Potential existing-home sales decreased to a 5.62 million seasonally adjusted annualized rate (SAAR), a 2 percent month-over-month and 10.5 year-over-year decrease, according to the First American potential home sales model for May.
Currently, potential existing-home sales is 1.17 million (SAAR), or 17.2 percent below the pre-recession peak of market potential in April 2006. But, the market potential for home sales remains 2.5 percent higher than May 2019, before the pandemic hit, First American Chief Economist Mark Fleming said in a release.
“Home purchase demand is declining as mortgage rates rise along still-strong house price appreciation. While a decline in demand may reduce the pace of sales and lead to an increase in inventory, existing homeowners are less inclined to sell their homes as mortgage rates rise,” Fleming said. “Historically, nearly 90 percent of total inventory is existing-home inventory, and existing homeowners are staying put. Increasing the supply of homes for sale is key to slowing house price growth and restoring balance to the housing market.”
Before the 2007 housing market crash in 2007, people lived in their home an average of five years, he said. Between 2008 and 2016, that average grew to around eight years, Fleming said.
“The most recent data shows that the average length of time someone lives in their home reached a historic high of 10.6 years in May 2022,” he said. “Since existing homeowners supply the majority of the homes for sale, and homeowners are staying put longer, the housing market faces an ongoing supply shortage.”
Two trends are keeping homeowners from moving, Fleming said, preventing housing supply from reaching the market.
“Many existing homeowners are rate locked-in to historically low, sub-3 percent mortgage rates, and now that rates are rising, there is a financial disincentive to sell their homes and buy a new home at a higher mortgage rate,” Fleming said. “The golden handcuffs of low mortgage rates prevent more supply from reaching the market.
“Seniors choosing to age in place, rather than downsize or move to another home, further limits housing supply. A 2019 study from Freddie Mac shows that if adults born between 1931-1959 behaved like earlier generations, they would have released nearly 1.6 million additional housing units to the market by 2018. As seniors continue to choose to age in place, there will be fewer existing homes available for sale.”
What does that all mean for the housing market?
“A moderation of house price growth will signal that balance is returning to the housing market. Yet, more housing supply is critical to meaningful moderation in house price appreciation,” he said. “While rising mortgage rates will continue to cool demand, it will also keep existing homeowners locked into their homes. You can’t buy what’s not for sale -- and existing homeowners have little incentive to relieve the supply pressure, keeping a lid on housing market normalization.”