First American Financial released its proprietary Potential Home Sales Model for August, measuring what the healthy market level of home sales should be, based on economic, demographic and housing market fundamentals. The model showed:
• Potential existing-home sales decreased to a 5.34 million seasonally adjusted annualized rate (SAAR), a 0.2 percent month-over-month decrease. This represents a 53.2 percent increase from the market potential low point reached in February 1993.
• The market potential for existing-home sales decreased 3.4 percent compared with a year ago, a loss of 191,000 (SAAR) sales.
• Currently, potential existing-home sales are 1,449,000 (SAAR), or 21.3 percent, below the peak of market potential, which occurred in April 2006.
“Our Potential Home Sales Model … decreased by 0.2 percent in August, and remains 3.4 percent lower than one year ago,” Mark Fleming, chief economist at First American, said. “While it seems that the steep decline in sales driven by the rapid rise in mortgage rates is behind us, sales remain low.
“Existing-home sales will have a tough time gaining real momentum in a limited inventory environment where most homeowners are rate-locked into their homes – you can’t buy what’s not for sale,” Fleming said. “A higher mortgage rate environment resulting in limited sales helps to explain why the housing market has slipped back into a housing recession.”
According to First American’s Housing Recession indicator, a comprehensive, rule-based model based on the National Bureau of Economic Research Business Cycle Dating Committee’s method of calling recessions that relies on eight economic indicators, the housing market dipped back into recession in May.
“The housing market was in recession last year between May and November but pulled out of recession when mortgage rates eased late last year and the new-home market recovered,” Fleming said. “The resurgence in mortgage rates, constrained affordability, a slowing pace of sales, fewer residential housing jobs and less residential housing investment returned the housing market to recession.”
The last time the housing market double dipped in and out of recession was during the Global Financial Crisis (GFC). The brief pause during the GFC housing recession, between July and November 2009, was precipitated in large part by a decline in mortgage rates from about 5.5 percent to 4.7 percent, which improved affordability and sparked a brief surge in existing-home sales, Fleming said.
“The GFC double-dip and the current double-dip highlights the sensitivity of the housing market to mortgage rate volatility,” he added. “Sales, affordability, residential construction and the real estate-related labor market are all sensitive to mortgage rate trends.”