First American Financial Corp. released its Potential Home Sales Model for October. In it, Chief Economist Mark Fleming said increases in employment and post-crisis, record-breaking wage growth and historically low mortgage rates are helping the housing market. But the shortage of affordable inventory for first-time homebuyers is preventing market activity from reaching its true potential.
“With mortgage rates still near-historic lows in September, wages growing at a brisker pace and greater employment, the market potential for existing home sales grew dramatically,” he said in a press release accomplanying the model. “However, despite the increased consumer house-buying power fueled by lower rates and higher incomes, existing home sales remain below market potential, in part due to tight inventory. The supply of affordable entry-level homes is not keeping up with increasing first-time homebuyer demand. The increasing shortage of affordable inventory for first-time homebuyers is preventing market activity from reaching its true potential.”
In October, the market for existing home sales grew by 6.7 percent compared with a year ago, an increase of 376,000 seasonally adjusted, annualized rate (SAAR) sales. Potential existing-home sales increased to a 5.9 million SAAR. This represents a 97.4 percent increase from the market potential low point reached in December 2008.
Currently, potential existing-home sales is 206,000 (SAAR) or 3.5 percent below the pre-recession peak of market potential, which occurred in July 2005. According to Fleming, it is underperforming its potential by 6.5 percent or estimated 384,000 (SAAR) sales.
Mortgage rates ticked up slightly to 3.47 percent, a raise of 0.01 percent between September and October.
“While mortgage rates have been creeping up as of late, they still remain at near historic lows,” Fleming said. “The low rates combined with increases in wages remain the key drivers to growth in the housing market, continuing to soften the impact of rising prices, offering consumers increased leverage and buoyed homebuying power.
“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,” Fleming continued. “Historical context is critically important. Our potential homes sales model measures what we believe a healthy market level of home sales should be based on the economic, demographic and housing market environments.”