Homebuyer Plans Dip, But 'There's Plenty Of Room For Prices To Drop': Confidence Grows For Future Market Recovery

In a housing market marked by high prices and high mortgage rates, potential homebuyers are showing increased caution, according to the Conference Board’s latest Consumer Confidence Index.

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The overall Consumer Confidence Index rose to 103.3 in August, up from a revised 101.9 in July. However, there is a more nuanced story beyond the headline figure as it pertains to the housing market. On a six-month moving average, home purchasing plans fell to a 12-year low, signaling hesitancy among potential buyers, according to the Conference Board.

“Compared to July, they were more positive about business conditions, both current and future, but also more concerned about the labor market,” Dana Peterson, Chief Economist at The Conference Board, noted in the report. 

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That uncertainty is more evident in the housing sector. Despite a recent dip in mortgage rates, from 7.2% to 6.4% over the past three months, buyer demand has not rebounded as some analysts expected. Nick Gerli, CEO of Reventure, said on X, formerly Twitter, that mortgage purchase applications are currently 9% below last year’s levels and remain at multi-decade lows.

“Rates are going to need to drop by a lot for it to make an impact on buyers. Probably into the low 5s,” Gerli said. He attributes the lack of response to the fact that current rates, while lower than recent peaks, are still much higher than the 3-4% range seen from 2018 to 2021.

The affordability crisis in housing is evident in current market conditions. Gerli estimates that the typical mortgage cost now consumes over 40% of the U.S. median household income. “That’s simply not sustainable,” he said.

However, the Conference Board report and Gerli’s analysis suggest reasons for cautious optimism. Peterson noted that average 12-month inflation expectations dropped to 4.9% in August, the lowest since March 2020. That could potentially ease some pressure on the housing market in the long term.

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Gerli sees three main mechanisms for improving housing affordability: lower prices, lower mortgage rates and higher incomes. He predicts that all three will need to work together over the next 3-4 years to bring the market back into balance.

“There’s plenty of room for prices to drop,” the Reventure CEO said, pointing out that inflation-adjusted home prices are at their highest levels in 130 years. He suggests that existing homeowners have sufficient equity to absorb meaningful price cuts, which could reignite buyer demand more quickly than waiting for income growth or further rate drops.

The Conference Board’s data shows some regional and demographic variations in consumer sentiment. Confidence declined among consumers under 35 and those earning less than $25,000 annually. Conversely, it increased for those 35 and older, with consumers earning over $100,000 remaining the most confident on a six-month moving average.

Looking ahead, the housing market’s recovery may be gradual. Gerli estimates that mortgage rates might not drop below 6% until early 2025, based on current Federal Reserve projections.

That suggests that real improvements in affordability could be a year or more away.

While the immediate outlook for homebuyers remains challenging, eventual rate decreases, potential price adjustments and ongoing wage growth bodes well for a more balanced market in the coming years. 

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