The existing home sales report for March from the National Association of Realtors isn’t due until next week, but Mark Fleming, chief economist for First American, said his early look suggests that a lack of equity is continuing to dog the housing market.

Housing has seen a weak start to the year overall. Mortgage applications have been soft – more down than up – and indicators like sales, starts, and new home purchases have underperformed. This is despite the fact that buying is cheaper than renting in three out of four markets nationwide.

Existing home sales were tepidly positive in February, and the primary reason cited was tightening inventory.

Fleming says the main reason for the weakness in the existing home sale market is lack of equity.

“Lack of equity remains a significant constraining factor for market participants and is the primary reason the existing-home sales market is underperforming.  Existing homeowners are the largest share of the existing-home sales market, and they can’t be home buyers if they don’t have the sufficient equity to be home sellers,” Fleming says. “This is one of the key reasons we are observing tight inventory in many markets.

“Yet the appreciation we do observe, returning equity to existing homeowners, is the most significant key driver of the improvement in expected sales,” Fleming said.

First American’s proprietary model provides a gauge on whether actual existing-homes sales are under capacity or over capacity based on current market fundamentals.

Anthony Sanders, distinguished professor of finance at George Mason University, said Fleming is onto something even if it's not the whole story.

“Lack of equity is a reason, but it is not the only reason,” Sanders said. “Dismal wage growth and real median household income continues to weigh down the housing market.”

The proprietary model showed an increase of 0.4% in March compared to February and an increase of 8.1% compared to March 2014, demonstrating the positive momentum in the current market fundamentals that traditionally drive existing-home sales.  The fundamental seasonally adjusted capacity for the annual sales increased by 27,000 in March.  The two largest contributors to the increase in capacity were house price growth (26,000) and improved economic conditions (3,000), and accounted for the majority of the change in the model.  Growth in the population contributed modestly (1,000).  An increase in interest rates slightly reduced the overall capacity for sales (3,000).

“The fundamental market conditions support a higher level of sales. We have historically low interest rates and affordability remains high. Without equity constraints, these conditions would stimulate more sales activity than we currently see in the market,” noted Mark Fleming.

Click to enlarge

(Source: First American) 

The Market Capacity for Existing Home Sales Month-Over-Month Change chart above provides an illustration of which current market fundamental components are having the most significant impact on the overall change in capacity for existing home sales.

 The current market fundamental components – the blue bars – add up to the total change in sales capacity – green bar.