FED - Expect home prices to rise at a faster pace than expected

NEW YORK—Expect home prices to rise at a faster pace than expected, according to a new report from the Federal Reserve Bank of New York.

The New York Fed’s 2022 SCE Housing Survey shows that households expect home prices to rise at a faster pace over the coming twelve months than New York Fed experts forecast last year.

However, rent change expectations were higher than home price expectations over both the short- and medium-term. Households also expect relatively low home value appreciation over the next five years. Owners, and especially renters, expressed a lower expectation of buying a home if they were to move over the next three years. Renters also reported a marked decline in their expectations of ever owning a home, the Fed stated, citing report data.

“A large majority of households continue to view housing as a good financial investment, although the share characterizing housing as a ‘somewhat good’ or ‘very good’ investment declined slightly from a February 2021 series high, and the share describing it as ‘somewhat bad’ or ‘very bad’ rose to its highest level since 2018. The results suggest that households see further substantial house price growth in the near term, but a pronounced slowdown in price growth in subsequent years,” the Fed said.

Key findings:

Home Prices/Rents

• Average home price change expectations at the one-year horizon rose sharply relative to last year. The mean one-year ahead expected change in home prices was 7.0%, over a percentage point above last year’s reading of 5.7%, and the highest level since the inception of the survey in 2014.
• Households’ home price change expectations for the five-year horizon were unchanged from last year. Households expect prices to rise by 2.2% per year on average for the next five years. Combined with the expectation of a 7.0% increase over the next twelve months, this suggests that households expect a pronounced slowdown in price growth after next year.
• Rent change expectations were higher than home price expectations over both horizons. On average, households expect rent increases of 11.5% over the next 12 months, compared to 6.6% in February 2021. Over the next five years, households expect annual rent increases of 5.2%, up from 4.4% a year ago. Taken together, these numbers suggest a spike in rents in the near term, followed by more moderate growth in subsequent years.

Housing Outlook

• While attitudes toward housing as a financial investment remained strongly positive, they weakened slightly from the previous year, as 71.0% of all respondents characterized that buying property in their zip code as a “very good” or “somewhat good” investment. This is slightly below the series high of 73.6% in February 2021. The share of respondents reporting that housing is a “bad” or “somewhat bad” investment rose to 9.9% from 6.5% a year ago, the New York Fed stated.
• The average expected probability of buying a home if the household were to move within the next three years fell sharply to 60.7%, down from 68.5% in 2021. This decline marks the first reduction in this series since the survey’s inception in 2014. The average expectation of buying a home if the household moves is at its lowest level since 2015.
• Renters reported a sharp decline in their probability of owning a home in the future, from 51.6% in 2021 to 43.3% this year. The current reading is a series low and is well below 50% for the first time since 2014. 

Mortgage Rates

• On average, households perceive that mortgage rates were unchanged relative to pre-pandemic levels at 5.9%, but expect them to rise in the future. Households now expect mortgage rates to rise sharply in the coming years, to 6.7% a year from now and 8.2% in three years’ time.