First American Financial Corp. released its Potential Home Sales model for May. The model provides a gauge on whether existing-home sales are under or over their long-run potential level, based on current market fundamentals. For May, the model showed that the market for existing-home sales is underperforming its potential by 2.8 percent, or an estimated 156,000 seasonally adjusted, annualized rate (SAAR) of sales.
Although underperforming, this is an improvement over last month’s underperformance gap of 4.1 percent, or 232,000 SAAR sales.
In May, the market potential for existing-home sales grew by 0.9 percent compared with April, an increase of 51,000 SAAR sales, and decreased by 4.8 percent compared with a year ago. This month, potential existing-home sales reached 5.63 million SAAR sales. This is an 86.6 percent increase from the market potential low point reached in December 2008, but is down 567,000 SAAR sales, or 10.1 percent, from the pre-recession peak of market potential in July 2005.
According to the National Association of Realtors (NAR), existing-home sales rose for the second consecutive month in April, to 5.45 million SAAR sales, from an upwardly revised 5.36 million SAAR sales in March.
“The 1.7 percent month-over-month increase and impressive 6 percent annual increase was driven by broad growth across the country, except in the West where buying activity, hampered by large price gains and tight supply, caused sales to fall 3.4 percent year-over-year,” First American Chief Economist Mark Fleming said in a news release accompanying the model. “While nationally the inventory of homes for sale still remains at historically depressed levels, the supply continues to increase, rising to a 4.7-month supply in April, up from a downwardly revised 4.4-month supply in March.
“The tight supply continues to put upward pressure on house prices, which rose 5.8 percent year-over-year on a seasonally adjusted nominal basis according to the First American Real House Price Index. However, the current low-rate environment continues to provide relief to potential homebuyers in the form of increased leverage and home-buying power,” Fleming continued.
The average rate for a 30-year fixed rate mortgage fell to 3.6 percent in May, the lowest it has been since May 2013. The era of low rates seems likely to continue for some time, Fleming said, even in the face of potential rate hikes from the Federal Reserve later this year.
“This week, the yield on the 10-year Treasury-note tumbled further to 1.59 percent after the June meeting of the Federal Open Market Committee (FOMC) and the committee’s decision not to raise the federal funds rate,” Fleming said. “This leaves fewer opportunities this year for a rate hike, although … this will have little impact on the health of the housing market and housing affordability. In fact, FOMC decisions are currently non-event events for the housing market.”