First American Financial Corp. released First American’s proprietary Potential Home Sales model for the month of August 2016. The model provides a measure of what a healthy market level of home sales should be based on Chief Economist Mark Fleming’s analysis of current economic and demographic factors and the dynamics of the housing market environment.
For August, the model showed that the market for existing-home sales is underperforming its potential by 5.6 percent or an estimated 323,000 seasonally adjusted, annualized rate (SAAR) of sales, an improvement relative to last month’s revised performance gap of -5.7 percent or 328,000 (SAAR) sales.
In August, the market potential for existing-home sales grew by 1.08 percent compared with July, an increase of 62,000 (SAAR) sales, and increased by 5.9 percent compared with a year ago. This month, potential existing-home sales increased to 5.78 million (SAAR). This represents a 91.9 percent increase from the market potential low point reached in December 2008; however it is a decline of 371,000 (SAAR), or 6.4 percent, from the pre-recession peak of market potential, which occurred in July 2005.
According to the National Association of Realtors (NAR), existing-home sales stumbled in July, falling to 5.39 million (SAAR) from 5.57 million (SAAR) sales in June. The 1.6 percent year-over year decrease is the first year-over-year decline since November 2015. Month-over-month, the drop was 3.2 percent, the first decline since March.
The West, which recently has been a laggard in sales when compared with other parts of the country, saw a 2.5 percent increase from June to July and was the only region to experience an increase in existing-home sales according to the press release. The Northeast fell by 13.2 percent on a month-over-month basis, while the Midwest and South saw sales drop by 5.2 percent and 2.5 percent, respectively.
“Low inventories still remain a significant issue, although the increase to a 4.7-month supply in July from a downwardly revised 4.5-month supply in June should offer some relief to frustrated potential homebuyers competing over the constrained supply. Low inventory levels continue to put upward pressure on home prices, which rose an estimated 6.1 percent year-over-year on a seasonally adjusted basis in July, according to the Case-Shiller House Price Index,” Fleming said.
“Despite tight inventories and rising prices, consumers continue to be optimistic about the housing market. Nowhere is this more evident than in new-home sales volume, which according to the U.S. Census Bureau, grew by 12.4 percent between June and July and 31.3 percent from the year prior,” he continued. “Furthermore, the share of new-home sales under $300,000 grew to 52 percent in July up from 48 percent in June, indicating that not only are homebuilders adding much needed supply to the market, but they are doing so at the lower end of the price distribution with an eye on entry-level buyers.”
Historic low mortgage rates have been extremely influential in boosting the housing market. However, recent improvements in employment data and income gains are starting to play a larger role influencing homebuying power, providing a firm foundation for increased housing demand, Fleming said.
Further confirming signs of a stronger consumer, the U.S. Census Bureau announced that real median household incomes increased by 5.2 percent between 2014 and 2015, the first annual increase in household incomes measured since 2007. The increases in household income were broad, with every demographic group seeing gains in income. However, the increases were greater for lower- and middle-income households.
“These recent gains in consumer financial health not only impact housing demand, but also play a role in the Federal Open Market Committee’s (FOMC) rate policy,” Fleming said.
“Rising rates will have a modest impact on housing demand, but they also signal a strengthening labor market and increased inflation pressure due to rising incomes – both unequivocally good for housing market health.”