First American Financial Corp. released its Potential Home Sales Model for November 2022, measuring what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals.
Data pointed to potential existing-home sales increasing to a 5.24 million seasonally adjusted annualized rate (SAAR), a 2.5 percent month-over-month jump. This represents a 50.4 percent increase from the market potential low point reached in February 1993.
Market potential for existing-home sales decreased 18.2 percent compared with November 2021, a loss of 1,164,600 SAAR sales.
Reporting placed potential existing-home sales at 1,546,000 SAAR, or 22.8 percent below the pre-recession peak of market potential, which occurred in April 2006.
“Housing market potential in 2023 will remain largely dependent on the path of mortgage rates, which will be heavily influenced by inflation. In November 2022, housing market potential increased by 2.5 percent relative to October, boosted by a slight month-over-month decline in mortgage rates,” said Mark Fleming, chief economist at First American, in a release. “Even with the modest monthly increase in housing market potential, year-over-year potential existing-home sales remain down 18 percent, a decline of 1,164,600 potential existing-home sales. The steep annual decline in market potential is largely the result of higher mortgage rates, which prevent both buyer and seller from participating in the market.”
Fleming said there’s also many reasons to be optimistic about what 2023 has in store for the housing market, including his perception that inflation on core goods is beginning to wane, with shelter inflation doing the same over the coming months.
“There is reason to be hopeful that mortgage rates, and thereby the housing market, will stabilize in 2023,” he said. “The popular 30-year, fixed mortgage rate is loosely benchmarked to the 10-year Treasury bond, so as the Federal Reserve continues tightening monetary policy to combat inflation, we can expect more upward pressure on Treasury bonds and, therefore, mortgage rates. But the Fed will slow the pace of monetary tightening when there is sustained evidence that inflation is receding, and there is good reason to believe that inflation may slow in 2023.”
Median house-buying power in November fell by $158,000 year-over-year, the second largest annual decline in over 25 years, only exceeded by October’s year-over-year decline, according to First American.
The primary driver of the decline in house-buying power was the significant increase in mortgage rates over the last year. The 30-year, fixed mortgage rate jumped from 3.1 percent in November 2021 to 6.8 percent in November of this year, reducing house-buying power by $170,000.
However, household income has not remained static, but has risen, helping prevent the loss to house-buying from being more severe. Such a significant rate-driven decline to consumer purchasing power reduced market potential by 772,000 potential home sales compared with a year ago, Fleming said.
“Compared with October, mortgage rates eased a bit, boosting house-buying power by a modest $4,000 and increasing market potential by 25,000 potential home sales,” he said. “The monthly increase in housing market potential due to the modest 0.1 percentage point decline in the 30-year, fixed mortgage rate demonstrates the rate sensitivity of prospective homebuyers. Buyers will jump back into the market if they find a home that fits their monthly mortgage budget, and even a modest decline in mortgage rates can help increase their budget.”