In October, potential existing-home sales increased to a 6.27 million seasonally adjusted annualized rate (SAAR), a 0.1 percent month-over-month increase, according to First American’s Potential Home Sales Model. That’s a 79.8 percent increase from the market potential low point reached in February 1993.
The market potential for existing-home sales increased 10.3 percent year-over-year, a gain of nearly 584,000 (SAAR) sales. Currently, potential existing-home sales is 522,000 million (SAAR), or 7.7 percent below the pre-recession peak of market potential in April 2006.
“We may see another strong month in October, as housing market potential increased 10.3 percent compared with one year ago to 6.27 million (SAAR), according to our measure of the market potential for existing-home sales,” First American Chief Economist Mark Fleming said in a release.
“As we approach the final weeks of the year, it’s important to reflect on how the housing market has performed,” he said. “Analyzing the individual economic forces that have driven the continued growth of market potential for existing-home sales can provide insight into how the housing market may fare in 2022.”
Credit standards have loosened over the last year, Fleming said.
“Since the peak of the pandemic in the spring of 2020, lending standards have bounced around but, ultimately, trended toward looser conditions. In October, credit loosened compared with one year ago as the economy continued to improve and lender confidence increased,” he said. “Loosening credit conditions increased housing market potential by approximately 331,000 potential home sales compared with one year ago.”
House price appreciation is also a factor in the strength of the market.
“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 223,000 potential home sales in October compared with one year ago.”
“Household formation continued to grow over the last year, largely driven by millennials, accelerating demand for housing,” he added. “The increase in household formation enhanced market potential by nearly 134,000 potential home sales in October compared with a year ago.”
House-buying power increased .6 percent year-over-year.
“The modest increase in house-buying power was due to the 3.6 percent year-over-year increase in household income,” Fleming said. “Rates pushed back against the increase, as the average 30-year, fixed mortgage rate in October 2021 was 0.23 percentage points higher than one year ago. The increase in house-buying power boosted market potential by 12,000 potential home sales.”
The only economic force that reduced housing market potential year-over-year was the lack of housing inventory.
“The average length of time someone lives in their home continues to set new records, rising to approximately 10.7 years in October, up from 10.4 years one year ago. The longer people live in their homes means fewer and fewer people list their homes for sale, compounding the housing supply shortage,” he said. “The increase in the average length of time someone lives in their home had the only negative impact on housing market potential compared with one year ago, reducing it by 116,000 potential home sales. The lack of supply is the primary constraint to the housing market.”
What does all that mean for the market potential in the new year?
“In 2022, the average length of time someone lives in their home appears poised to rise again, especially as mortgage rates increase, which will prolong the housing supply shortage and dampen housing market potential. The labor market recovery is expected to continue, putting upward pressure on wages, helping consumer house-buying power. Yet, the improving economy is also likely to put upward pressure on mortgage rates,” Fleming said. “The winner of the tug-of-war between rising rates and higher household income will determine the direction of house-buying power. But, even if rising rates outpace the impact of higher incomes, buying a home is more than a financial calculation. Millennials are widely expected to continue to form households, boosting demand for homes. Strong demographic demand will continue to act as the wind in the housing market’s sails.”