First American released proprietary Potential Home Sales Model for the month of March. The model measures what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals.
March 2023 takeaways included:
• Potential existing-home sales decreased to a 5.35 million seasonally adjusted annualized rate (SAAR), a 2.5 percent month-over-month drop.
• This represents a 53.5 percent increase from the market potential low point reached in February 1993.
• The market potential for existing-home sales decreased 10.7 percent compared with a year ago, a loss of 641,700 (SAAR) sales.
• Currently, potential existing-home sales amount to 1,439,400 (SAAR), or 21.2 percent below the pre-recession peak of market potential, which occurred in April 2006.
“The housing market has faced its fair share of headwinds leading up to this year’s spring home-buying season. While mortgage rates have retreated from recent highs, they remain elevated compared with one year ago, and house prices, while down from the peak, also remain elevated. All while housing supply remains historically and unseasonably low,” Mark Fleming, chief economist at First American, said in a release. “These headwinds are not new to the housing market, but there is a new concern on the horizon – tightening credit standards.”
Fleming also cited industry fears that recent bank failures will prompt lenders to be much more conservative with approvals.
“At a high level, when lending standards are tight, fewer people can qualify for a mortgage to buy a home. When homeowners are less likely to qualify for a mortgage, they are more likely to stay in their current home or, for potential first-time home buyers, not buy one at all,” Fleming said. “Credit tightening can come in many forms. For example, the availability of mortgages or other loan products may fall, or it may become more difficult to qualify for a mortgage because of lender requirements for higher credit scores, lower debt-to-income ratios, or larger down payments or greater cash reserves.”
According to a recent analysis from Goldman Sachs, only 18 percent of mortgages are held on bank balance sheets, while nearly 70 percent of outstanding mortgages are securitized into mortgage-backed securities, meaning the lender doesn’t have to fund the loan from their deposits or manage the credit risk, added Fleming.
“Mortgages typically held on bank balance sheets include non-conforming and jumbo loans. Lenders may tighten lending requirements for these balance-sheet products. In fact, in a recent report, the Mortgage Bankers Association indicated that mortgage rates for jumbo loans increased, while rates for conforming loans declined,” said Fleming. “The divergence in rates suggests that banks may be tightening credit in response to banking uncertainty for those products. By tightening credit and limiting the number of jumbo loans they originate, banks can reduce their exposure to credit risk and conserve their cash if needed.”