The New York Federal Reserve’s latest Survey of Consumer Expectations underscores growing concerns about housing affordability and accessibility among Americans. The survey reveals a worrisome trend of anticipated increases in both rent and home prices, coupled with expectations of persistent high borrowing costs for homebuyers.
Respondents in the survey foresee a notable uptick in home prices over the near term. In February, they predicted a substantial 5.1% increase in home prices over the next year, a significant jump from the modest 2.6% forecasted a year earlier. Despite this surge in the short term, respondents express a more subdued outlook for home price growth over the longer term, anticipating a modest rise of 2.7% in home prices five years from now, slightly down from the previous year’s prediction of 2.8%.
On the rental front, respondents anticipate even sharper increases in costs. The survey reveals an expectation of a 9.7% rise in rental costs over the next year, marking the second-highest reading in the survey’s history and a notable increase from the 8.2% predicted in February 2023. However, respondents foresee rental costs stabilizing over the longer term, with an anticipated flat growth rate of 5.1% five years from now.
Despite concerns about affordability, respondents still maintain a “strongly positive” outlook on housing as an investment. However, this optimism is tempered by expectations of further increases in mortgage rates, which are already at elevated levels. Respondents predict an average mortgage rate of 8.7% within a year, reaching a record high, and climbing further to 9.7% within three years.
These findings have significant implications for the broader economy and monetary policy. The survey results suggest that the Federal Reserve may face fresh challenges in its efforts to rein in inflation to its 2% target. Rising housing costs contribute to overall inflationary pressures, making it difficult for the Fed to achieve its inflation objectives. Moreover, persistent high mortgage rates have a chilling effect on housing market activity, potentially dampening economic growth.
The housing market’s challenges are particularly concerning given its broader societal impact. Affordability issues can exacerbate wealth inequality and limit upward mobility for low- and middle-income households. High housing costs also strain household budgets, leaving individuals with less discretionary income for other necessities and investments.
Addressing these housing affordability challenges requires a multifaceted approach involving both monetary and fiscal policy measures. The Federal Reserve may need to carefully consider its stance on interest rates and take targeted actions to mitigate inflationary pressures without stifling economic growth. Additionally, policymakers at the federal, state, and local levels should explore initiatives to increase housing supply, promote affordable housing development, and support renters and homeowners facing financial strain.
In conclusion, the New York Federal Reserve’s survey highlights the urgent need to address housing affordability concerns facing American households. With expectations of continued increases in housing costs and mortgage rates, policymakers must take proactive steps to ensure that housing remains accessible and affordable for all segments of society while supporting sustainable economic growth.