Tightening Supply Squeezes Market Potential, According to First American Potential Home Sales Model
—The housing supply shortage hindering the market today is likely to remain in 2018, says Chief Economist
- Potential existing-home sales decreased to a 5.96 million seasonally adjusted, annualized rate (SAAR), a 2.0 percent month-over-month decrease.
- This represents a 98.3 percent increase from the market potential low point reached in
December 2008 . - In November, the market potential for existing-home sales decreased by 1.5 percent compared with a year ago, a loss of 93,000 (SAAR) sales.
- Currently, potential existing-home sales is 404,000 (SAAR), or 6.8 percent, below the pre-recession peak of market potential, which occurred in
July 2005 .
Market Performance Gap
- The market for existing-home sales is underperforming its potential by 7.3 percent or an estimated 438,000 (SAAR) sales.
- Market potential decreased by an estimated 124,000 (SAAR) sales between
October 2017 andNovember 2017 .
Chief Economist Analysis: Housing Supply Shortage to Remain in 2018
“Strong first-time homebuyer demand continues with the help of low mortgage rates. But, tight supply continues to be the biggest constraint on housing market growth. Existing homeowners are increasingly prisoners in their own homes, preventing additional existing-home supply from entering the market. Homebuilders are also struggling to add more new home inventory, so both sources of housing supply face challenges,” said
Additional Quotes from Chief Economist
- “The housing market’s potential for existing-home sales decreased moderately between
October 2017 andNovember 2017 . The decrease was driven by a reduction in the expectation for future supply, even as mortgage rates, which remained below 4 percent for the sixth consecutive month, fuel demand.” - “Both sources of future housing supply, new homebuilding and existing homes, are not meeting market demand. The pace of new homebuilding faces headwinds. At the same time, the fear of not being able to find a home to buy is preventing homeowners from putting their homes on the market, as more homeowners are increasingly prisoners in their own homes. The number of homes for sale has declined on a year-over-year basis for the past 39 consecutive months.”
- “The housing market has been underperforming its potential since May, although the market performance gap improved this month relative to the 12-month peak in the market performance gap measured in October.”
- “The supply of homes for sale nationally has fallen 7.5 percent from a year ago, and homes are selling 8.5 percent faster than a year ago, according to Realtor.com.”
- “The lack of inventory relative to demand is driving the fast pace of price appreciation. While rates have remained low and kept consumer house-buying power strong, the strength of house-buying power is not enough to offset rising prices, so affordability has suffered.”
- “According to the First American Real House Price Index, affordability is down 8.0 percent in September compared to a year ago and declining in all markets tracked by First American.”
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
Background information on the First American Potential Home Sales model is available here.
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. © 2017 by First American. Information from this page may be used with proper attribution.
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