Housing market potential slumped in November, in large part because of rising mortgage rates, according to the latest First American Potential Home Sales model.
The model for November showed potential existing-home sales decreased to 5.8 million seasonally adjusted, annualized rate (SAAR). This represents a 92.5 percent increase from the market potential low point reached in December 2008. In December, the market potential for existing-home sales grew by 2.9 percent compared with a year ago, an increase of 164,000 SAAR sales.
Currently, potential existing-home sales is 432,000 SAAR, or 7.5 percent below the pre-recession peak of market potential, which occurred in July 2005.
“The post-election increase in mortgage rates is contributing to the slower growth in sales activity. However, the most significant influence on sales is the lack of homes listed for sale, particularly entry-level homes. The supply of homes for sale has declined for 18 consecutive months, falling to four months in November – a level not seen since the mid-2000s. Home price appreciation is typically more sensitive to mortgage rate increases. Rising rates may slow the house price growth rate by as much as 2 percent by the end of 2017,” First American Financial Chief Economist Mark Fleming said in a press release.
According to the report, the market for existing-home sales is under performing its potential by 2.2 percent on an estimated 129,000 SAAR sales. Last month’s revised underperformance gap was 6.2 percent, or 370,000 SAAR sales.
“The low inventory of homes for sale continues to be a concern, as it is putting upward pressure on house prices and could counteract the downward price pressure caused by higher mortgage rates,” Fleming said.
“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,” he continued. “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. Historical context is critically important. Our potential home sales model measures what we believe a healthy market level of home sales should be based on the economic, demographic, and housing market environments.”