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Buyers grapple with uncertainty but have reason to be hopeful 

Wary of making a bad decision in a shifting market, buyers are weighing their options — and waiting for prices to fall along with interest rates.

January 18, 2023
3 minutes

Key points:

  • In a research presentation, Zonda's chief economist said this week's mortgage rates are something to "celebrate."
  • A recent survey by the company found that 55% of millennial buyers are waiting for prices to go down, compared with just 5% last year.
  • Homeownership remains a goal for this demographic, but buyers may need reassurance.

Hopes and fears are driving buyer decisions as home prices and mortgage rates continue to fluctuate. 

That was the assessment of Ali Wolf, chief economist at the homebuilding proptech company Zonda, in a research presentation Wednesday. Buyers are holding out hope for lower prices, she said, but fearful of buying at inflated values.

One sign that buyers might be starting to overcome their fears — or at least adapting to the new normal — is the increase in mortgage applications reported Wednesday by the Mortgage Bankers Association. Interest rates, which have continued to fall from last year's peak, have also likely contributed to the rise in applications. For the week ending January 13, mortgage applications increased 27.9% on a seasonally adjusted basis from one week earlier. 

"Mortgage application activity rebounded strongly in the first full week of January, with both refinance and purchase activity increasing by double-digit percentages compared to last week, which included the New Year's holiday observance," said Mike Fratantoni, MBA's SVP and Chief Economist.

"Mortgage rates are now at their lowest level since September 2022, and about a percentage point below the peak mortgage rate last fall. As we enter the beginning of the spring buying season, lower mortgage rates and more homes on the market will help affordability for first-time homebuyers."

Tim Sullivan, senior managing principal at Zonda, also pointed to optimism in the season ahead, noting that the company was beginning to see "green shoots" in the battered housing market.

"It's weird to be … celebrating a 6% interest rate," Wolf acknowledged. "But it seems that sentiment has really breathed the sigh of relief that we went from 3% interest rates to seven and now we're back down to six."

Still, buyers are wary of jumping back in the market too soon.

"Not only are there scars from the great financial crisis, but if you think about the Federal Reserve, they've straight up said the word 'bubble' in relation to the housing market," Wolf said. That, along with news reports about layoffs and a predicted recession, makes first-time buyers in particular, very skittish.

In Zonda's recent survey of millennials, 55% said they are waiting for prices to come down. That's a huge swing from a year ago, when just 5% of respondents said they were waiting for price drops. Although they are on the sidelines for now, the survey indicates that fewer than 5% of that generation wants to rent forever. "Most ultimately at some point want to become a homeowner," Wolf says.

"There is a lot of hope for a market correction. A lot of people saying, 'If prices just come down or if we just get to a point that I feel like I'm not making a bad decision by buying right now, then I'm willing to go through with a purchase," Wolf said."

Buyers are also adjusting expectations and coping with the emotional impact of what higher interest rates do to their purchasing power. "Maybe they thought they could buy a $500,000 home when interest rates were at 3%, but maybe the market was too competitive and they weren't able to secure a home," she said. 

"Well now they're looking at something that's maybe $360,000 and that feels different, and that feels disappointing, and it feels frustrating that you're paying more money for a lesser home. And I think that's something that we're going to have to take some time getting through."

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