Home sales exceed expectations in December

Low mortgage rates are having a dual effect on sales, First American says

Home sales exceed expectations in December

Low mortgage rates spurred a 1.7% month-over-month increase in existing-home sales in December, according to new data from First American.

First American’s Potential Home Sales Index showed that home sales rose to 5.3 million sales on a seasonally-adjusted annualized rate in December – outperforming expectations by 1.2% or roughly 64,830 sales.

“The growth in the market potential for existing-home sales is the net result of several forces that either boost or bash housing market potential,” said First American Chief Economist Mark Fleming. “However, one market driver is actually both a positive and a negative influence on housing market potential – persistently low mortgage rates.”

Despite their positive impact on the housing market, low mortgage rates might deter homeowners from selling, according to Fleming.

“While historically low rates increase buying power and make it more affordable for potential buyers to purchase a home, they also discourage many existing homeowners from selling,” Fleming said. “There is little to no house-buying power benefit for homeowners with an already-low mortgage rate, so the only way existing homeowners can increase their house-buying power is through household income growth. This helps explain why more and more homeowners have decided to stay put, reducing the inventory of homes for sale.”

As a result, tenure length, or how long one stays in a home between moves, jumped 8%, from less than six years in 2018 to roughly 12 years in 2019.

“Consensus among forecasters is that mortgage rates will remain below 4% for the next two years,” Fleming said. “Low mortgage rates and increased house-buying power will continue to boost demand, as will demographic tailwinds from millennials entering their prime home-buying years. On the other hand, those persistently low rates will discourage existing homeowners from selling, pushing up tenure length, and limiting the inventory of homes available for sale.

“However, that doesn’t necessarily mean we should expect housing market potential to decline,” he said. “There are many considerations that go into one’s housing tenure decision, which could result in the desire to move. The lack of housing supply has been the norm for several years, yet the housing market has endured.”

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