Between high home prices and high mortgage rates, homeownership has become increasingly out of reach for middle-class households. It’s no wonder many recent homebuyers hold a grudge against the Federal Reserve, with 60% of them saying the central bank kept interest rates high for too long, according to a new survey by U.S. News.
Americans also believe some common misconceptions about the economic role held by our favorite scapegoat, the Federal Reserve.
Between Aug. 30 and Sept. 9, U.S. News ran a nationwide survey of 1,201 Americans who bought a home in the past year using a mortgage, conducted through PureSpectrum. We asked respondents a series of questions about their homebuying experience and how it shaped their beliefs, including their sentiments on Fed policy, their refinancing plans and whether they regret buying a house in a high-rate environment. Here’s what we found:
— Recent homebuyers, who are highly sensitive to high interest rates, are taking aim at the Federal Reserve. Sixty percent say the Fed kept interest rates high for too long, while only 19% say it didn’t. More than half of respondents (52%) say that the central bank sets mortgage rates, a common misconception.
— The Fed is an independent government agency, but homebuyers suspect political motives. More than half (54%) think the Fed is politically motivated to cut interest rates ahead of the 2024 presidential election. Meanwhile, 48% say that the president should be more involved in the Federal Reserve’s policy decisions, while 24% disagree.
— “Buy now, refi later” still applies to the 2024 housing market. This year, 62% of recent buyers plan on refinancing to a lower rate in the future — down from the 84% who said so in our 2023 survey — but 10% who bought in the past year say they’ve already refinanced.
— The shock of high interest rates may be fading among recent buyers. Only 46% regret buying a home when mortgage rates were high, compared with the 62% who experienced regret in last year’s survey. Additionally, the number of recent buyers who feel “trapped” by their monthly payments decreased from 50% in 2023 to 46% in 2024.
— Many homebuyers have unrealistic expectations for when they’ll be able to refinance. More than half (53%) are waiting until rates drop below 5% at least, which isn’t in the forecast for 2024, 2025 or even 2026. However, 90% believe they’ll be able to refinance within the next three years.
[Compare: Compare Current Mortgage Rates]
Homebuyers Lack Faith in Fed as High Mortgage Rates Persist
Those who bought a home in the past year, many of whom have been contending with 6% to 7% mortgage rates, are sensitive to the Fed’s rate policy decisions. They may perceive that the central bank is to blame for all of their affordability woes, which could partially explain why they’re so critical of Fed policymakers in our survey.
In fact, 52% mistakenly believe the common misconception that the Federal Reserve sets mortgage rates, compared with the 21% who correctly identified that statement as false. The Fed doesn’t set mortgage rates; individual lenders do. The Fed’s monetary policy has a wide-reaching and complex influence on mortgage pricing, but long-term mortgage interest rates don’t always follow the federal funds rate.
Most recent homebuyers (60%) say that the Fed has kept interest rates high for too long, which is three times as many who disagree with that statement (19%). However, they’re not alone — some economists, including Fed alumni — have also been questioning if the central bank has waited too long to cut rates.
More than half of recent homebuyers (54%) believe that the Fed is politically motivated to cut interest rates ahead of the November election, compared with the 20% who say it isn’t and the 26% who answer, “I don’t know.”
Fed Chair Jerome Powell has disputed this claim, saying in a news conference following the July Federal Open Market Committee meeting, “We never use our tools to support or oppose a political party, a politician or any political outcome.” Although his position as Fed chair should be proof enough that he’s nonpartisan, Powell was appointed in 2018 by former President Donald Trump and reappointed in 2022 by President Joe Biden.
There’s a good reason why the central bank is an independent government agency. The Fed has a dual mandate of price stability and maximum employment, but some of the tools that policymakers have to achieve this delicate balance — most notably, interest rate hikes — aren’t always popular in the eyes of the consumer.
Put simply, if politicians had more control over the Fed, they could campaign on cutting interest rates to win over voters, regardless of whether it’s an appropriate monetary policy. For the sake of not forgetting history lest we be doomed to repeat it, remember the last time a president (Richard Nixon) wielded influence over a Fed chair (Arthur Burns): It was the 1970s, and inflation ran rampant.
Still, 48% of recent homebuyers agree that the president should have more control over the Fed’s policy decisions, which is twice as high as the amount who disagree, at 24%.
[READ: Mortgage Interest Rate Forecast for 2024 and 2025]
Buy Now, Refi Later Is Still the Rule in Real Estate
This year’s homebuyers were far less likely to be told that they could “buy now and refinance later” compared with last year’s homebuyers, at 61% vs. 82%.
Despite the fact that buy now, refi later may have lost its status as the unofficial slogan of the real estate market this year, it’s still very much in practice. The majority of 2024’s recent buyers (62%) do plan on refinancing, and 10% say they’ve already refinanced since buying a home in the past year.
And so the lesson from last year still applies: Remember that buy now, refi later isn’t a guarantee. It’s difficult for economists to predict mortgage rate trends, let alone the layman homebuyer.
Best-case scenario, homeowners are able to lower their monthly payments within six months or a year of buying at a high rate. But worst-case scenario, mortgage rates unexpectedly stay higher for longer, as they did throughout most of 2023. This is of particular concern, since 17% of recent homebuyers who plan on refinancing say they won’t be able to afford their monthly payments if they can’t refinance in the future — a slight rise from last year’s survey, when 13% of respondents said so.
Also, those with an eye on a refi should be advised that refinancing isn’t free. Homeowners can expect to pay between 2% and 3% of the loan amount to refinance a mortgage. Some lenders might advertise a no-closing-cost refi — and 30% of recent buyers will seek one of these out when they shop for offers — but the bank will always recoup costs one way or another. Lower fees often come at the expense of higher interest rates, and vice versa.
Before making the decision to buy a home with the intention of refinancing when rates come down, prospective borrowers should calculate their break-even point, which is the amount of time they’d have to live in the home for their interest savings to offset the upfront costs of refinancing.
Considering that 25% of recent buyers plan on keeping their home for five years or less (including 11% who will sell in under three years), it’s crucial to weigh the cost of a future refinance against any potential savings.
[Read: Best Mortgage Refinance Lenders.]
Recent Buyers Have Rose-Colored Refinance Expectations
Recent homebuyers who plan on refinancing to a lower rate in the future tend to be overly optimistic as to how far rates will drop within the next few years.
The vast majority (85%) would like to see rates below 5.5% in order to refinance, but economists don’t think average 30-year rates will fall that low in 2024, 2025 or even 2026. Meanwhile, 78% of recent buyers who plan on refinancing think they’ll be able to do so within the next two years.
However, economists don’t always get it right. In the words of Fed Chair Powell, “Forecasting is very difficult. Forecasters are a humble lot with much to be humble about.”
At the beginning of 2023, forecasters said mortgage rates would decline throughout the year, but rates ended up increasing to nearly 8% by October. Homebuyers who were under the impression that they could refinance to a lower rate by year-end may have had to hold onto those high mortgage payments for longer.
Conversely, there’s always the chance that some catastrophic economic event, like a particularly nasty recession, could bring rates below 5% sooner than forecasters currently expect.
But that leads to the greater point: Nobody has a financial crystal ball. When it comes to housing costs, homeowners should plan for a monthly mortgage payment that they can afford in the present, not one that they can hypothetically afford in the future if rates fall.
More from U.S. News
Mortgage Interest Rate Forecast for 2024 and 2025
No, Your Mortgage Rate Won’t Go Down With the Fed Rate Cut — Debunking the Myths
Historical Mortgage Rates: See Averages and Trends by Decade
Burned by High Rates, 54% of Homebuyers Say Fed Is ‘Politically Motivated’ originally appeared on usnews.com
