In August, potential existing-home sales increased from the previous month, exceeding the market’s potential, according to First American’s Potential Home Sales Model.
“The housing market exceeded its potential in August 2019, as actual existing-home sales were 0.8% above the market’s potential,” First American Chief Economist Mark Fleming said. “Housing market potential increased relative to last month but declined 1.9% compared with August of last year.”
Although existing-home sales have outperformed market potential for the last six months, the performance gap has been very small. In fact, when the actual level of existing-home sales is significantly above the market potential for home sales, the likelihood of a market correction increases, Fleming said.
According to the company’s analysis, the market potential for existing-home sales fell from 2018, equating a loss of 102,760 sales. This means that potential existing-home sales are 23.1% below the pre-recession peak of March 2004.
That being said, August’s rate still represents a 54.2% increase from the market potential low point reached in February 1993. And overall, the market performance gap increased by an estimated 23,000 sales between July and August of this year.
“Today, the performance gap is not at the level that implies a possible market correction. In fact, there are signs that the market potential for existing-homes may begin to rise,” Fleming said. “The year-over-year growth in tenure length has been slowing since March of this year and it is conceivable that it could stabilize or even decline. Tenure length is largely the result of the rate ‘lock-in’ effect, and seniors aging in place.
“In the latest Freddie Mac weekly report of mortgage rates, the 30-year, fixed mortgage rate was 3.5%, approaching the lowest mortgage rate in history of 3.3%, which occurred in 2012,” Fleming continued. “If mortgage rates remain this low or even fall further, more existing-home owners may be enticed to move as the rate ‘lock-in’ effect fades,” Fleming said. “While actual existing-home sales are marginally outperforming market potential this month, declining mortgage rates could be the factor that bridges the gap.”
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.