Housing market potential at highest level in 13 years

Potential existing-home sales increased to a seasonally adjusted annualized rate of 5.92 million units in August, according to First American Financial Corporation.

That’s the highest level since 2007 for First American’s potential home sales model, which estimates what a healthy level of home sales should be based on economic, demographic and housing market conditions. When the actual level of existing-home sales surpass potential existing-home sales considerably, the sales pace isn’t supported by market fundamentals. When potential sales exceed existing-home sales, market turnover is underperforming the rate supported by current conditions.

According to First American’s data, August’s market for existing-home sales underperformed its potential by 4.8%, equating to an estimated 282,430 sales on a seasonally adjusted annual basis. That market performance gap grew by an estimated 271,060 sales (seasonally adjusted annual rate) between July and August, suggesting that market fundamentals could support even more turnover than the current sales pace.

Several factors helped drive housing market potential to its 13-year high, according to Mark Fleming, First American’s chief economist.

“House-buying power — how much home one can afford to buy given household income and the prevailing mortgage rate — increased 1.3% month over month,” said Fleming. “The house-buying power increase was driven by the combined impact of lower mortgage rates, which were 0.08 percentage points lower in August than the previous month, and a moderate increase in month-over-month household income.”

That increase in house-buying power boosted market potential by about 28,180 potential home sales, Fleming added. The growing wealth effect of homeowners gaining equity in their homes added another 17,270 potential home sales, while rising household formation contributed another 24,255 potential home sales.

According to First American, though, the biggest factor boosting market potential was the loosening of credit. According to the Chicago Fed’s National Financial Conditions Index, credit loosened in August, reaching pre-pandemic levels. (Note that the Mortgage Bankers Association’s Mortgage Credit Availability Index indicated that mortgage credit availability declined in August; the two indices use different methodologies to gauge credit conditions.) Credit loosening in August added 266,640 sales to August’s potential home sales figure.

On the flipside, housing tenure length continues to rise, with homeowners electing not to move reducing the inventory of homes for sale. Tenure length increased 0.5% month over month in August, decreasing market potential by 20,070 home sales.

So with August’s potential home sales number rising by 5.6% from July to August, the question is, is the pace of market potential growth sustainable? Fleming says that while underlying conditions are supportive, the COVID-19 pandemic continues to infuse uncertainty into any forward projection.

“Demographic demand and Fed policy keeping rates low has helped housing recover rapidly from the initial stages of the pandemic and remain immune to the ongoing economic impacts of the coronavirus for now,” Fleming said, “but as with the virus itself, we are not sure if immunity lasts forever.”    


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