After two years of a red-hot housing market, the spring homebuying season will be watched closely for signs that balance might be returning, according to First American Chief Economist Mark Fleming.
“Our Potential Home Sales Model estimates the expected level of existing-home sales based on market fundamentals, providing a helpful tool to assess the state of the housing market as spring homebuying ramps up,” Fleming said in a release. “In February, the market potential for existing homes sales was estimated to be 6.17 million at a seasonally adjusted annualized rate (SAAR), down 2.8 percent from January, but nearly flat with a year ago. We can use the Potential Home Sales Model to identify the tailwinds propelling the housing market forward, and the headwinds pushing back on market potential. Among the headwinds, there are both long-term and short-term dynamics impacting housing market potential to consider.”
The unrelenting housing inventory shortage remains one of the market’s biggest long-term headwinds, he said.
“The majority of the supply of homes for sale are existing homes, so existing homeowners are critical influencers of housing supply. However, existing homeowners are increasingly staying put,” Fleming said. “The average length of time someone lives in their home continues to set new records. When existing homeowners live in their homes longer, fewer and fewer homes are listed for sale, compounding the housing supply shortage – you can’t buy what’s not for sale, and you won’t sell if you can’t find something better to buy.”
Rising mortgage rates also have an impact on housing supply.
“Because so many existing homeowners have refinanced into rock-bottom mortgage rates, an increase in mortgage rates can leave existing homeowners feeling ‘rate locked-in,’” Fleming explained. “When the prevailing mortgage rate is greater than homeowners’ existing rate, it will cost homeowners more each month to borrow the same amount of money, disincentivizing them from selling their homes – why move out, if you can’t move up? Homeowners staying put reduced housing market potential by 8,600 potential home sales compared with one month ago.”
Other impacts include tightening credit standards keeping more people from qualifying for a mortgage and declining house-buying power
“House-buying power, how much home one can afford to buy given household income and the prevailing mortgage rate, decreased 3.6 percent compared with one month ago. The monthly decline in house-buying power was due to the 0.3 percentage point increase in the average 30-year, fixed mortgage rate. The decline in house-buying power reduced market potential by nearly 79,000 potential home sales,” Fleming said.
House-buying power may improve in the spring, he said.
“While rates are generally expected to trend upwards in 2022 as the economy continues to improve, geopolitical uncertainty has recently put downward pressure on mortgage rates, at least temporarily,” Fleming said. “Household income is also expected to increase as the economy continues to improve and employers’ bid up wages to attract workers.”
There were two forces that pushed the housing market potential forward in February: equity from price appreciation and demographic demand.
“As homeowners gain equity in their homes, they may be more likely to consider using the equity to purchase a larger or more attractive home,” Fleming said. “The historic imbalance in housing supply relative to demand over the last year fueled faster house price appreciation, which increased housing market potential by nearly 27,000 potential home sales in February compared with one month ago. Annual house price growth has moderated from its peak in recent months, and existing homeowners may fear missing out on selling their homes at historically high prices, prompting them to sell. In addition, household formation, a primary and long-term driver of home-buying demand, continued to rise and contributed a gain of 2,000 potential home sales.”
What does this all mean for the spring homebuying season?
“While the housing market potential headwinds exceeded the tailwinds in February, it’s clear that demographic demand for homes remains robust, and the primary constraint to more sales is the lack of housing supply,” Fleming said. “There are several unknowns as the spring homebuying season begins, but one thing is clear – if you sell it, they will buy it.”