Homebuyer sentiment plummets to lowest level since May 2020

A record-low share of Americans believe it’s an opportune time to purchase a home, according to new data measuring homebuying sentiment, as affordability constraints limit opportunities for young buyers.

Only 1 in 4 respondents in Fannie Mae’s Home Purchase Sentiment Index released Monday reported it’s a good time to buy a home, with the overall index falling 2.4 points to 71.8 in January. That’s the lowest level since May 2020 and down 5.9 points compared with the same time last year.

The sharp drop in January reflects growing concerns from both homebuyers and sellers, particularly among younger adults. Overall, four of the six-component index measures took a negative turn, with home buying and home-selling conditions, job stability concerns, and mortgage rate outlook seeing the sharpest drops.

“Younger consumers – more so than other groups – expect home prices to rise even further, and they also reported a greater sense of macroeconomic pessimism,” said Doug Duncan, Fannie Mae’s senior vice president and chief economist, in a press statement. “While the younger respondents are typically the most optimistic about their future finances, this month their sense of optimism around their personal financial situation declined.”

There is good reason for concern among buyers. On top of increasing home values and limited housing supply that have put a strain on home affordability for some time, mortgage rates are now rising as more than 45 million millennials enter their prime first-time home buying ages of 26 to 35.

“All of this points back to the current lack of affordable housing stock,” Duncan said, “as younger generations appear to be feeling it particularly acutely and, absent an uptick in supply, may have their homeownership aspirations delayed.”

According to figures provided by Black Knight, homebuyers are facing a severe housing shortage as the U.S. registers a deficit of between 500,000 to 750,000 active listings compared to December 2017-2019 inventory levels.

Additionally, rock-bottom inventory levels accelerated home price growth in late 2021 and early 2022 — with the average home value increasing a record 0.84% last month.

That’s raised the monthly cost of housing for new buyers. For instance, the monthly principal and interest payment to purchase the average-priced home with 20% down reached an all-time high of $1,454, Black Knight found, up $350 — or 32% — from a year ago.

It now takes 25.8% of the median household income to make that payment on a 30-year mortgage, according to Black Knight, up from the 22.4% at the end of Q3 2021.

“Interest rate jumps in recent weeks have pushed us – and quite quickly – above the long-term, pre-Great Recession average payment-to-income ratio of 25%,” said Ben Graboske, Black Knight’s data and analytics president, in a statement. “Straight to the worst affordability levels since 2008.”

To buy lower rates, homebuyers are paying more in points to offset the recent rate jumps, according to Optimal Blue’s rate lock data, further tightening affordability for potential homebuyers, Graboske said.

Mortgage rates recently paused, after reaching the highest point in 22 months in mid-January. Although the rate for 30-year fixed mortgage remained little changed at 3.55% last week, this may not be the case for long.

A surprisingly good jobs report on Friday showed nearly half a million new payroll jobs in January, meaning the Federal Reserve may accelerate plans to raise interest rates to combat inflation, which is running at a 40-year high.

As a result, the 10-year Treasury yield – which fixed mortgage rates typically track – jumped.

“The 10-year Treasury bond yield is at the highest rate since the onset of the pandemic at 1.9%,” Lawrence Yun, chief economist for the National Association of Realtors, said in a statement. “Mortgage rates will follow this upward path as well.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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