Although the nation’s potential existing-home sales experienced a monthly decline in October, data shows the rate improved from the previous year, according to First American’s Potential Home Sales Model.
“In October 2019, the housing market exceeded its potential, as actual existing-home sales exceeded market potential by 4.6%, or an estimated 239,000 seasonally adjusted annualized sales,” First American Chief Economist Mark Fleming said. “Housing market potential decreased relative to last month but increased 0.6% compared with October of last year.”
According to the company’s analysis, the market potential for existing-home sales fell by 0.6% from September but rose by 0.6% from 2018, equating a gain of 33,050 sales.
Two factors drove the month-over-month decline in the potential for existing-home sales – a month-over-month decline of 0.8% in consumer house-buying power and the continued impact of rising tenure length, meaning people are remaining in their houses longer.
The decline in house-buying power dampened market potential substantially, Fleming said.
“In October, mortgage rates increased by 0.08 percentage points, the first monthly increase since November 2018. While household income increased by 0.2% compared with one month ago, it was not enough to offset the negative impact of the increase in mortgage rates on house-buying power,” Fleming said. “The resulting decline in house-buying power dropped the market potential for existing-home sales by nearly 22,000 sales.”
During the month, tenure length, the average length of time someone lives in their home, increased by 6% compared with January 2019, and 0.7% compared with last month, Fleming said. Increasing tenure length reduced the market potential for existing-home sales by 31,800, he said.
“Tenure length and house-buying power are two of the most influential forces on market potential, and they combined to drag down the market potential for existing-home sales by 0.6% compared with last month, despite positive contributions from new home construction (1,300 potential home sales), looser credit standards (7,500 potential home sales), rising house prices (9,600 potential home sales), and increasing household formation (6,500 potential home sales).”
That being said, Fleming suggests improvements heading into next year, as mortgage rates and consumer buying power are projected to strengthen in 2020.
“One month of declining house-buying power is not a trend. Mortgage rates are currently hovering at 3.7% and forecasters currently expect rates will remain somewhere between 3.7% to 3.9% in 2020 – still near historical lows,” Fleming said. “Meanwhile, household income is expected to continue to grow as wages rise. It’s possible that house-buying power in 2020 may dip lower than in the spring and summer of 2019 but will likely remain near historical highs.”
Nevertheless, Fleming warns tenure length is likely to climb next year, which could dampen the housing market’s potential home sales.
Overall, Fleming warns the market potential for existing-home sales in 2020 will largely depend on the strength of the rate lock-in effect and whether house-buying power can increase sufficiently to offset it.
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.