First American Financial Corporation’s Potential Home Sales Model for the month of September 2018 attempts to measure the number of potential home sales against the actual number coming to market.
In the latest study, First American found that potential existing-home sales increased to a 6.18 million seasonally adjusted annualized rate (SAAR) – a 0.9 percent month-over-month increase. It’s a 65.4 percent increase from the market potential low point reached in February 2011.
According to the study, the market for existing-home sales is underperforming its potential by 7.2 percent.
“While the housing market continues to underperform its potential by 7.2 percent, the gap between actual existing home sales and the market potential for home sales narrowed by 1 percent in September compared with August, according to our Potential Homes Sales model,” says Mark Fleming, chief economist at First American. “However, even though the performance gap narrowed a bit, the housing market still has the potential to support more than 440,000 additional home sales at a seasonally adjusted annualized rate.
“The primary culprit for the housing market’s performance gap remains severe supply shortages – homebuyers can’t buy what’s not for sale,” says Fleming.
Rates up, sales down
“Mortgage rates have been steadily increasing for the past year, and the consensus among economists is mortgage rates will continue to rise, increasing from the current rate of 4.9 percent for a 30-year, fixed-rate mortgage to an average of 5 percent in 2019,” says Fleming. “The 30-year, fixed rate mortgage hasn’t hit five percent since 2009.”
Current owners have a disincentive to sell, however, if their current mortgage rate is ultra-low.
“Homeowners with mortgage rates below the current rate may be reluctant to give them up for a higher rate, a phenomenon known as the ‘rate lock-in effect.'” Fleming says. “There is less incentive to sell your home if borrowing the same amount from the bank at today’s rates will be more expensive than your existing monthly mortgage payment. As rates rise, many existing homeowners are increasingly financially imprisoned in their own home by their historically low mortgage rate.”
The proof is in the tenure
“Examining median tenure length – how long homeowners typically own their homes – demonstrates the impact of rising rates on homeowners’ decision to sell,” says Fleming. “For example, just prior to the housing downturn in 2007, homeowners typically stayed in their homes for four years, according to median homeowner tenure data from DataTree by First American. In the aftermath of the housing market crash (2008-2016), median homeowner tenure increased to approximately seven years. Many people remained in their homes because their mortgage balances exceeded their property values during this time, so they would have lost money by selling their homes.
Many recession-era underwater homes now have equity, however.
“Despite the increase in equity, median tenure length jumped to 10 years in September 2018 – a 10 percent year-over-year increase,” says Fleming. “Since the crisis, we had a brief period of rising rates between April 2013 and April 2014, and tenure lengths increased 6 percent during that 12-month window.
“The recent dramatic spike in tenure length is reflected in the growing performance gap between market potential and actual existing-home sales, which is up 48 percent since the end of 2017,” said Fleming. “Homeowners are staying in their homes longer than ever, limiting supply and slowing home sales.”
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