest rates in 2024. High mortgage rates resulting from Fed policy have significantly dampened activity in the housing market.

Speaking after a Federal Reserve meeting last week where rates were held steady, Fed Chairman Jerome Powell stated that he still expects price pressures to ease as the year progresses. However, he also anticipates housing factors to continue contributing to price pressures, stating that "there are a number of areas in the economy where there are just lag structures built into the inflation process, and housing is one of them."

Powell highlighted the process of setting rental rates as a particular issue, noting a slow-moving process where it takes time for rents to rise in response to higher inflation and for those elevated increases to then decrease.

The New York Fed report also mentioned that high mortgage rates are currently locking homeowners into houses that currently benefit from the low rates seen during the coronavirus pandemic. A blog post from the bank noted that "close to half of respondents assess their probability of moving in the next three years to be less than 10%," due to the costs associated with buying a new house.