Home sales hit their potential in July but that’s not great news

Sales potential slipped as supply lagged but are there better times ahead?

Home sales hit their potential in July but that’s not great news

The strong labor market and increases in household income should be driving the US housing market but some homeowners are still reluctant to sell, weakening supply while demand is strong.

First American’s Potential Home Sales Model for July 2019 shows that potential existing-home sales decreased marginally to a 5.18 million seasonally adjusted annualized rate (SAAR), a 0.3% month-over-month decrease.

“The housing market essentially reached its potential in July 2019, as actual existing-home sales were 0.05% above the market’s potential,” said Mark Fleming, chief economist at First American. “Existing-home sales in 2019 are running at a pace similar to 2015, even though rates have fallen and household income has increased this year.”

He added that housing market potential benefitted from a 10.6% year-over-year increase in consumer house-buying power in July, as the 30-year, fixed-rate mortgage, an important component of consumer house-buying power, fell to its lowest point since November 2016.

Despite the boost for affordability, the market potential for existing-home sales fell 0.3% in July month-over-month and dropped 1.2% year-over-year (63,000 sales).

People are not selling
Market potential has been rising thanks to new household formation and increasing house-buying power as household income grows.

But current conditions are still keeping homeowners on the sidelines rather than selling because they are concerned at not being able to find a home to buy.

While lower mortgage rates make those who feel locked-in to their existing rates more confident, they may have to go lower to convince more to sell.

“Compared with one year ago, tenure length increased by 11% and contributed to a loss of nearly 425,000 potential home sales, more than offsetting the nearly 395,000 potential existing-home sales from the forces boosting market potential,” said Fleming. “To a lesser extent, tightening credit also contributed to a loss of 33,000 potential existing-home sales. The result? An overall decline in potential existing-home sales compared with one year ago, despite boosts in demand and affordability.”

But Fleming added that there are positive signs ahead.

“In the latest Freddie Mac weekly report of mortgage rates, the 30-year, fixed mortgage rate was 3.6%, approaching the lowest mortgage rate in history of 3.3%, which occurred in 2012,” said Fleming. “Additionally, existing homeowners are sitting on $5.7 trillion of tappable equity, money which could be used to fund the purchase of a move-up home.”