First American’s Potential Home Sales Model highlights the barrier to growth
Market conditions are looking good with lower mortgage rates, high demand, a strong economy, and healthy employment stats.
But the factor that continues to constrain the US housing market is supply says First American Financial’s chief economist Mark Fleming.
“While increasing house-buying power improved housing affordability and boosted the incentive to sell, the low supply of homes for sale continues to hold the market back,” said Fleming. “Tenure length increased by 0.7% compared with one month ago, contributing to a loss of nearly 33,000 potential home sales.”
He added that homeowners’ prisoners dilemma, rate 'lock-in' (albeit less so now) and seniors aging in place have all contributed to rising tenure length.
First American’s Potential Home Sales Model for June calculates that the market for existing-home sales is underperforming its potential by 1.5% or an estimated 80,150 (SAAR) sales.
Potential existing-home sales increased marginally to a 5.25 million SAAR, a 1.1% month-over-month increase.
“In June, housing market potential benefited from a 10.7% year-over-year increase in consumer house buying power as 30-year, fixed mortgage rates, an important component of consumer house-buying power, fell to their lowest point since November 2016, and declined 0.8 percentage points compared with one year ago,” said Fleming. “Household income, the other component of consumer house-buying power, continued to rise as well, increasing 2.5% compared with one year ago.”
Another potential 124K sales could be ahead
With mortgage rates decreasing and many predicting that the Fed will cut interest rates at its meeting this month, there is potential for a further 6-figure increase in potential home sales, if mortgage rates hit the historic low last seen 3 years ago.
“If mortgage rates reach 3.44%, house-buying power would increase by $18,000, and potential home sales would increase by 124,300 sales, holding all else equal,” explained Fleming. “Stronger house-buying power benefits the housing market in two ways: it boosts affordability for home buyers and it may encourage some homeowners, who are less 'rate locked-in,' to re-enter the market.”
