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First American: Dwindling inventory threatens potential home sales growth

Market potential for existing-home sales retreats by 2.9%, totaling a loss of 153,000 sales

Although potential existing-home sales rose marginally in February, a lack of inventory now threatens future growth, according to First American’s Potential Home Sales Model.

According to the report, potential existing-home sales increased to a 5.17 million seasonally adjusted annualized rate, increasing 1.5% from January.

Notably, this represents a 54% increase from the market potential low point reached in February 1993.

However, the market potential for existing-home sales retreated by 2.9% compared with a year ago, totaling a loss of 153,000 sales.

This means that potential existing-home sales have fallen 23.2% below the pre-recession peak of market potential in March 2004.

“In February 2019, the housing market continued to underperform its potential, but showed signs of promise leading into the spring home-buying season,” First American Chief Economist Mark Fleming said.

However, actual existing-home sales now sit 2.5% below the market’s potential, which means the market has the potential to support at least 127,000 more home sales, according to Fleming.

So, what’s holding the market potential back? Well, Fleming says it is a lack of inventory.

“Supply shortages have been the primary culprit for this performance gap – you can’t buy what’s not for sale,” Fleming said. “However, so far in 2019, we’ve seen mortgage rates decline and wages rise – both trends work to boost house-buying power and fuel greater market potential for home sales, setting the stage for a stronger than expected spring home-buying season.”

Fleming suggests the best way to ensure home-buying power remains strong is by increasing housing construction.  

“One way to reduce supply squeeze is to build more new homes, but construction headwinds have prevented homebuilders from keeping up with housing demand,” Fleming said. “Lack of new home supply directly contributed to a decline of nearly 8,000 potential home sales in the last three months.”

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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