A new index by one of the most influential institutions in the housing market suggests people are increasingly worried about the economy.
The Fannie Mae (FNMA) Home Purchase Sentiment Index (HPSI) was formally launched earlier this week as an predictive indicator of the housing market’s next move. In the last couple of months, the index dropped to 80.8 from its record high of 84.7 set back in June. However, it remains higher than it was a year ago and has stayed within a five-point range since September 2014.
The agency attributes the drop to concerns over the economy. “The folks thinking it’s on the wrong track have increased significantly,” said Fannie Mae chief economist Doug Duncan. “There’s something going on at the household level that’s reducing their confidence.”
Fannie Mae, which provided about $144 billion in liquidity into the mortgage market, has been surveying roughly 1,000 people every month for nearly half a decade. The HPSI is based on responses to questions covering the timing of buying and selling a home, the direction of home prices and mortgage rates, personal job prospects, and household income. The net percentage of each question is then summed to compose the index.
Only 32% of those surveyed in August said the economy is headed on the right track, while 58% said it was going the wrong way. In June, those numbers were 39% and 51%, respectively.
Nonetheless, Duncan remains positive on the housing sector, a view that appears to be in line with the equity market. While the S&P 500 (^GSPC) is down 5% so far this year, the SPDR S&P Homebuilders ETF (XHB) is up 8% while the iShares U.S. Home Construction ETF (ITB) has gained 9%.
“We’re still on that slow and steady improvement track,” he said. “We’ve done a lot of demographic work that suggests a normal level of housing construction – multifamily, single-family, and manufactured housing – in a given year would be about 1.5 million units. This year, it looks like we’ll do about 1.1 million units. So on the supply side, we’re still well short of what demographics would suggest.”
Duncan expects construction will rise, particularly with multifamily buildings, to meet pent-up demand.
“Rents are now coming up relative to sales prices and there is some pressure to start seeing construction on the single-family side as well,” he said.
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