Stage is Set for Stronger Spring Home-Buying Season, According to First American Potential Home Sales Model
—We’ve seen mortgage rates decline and wages rise – both trends work to boost house-buying power and fuel greater market potential for home sales, setting the stage for a stronger than expected spring home-buying season, says Chief Economist
- Potential existing-home sales increased marginally to a 5.17 million seasonally adjusted annualized rate (SAAR), a 1.5 percent month-over-month increase.
- This represents a 54.0 percent increase from the market potential low point reached in
February 1993 . - The market potential for existing-home sales declined by 2.9 percent compared with a year ago, a loss of 153,000 (SAAR) sales.
- Currently, potential existing-home sales is 1.6 million (SAAR), or 23.2 percent below the pre-recession peak of market potential, which occurred in
March 2004 .
Market Performance Gap
- The market for existing-home sales is underperforming its potential by 2.5 percent or an estimated 127,000 (SAAR) sales.
- The market performance gap increased by an estimated 200,000 (SAAR) sales between
January 2019 andFebruary 2019 .
Chief Economist Analysis: Housing Market Poised for Strong Spring
“In
“Supply shortages have been the primary culprit for this performance gap – you can’t buy what’s not for sale,” said Fleming. “However, so far in 2019, we’ve seen mortgage rates decline and wages rise – both trends work to boost house-buying power and fuel greater market potential for home sales, setting the stage for a stronger than expected spring home-buying season.”
House-Buying Power Fuels Market Potential
“The last three months have been kind to potential home buyers. While mortgage rates increased throughout most of 2018, they began to trend downward in December and have continued to fall since then,” said Fleming. “All the while, average household income has trended up, boosting house-buying power.
“The decline in mortgage rates over the last three months may have encouraged some homeowners, who were “rate locked-in” by rising mortgage rates, to re-enter the market. Additionally, millennials that were previously priced out of the market when rates were higher in 2018 are likely to jump back in,” said Fleming. “The increase in house-buying power directly contributed to a gain of nearly 131,000 potential home sales in the last three months, by far the strongest driver of market potential.”
What’s Still Holding Back Market Potential?
“Even with the house-buying power boost, the market for existing-home sales is underperforming its potential due to the persisting supply shortage,” said Fleming. “The supply squeeze is two-fold: the existing homeowner’s dilemma and the lack of new construction.
“The majority of existing homeowners have mortgages with historically low rates, and there is limited incentive to sell if it will cost them more each month to borrow the same amount of money from the bank. This rate-lock phenomenon has led to a 9 percent yearly increase in tenure length, which reduced market potential by 99,000 sales in the last three months,” said Fleming.
“One way to reduce supply squeeze is to build more new homes, but construction headwinds have prevented homebuilders from keeping up with housing demand,” said Fleming. “Lack of new home supply directly contributed to a decline of nearly 8,000 potential home sales in the last three months.”
A
“Rising house-buying power and limited supply are locked in a tug-of-war as the two strongest forces influencing housing market potential in advance of the spring home-buying season,” said Fleming. “The increase in house-buying power, in conjunction with favorable market conditions, led to an increase of nearly 161,000 potential home sales over the last three months. The rise in house-buying power overpowered the effects of limited supply.
“Continuing low mortgage rates and a strong labor market will fuel demand as the spring home-buying season ramps up. In addition, the recent increase in housing starts means home builders are pushing through new construction projects, which should help alleviate the supply shortage in the future,” said Fleming. “The net effect? We expect the spring home-buying season to be stronger than anticipated just a few months ago.”
What Insight Does the Potential Home Sales Model Reveal?
“When considering the right time to buy or sell a home, an important factor in the decision should be the market’s overall health, which is largely a function of supply and demand. Knowing how close the market is to a healthy level of activity can help consumers determine if it is a good time to buy or sell, and what might happen to the market in the future. That’s difficult to assess when looking at the number of homes sold at a particular point in time without understanding the health of the market at that time,” said Fleming. “Historical context is critically important. Our Potential Home Sales Model measures what home sales should be based on the economic, demographic and housing market environments.”
Next Release
The next Potential Home Sales Model will be released on
About the Potential Home Sales Model
Potential home sales measures existing-homes sales, which include single-family homes, townhomes, condominiums and co-ops on a seasonally adjusted annualized rate based on the historical relationship between existing-home sales and
Disclaimer
Opinions, estimates, forecasts and other views contained in this page are those of First American’s Chief Economist, do not necessarily represent the views of First American or its management, should not be construed as indicating First American’s business prospects or expected results, and are subject to change without notice. Although the First American Economics team attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. © 2019 by First American. Information from this page may be used with proper attribution.
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