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First American: Growth in potential existing-home sales dampened by lack of inventory

The market potential for existing-home sales increased by 1.1% in June

In June, potential existing-home sales increased slightly from the previous month, keeping the market’s potential below its 2018 rate, according to First American’s Potential Home Sales Model.

“The housing market underperformed its potential in June 2019, as actual existing-home sales were 1.5% below the market’s potential,” First American Chief Economist Mark Fleming said. “The market potential for existing-home sales increased 1.1% compared with May, according to our Potential Home Sales model.”

According to the company’s analysis, the market potential for existing-home sales fell by 0.2% from 2018, equating a loss of 11,170 sales.

All in all, this means that potential existing-home sales are 22% below the pre-recession peak of March 2004.

That being said, June’s rate represents a 56.3% increase from the market potential low point reached in February 1993.

“In June, housing market potential benefitted from a 10.7% year-over-year increase in consumer house buying power as 30-year, fixed mortgage rates, an important component of consumer house-buying power, fell to their lowest point since November 2016, and declined 0.8 percentage points compared with one year ago,” Fleming said. “Household income, the other component of consumer house-buying power, continued to the rise as well, increasing 2.5% compared with one year ago.”

While increased house-buying power improved housing affordability and boosted the incentive to sell, Fleming notes that a lack of inventory continues to hold the market back.

“Tenure length increased by 0.7% compared with one month ago, contributing to a loss of nearly 33,000 potential home sales,” Fleming said. “The homeowner’s prisoners dilemma, rate “lock-in” (albeit less so now) and seniors aging in place have all contributed to rising tenure length.”

NOTE:  First American's potential home sales report 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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