By Michael S. Derby
(Reuters) -Americans are once again bracing for another round of higher housing costs, amid rising expectations by renters that they'll never be able to buy a house, the Federal Reserve Bank of New York said on Monday.
As part of its latest Survey of Consumer Expectations, the regional Fed bank found that respondents at the start of the year saw higher near-term increases for both rent and home prices, although they do see some relief over the longer haul for home prices. Households also see no relief on home borrowing costs and are in fact bracing for the highest levels of mortgage rates in a survey that dates back to 2014.
The New York Fed said that in February respondents predicted home prices would rise 5.1% a year from now, up from the 2.6% they predicted a year ago. But five years from now, respondents see home prices up by 2.7%, from 2.8% in last year's poll.
On the rental front, respondents reckon costs a year from now will be up 9.7%, the second-highest reading in the survey’s history, from 8.2% in the poll done in February 2023. Five years from now, survey respondents see rent "essentially flat," the New York Fed said, at 5.1%.
The report found that respondents still have a "strongly positive" outlook on housing as an investment.
They also expect mortgage rates, already high, to go higher. Respondents predict the average mortgage rate a year from now will be at 8.7% and will be at 9.7% in three years, with both readings at record levels. As of May 2, home lender Fannie Mae said the average 30-year fixed mortgage stood at 7.22%, well above the sub-3% levels available only a few years ago.
Renters, however, are losing hope of ever owning a home. The report found a record low of respondents putting good odds of buying a house at some point in the future.
The New York Fed report suggests that the U.S. central bank could face fresh challenges getting inflation back down to its 2% target with the expected cost of housing still rising robustly. The Fed has been vexed by unexpectedly strong price pressures in the first months of this year, bringing into question whether it will be able to cut interest rates in 2024. High mortgage rates related to Fed policy have deeply chilled activity in the housing market.
Speaking after a Federal Reserve meeting that held rates steady last week, Fed Chairman Jerome Powell said he still expects price pressures to ease as the year moves forward. But he also projects housing factors to continue to contribute to price pressures, telling reporters "there are a number of places in the economy where there are just lag structures built into the inflation process and housing is one of them."
Powell flagged the process of setting rental rates as a particular issue, flagging a slow moving process where it takes time for rents to rise in reaction to higher inflation and for those elevated increases to then abate.
The New York Fed report also noted that high mortgage rates now are locking homeowners into houses that currently enjoy the low rates seen during the coronavirus pandemic. A blog post from the bank noted "close to half of respondents assess their probability of moving in the next three years to be less than 10%," given the cost associated with buying a new house.