Potential existing-home sales increased to a 6.41 million seasonally adjusted annualized rate (SAAR), a 1.3 percent month-over-month increase, according to First American Financial Corp.’s Potential Home Sales Model for July.
The market potential for existing-home sales increased 15.8 percent year-over-year, a gain of 873,500 (SAAR) sales, according to the model. Currently, potential existing-home sales is 380,400 (SAAR), or 5.6 percent below the pre-recession peak of market potential in April 2006.
“The bump in housing market potential can primarily be attributed to a decline in mortgage rates and an uptick in household income, both contributing to higher house-buying power,” First American Chief Economist Mark Fleming said in a release. “Five of the six elements of our Potential Home Sales Model swung in favor of increasing market potential, but these were partially offset by an increase in the average length of time people live in their homes and subsequent limiting impact on housing supply negatively influencing market potential. You can’t buy what’s not for sale, even if your buying power says you can afford it.”
House-buying power rose 1.9 percent from June to July, according to the model.
“The primary driver of the increase in house-buying power was the ‘Delta Dip’ in mortgage rates, a 0.1 percentage point decline in the 30-year, fixed mortgage rate partly due to economic and health uncertainty from the delta variant putting downward pressure on Treasury yields and, in turn, mortgage rates,” Fleming said. “Holding income constant at its June level, the ‘Delta Dip’ in mortgage rates contributed to a $7,000 increase in house-buying power.”
An increase in household income lifted house-buying power another $2,500.
“The total $9,500 increase in house-buying power boosted market potential by a strong 41,300 potential home sales,” Fleming said.
The only factor reducing housing market potential is more people staying in their homes longer, he said.
“The average length of time someone lives in their home increased in July relative to one month ago, but at a slower pace than in the previous three months. Still, the increase had a negative impact on housing market potential, reducing it by 9,100 potential home sales compared with one month ago,” Fleming said. “Overall, the average length of time people stay in their home has been increasing since the aftermath of the housing market crash a decade ago, meaning fewer and fewer people are listing their homes for sale, which keeps housing supply tight and restrains potential sales.”
Those homeowners who took advantage of record low mortgage rates in 2020 and refinanced also are less inclined to move because they face a financial penalty if they do in the form of a higher mortgage rate and larger monthly payment.
“The lack of housing supply also prevents homeowners from listing their homes for sale – you can’t buy what’s not for sale and you won’t sell if you can’t find something better to buy,” Fleming said.
While more housing supply is coming, it isn’t likely to satisfy demand, he added.
“Home sales may moderate relative to the wave of pent-up demand that rushed to the market in the second half of 2020, but the fundamentals continue to support strong housing market potential,” Fleming said.