The economy is hot, but why aren't home sales?

First American finds growing evidence that rising rates are keeping homeowners from selling

The economy is hot, but why aren't home sales?

The housing market continued to underperform its potential in July despite the economy’s impressive growth streak, according to the Potential Home Sales Model released by First American Financial.

The model revealed that actual existing-home sales are 5.8% below the market potential during the month. This represents an estimated market performance gap of 352,000 seasonally adjusted annualized rate sales. Potential existing-home sales increased to a 6.08 million seasonally adjusted annualized rate, an increase of 0.3% month-over-month and 3.5% year-over-year.

First American Chief Economist Mark Fleming said growing evidence indicates that while rising rates do not significantly discourage home buyers, they do influence the home sellers.

“Rising rates reduce the incentive for current homeowners to sell their homes. There are limited reasons to sell when, due to higher mortgage rates, it will cost you more each month just to borrow the same amount from the bank,” said Fleming.

“Additionally, existing homeowners are hesitant to sell their homes as they are afraid that they will not be able to find a home to buy,” he said. “Home sales are being stifled by a shortage of homes on the market. The game of musical chairs that is the housing market today needs more chairs.”

Fleming said there is a need to increase the pace of new-home construction in case homeowners continue to hold onto their homes.

“Homebuilding, as a source of new supply, is crucial to solving the housing supply shortage. Homebuilders don’t have existing mortgages or the fear of not being able to find something to buy. Additional supply, particularly of new entry-level homes to meet the needs of the first-time buyers who remain interested in buying even as rates increase, is critical to satisfy the rising demand for housing,” said Fleming.

 

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