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People Hate Inflation Says Fannie Mae Chief Economist, After 70% of Consumers Say the Economy is Off-Track

Fannie Mae Chief Economist Doug Duncan explains why consumers sentiment is low on the economy yet stable on employment and income.

December 8, 2021
December 8, 2021
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Despite a decidedly negative outlook on where the economy is headed, consumer sentiment about buying a home remained relatively unchanged from October to November.

Seventy percent of consumers in Fannie Mae’s National Housing Survey (NHS) said the economy is on the wrong track. That’s the highest share since November 2011 and a 5 percentage point increase from the previous month.

But you may not have guessed that based on relatively mild responses from the same consumers regarding homebuying, income, and job stability. The Home Purchase Sentiment Index (HPSI) – a single number to represent overall homebuying sentiment – decreased just 0.8 points from 75.5 in October to 74.7 in November. 

Employment and income sentiment didn’t exactly scream economic concern either. Eighty-three percent of employed respondents were not concerned about losing their job in the next 12 months and 23% said their household income was significantly higher than last year, while 13% who said it was significantly lower.

Fannie Mae Chief Economist Doug Duncan told that the reason for this disconnect is clear.

“People hate inflation,” Duncan said. “We didn’t ask them directly about inflation in the survey, but you have to read between the lines. 

“They’re recognizing that all this stimulus generates money, employment is picking up, and unemployment is falling. So we feel more secure in our job and income, but that’s only true if the value of their income stays constant, and inflation eats away the value of income.”

Inflation threatens to drive up mortgage rates and home prices, making buying a home less affordable. The Federal Reserve has been vocal about its plans to combat inflation by accelerating the rate of its taper plan, which would drive up mortgage rates. Meanwhile, demand for real estate as a hedge against inflation is growing, especially on Wall Street, contributing to sustained price growth.

Consumers seem to be picking up on that, based on their National Housing Survey responses.

Consumer sentiment for next 12 months September 2021 October 2021 November 2021
Home prices will go up37%39%45%
Home prices will go down24%22%21%
Mortgage rates will go up51%55%58%
Mortgage rates will go down8%5%5%
Home rental prices will go up59%63%67%
Home rental prices will go down6%6%5%
Data from Fannie Mae.

With home prices, mortgage rates, and rental prices all expected to rise in the next year, buying now is one way to avoid paying for all three. But that’s easier said than done after back-to-back years of double-digit price growth sidelined many home shoppers.

“Yes, if you can afford it, you’d like to be ahead of that curve,” Duncan said. “But already we’re dealing with some constraints on affordability based on what’s happened the last couple of years.”

While consumer sentiment about the economy is similar to 10 years ago, the housing market is not. In 2011 – the last time 70% of NHS respondents said the economy was on the wrong track – the U.S. was still recovering from the great recession, and many homeowners owed more on their mortgage than their house was worth. 

Duncan said the pandemic caused some homeowners to enter forbearance, but very few are defaulting because home values are so high.

“Most people have cured their forbearances,” Duncan said. “There are still some [defaults] out there, but it’s nothing even close to what there was in 2011. And if you are in forbearance, chances are pretty good that the value of your house actually rose, so even if you can’t make the payments you can probably sell your house to clear the mortgage.”

Consumers tend to agree, as 74% said it is a good time to be a seller – even if it presumably means becoming a homebuyer.

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