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First American: Mortgage rates overshadowing healthy economy

Market potential for existing-home sales decrease 0.4% year-over-year

In October, potential existing-home sales rose from the previous month, but fell below 2017 levels, according to First American’s Potential Home Sales Model.

“While the housing market continues to underperform its potential by 6.5%, the gap between actual existing home sales and the market potential for home sales narrowed by 1% in October compared with September, according to our Potential Homes Sales model,” First American Chief Economist Mark Fleming said.

According to the report, potential existing-home sales increased to a 6.04 million seasonally adjusted annualized rate, increasing 0.5% from September.

Notably, this represents a 61.7% increase from the market potential low point reached in February 2011.

Fleming said the housing market has the potential to support more than 391,000 additional home sales at a seasonally adjusted annualized rate.

“The primary culprit for the housing market’s performance gap remains severe supply shortages – home buyers can’t buy what’s not for sale,” Fleming continued. “While the discussion of rising mortgage rates tends to focus on their impact on the buyer’s affordability, rising mortgage rates create a financial disincentive for existing homeowners with low mortgage rates from selling their homes.”

According to Fleming, this “phenomenon” affects both sides of the supply and demand dynamic, boiling down to those who don’t sell, don’t buy either.

The report explains that the market potential for existing-home sales decreased by 0.4% compared with a year ago, a loss of 24,600 sales. This means that potential existing-home sales have fallen 17.1% below the pre-recession peak of market potential in July 2005.

“Despite the boost in demand and positive economic environment, the market potential for home sales has outpaced actual existing-home sales for five straight years,” Fleming said. “However, this month, the market potential for home sales also saw its first year-over-year decline in over three years.”

The market for existing-home sales is underperforming its potential by 6.5% or an estimated 391,600 sales. Furthermore, the market performance gap decreased by an estimated 64,800 sales month-over-month, according to the report.

“Rising mortgage rates have been detrimental to the market potential for existing-home sales, impacting the propensity to sell, as well as the ability to buy,” Fleming said. “Mortgage rates have risen nearly one percentage point in the past year and will likely rise to 5% in 2019.”

NOTE:  Potential home sales measures existing-homes sales, based on the historical relationship between existing-home sales and U.S. population demographic data, including income and labor market conditions, price trends in the housing market and conditions in the financial market.

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