Potential existing-home sales decreased to a 5.74 million seasonally adjusted annualized rate (SAAR), a 3 percent month-over-month decrease, according to First American’s Potential Home Sales Model for April. That is a 64.6 percent increase from the market potential low point in February 1993.
“Housing market potential is down 8.1 percent, compared with the roaring housing market in April 2021, but today’s housing market is still very 2019, which was the housing market’s strongest year in a decade at the time,” First American Chief Economist Mark Fleming said in a release. “In fact, the market potential for existing-home sales remains 4.2 percent higher than April 2019.”
April also saw mortgage rates soar, Fleming said.
“The Federal Reserve is actively trying to tame inflation and recently announced a 50-basis point increase in the federal funds rate. The Fed will also begin quantitative tightening in June, announcing it will let $30 billion of Treasury bonds and $17.5 billion of mortgage-backed securities mature each month through August,” he said. “How inflation and the broader economy respond to the Fed’s monetary policy tightening will influence further Fed action. If inflation doesn’t decline as expected, the Fed may feel the need to more aggressively increase the federal funds rate and the pace of quantitative tightening, which may put further upward pressure on mortgage rates.”
Rising mortgage rates reduce housing affordability and increases the number of homeowners who are rate locked in, Fleming explained. “While these forces may reduce existing-home sales, they will also bring much-needed balance to the housing market,” he said.
"In April 2022, the average 30-year, fixed mortgage rate was 4.98 percent, which is almost two percentage points higher than one year ago. Holding household income constant at its April 2021 level, the increase in the average mortgage rate since last April reduced house-buying power by nearly $96,000,” Fleming said. “However, household income increased by 5 percent year-over-year, which helped ease the loss in house-buying to $77,000. The year-over-year decline in house-buying power reduced housing market potential by nearly 380,000 potential home sales.”
Although that is a significant decline in the potential number of home sales, that is relative to the pandemic-inflated potential sales in April 2021.
“Comparing today’s potential home sales levels to April 2019, before the pandemic, provides some helpful perspective. In fact, the market potential for existing-home sales is approximately 230,000 above the pre-pandemic benchmark of April 2019,” Fleming said. “The frenzy of the pandemic-era housing market appears to be the historical exception, not the rule. Recency bias may have many believing that mortgage rates below 4 percent is normal, but it is anything but normal from a historical perspective. In fact, the historical average for the 30-year, fixed mortgage rate is nearly 8 percent.
“The rate lock-in effect will constrain supply below demand, making real house price declines unlikely. The good news for potential homebuyers is that rising mortgage rates may help to cool the rapid pace of house price appreciation as some potential buyers will pull back from the market. As higher mortgage rates slow the housing market from its 150-mile-per-hour pace to something more in the line with its historical speed limit, sellers’ market conditions should ease, and homebuyers will benefit from a not-so-new normal.”