The Critical Forces Shaping the 2020 Housing Market Outlook, According to First American Potential Home Sales Model
—The question for 2020 is will increased demand from millennials and strong house-buying power be enough to offset the ongoing drag from rising tenure length and limited supply, says Chief Economist
- Potential existing-home sales increased to a 5.24 million seasonally adjusted annualized rate (SAAR), a 1.4 percent month-over-month increase.
- This represents a 56.0 percent increase from the market potential low point reached in
February 1993 . - The market potential for existing-home sales increased by 3.9 percent compared with a year ago, a gain of 196,480 (SAAR) sales.
- Currently, potential existing-home sales is 1.49 million (SAAR), or 22.2 percent below the pre-recession peak of market potential, which occurred in
March 2004 .
Market Performance Gap
- The market for existing-home sales outperformed its potential by 2.8 percent or an estimated 146,340 (SAAR) sales.
- The market performance gap decreased by an estimated 39,260 (SAAR) sales between
October 2019 andNovember 2019 .
Chief Economist Analysis: Housing Market Potential Increased in November
“In
“As 2019 winds down, actual existing-home sales have gained momentum. In order to understand why and what this may mean for housing market potential in 2020, let’s examine how the individual economic forces that drive the potential for existing-home sales have changed since
Economic Forces That Boosted Housing Market Potential in 2019
- House-Buying Power Spiked Nearly 19 percent in 2019: “House-buying power, how much home one can afford to buy given household income and the prevailing mortgage rate, jumped 18.7 percent since
November 2018 . The dramatic increase in house-buying power had the greatest impact on housing market potential in 2019, boosting market potential by 450,200 potential home sales,” said Fleming. “The house-buying power surge was driven by the combined impact of lower mortgage rates, which were 0.93 percent lower in November than they were a year ago, and a 2.6 percent increase in annual household income.”
- Household Formation Growth Continued: “Household formation grew in 2019, as millennials continued to form new households, pushing greater demand for housing,” said Fleming. “The increase in household formation enhanced market potential by 150,800 potential home sales in November compared with last year.”
- House Price Appreciation Remained Positive: “As homeowners gain equity in their homes, they are more likely to consider using the equity to purchase a larger or more attractive home. However, if equity is low, homeowners are likely to remain ‘equity locked-in’ to their home,” said Fleming. “Compared with one year ago, house price appreciation increased housing market potential by nearly 44,200 potential home sales.”
Economic Forces that Reduced Housing Market Potential
- Tenure Length Sets Records: “Tenure length, the average length of time someone lives in their home, reached record levels in 2019, exceeding 11 years, according to DataTree by First American. The increase in tenure length had the greatest negative impact on housing market potential, reducing it by 383,100 potential home sales compared with one year ago,” said Fleming. “Overall, tenure length has been increasing since the aftermath of the housing market crash, meaning fewer and fewer people are listing their homes for sale, keeping housing supply tight. The main reason? Most homeowners have mortgages with historically low rates and are hesitant to sell their homes. If they sell and purchase a new home, even though rates are low now, they may still have a higher mortgage rate. There is limited incentive to sell when, due to higher mortgage rates, it will cost you more each month just to borrow the same amount from the bank.”
- Credit Standards Tightened: “When lending standards are tight, fewer people can qualify for a mortgage to buy a home. Likewise, when standards are loose, more people can qualify for a mortgage and buy a home,” said Fleming. “When homeowners are less likely to qualify for a mortgage for a new home or qualify for a low mortgage rate, they are more likely to stay in their current home. In November, credit tightened compared with last year, which reduced housing market potential by 60,800 potential home sales.”
- No Housing Supply Relief: “The lack of supply and the fear of not being able to find something to buy keeps many existing homeowners from selling their homes, preventing new supply from reaching the market,” said Fleming. “As new supply enters the market, the risk of not being able to find something to buy lessens and homeowners’ confidence in the decision to sell their existing home grows. Compared with last year, the lack of new supply reduced housing market potential by 4,900 potential home sales.”
What Does This Mean for Market Potential in 2020?
“In 2019, the dramatic increase in house-buying power and strong household formation fueled housing demand, increasing the market potential for existing-home sales. The boost from house-buying power and household formation was strong enough to overcome the negative impact from the increase in tenure length and tight supply,” said Fleming. “In 2020, the continuation of rising tenure length appears likely, which will prolong the housing supply shortage and dampen housing market potential. The question for housing market potential in 2020 is will increased demand from the millennials and strong house-buying power be enough to offset the ongoing drag from rising tenure length and limited supply?”
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
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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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