This graduation season, many an overachiever is excitedly entering the labor market with big expectations.

First a job, then a rental household, most likely with a friend or two, and eventually, a homeowner? 

So, is the housing market also an overachiever this spring?

Not really, and here's why at the moment the housing market is barely graduating.

In fact, one could argue it’s underachieving its full capacity. 

We measure housing market capacity based on our Existing-Home Sales Capacity (EHS-C) model. The model provides a gauge on whether existing-homes sales, which include single-family homes, townhomes, condominiums and co-ops, are outperforming or underperforming based on current market fundamentals (current demographic, economic, price, and interest rate conditions).

For example, seasonally adjusted, annualized rates of existing-home sales above the level of the EHS-C model indicate market turnover is outperforming the capacity supported by the current conditions. Conversely, seasonally adjusted, annualized rates of existing-home sales below the level of the EHS-C model indicate market turnover is underperforming the capacity supported by the current conditions.

After crunching the numbers using the most recently available April data, the existing-home sales market continues to under achieve capacity. Based on the model, market capacity actually increased by 78,000 sales (1.3% in April, compared to March). 

On a year-over-year basis the market capacity for sales increased 9.2% in April. The two largest contributors to the increase in the EHS-C model were house price growth (33,000) and improved economic conditions (28,000), accounting for 78% of the total change. Growth in the population contributed modestly (1,000). A slight decline in interest rates added to the overall EHS-C increase by a little more than 16,000 sales.

What’s the cause of this underachievement? 

1. Supply is constrained

While individual homeowner equity positions are improving, many homeowners still have a higher than market reservation price, or the price at which they are willing (or able) to put their home on the market for sale.  Without the constraint of insufficient equity, many more homeowners would be willing to sell their homes, especially given the continued low interest rate environment and increased certainty in labor markets.  Since the end of the recession in 2009, the market’s capacity to support sales activity has almost doubled, but is now significantly constrained by the pent-up supply. It’s hard to be a homebuyer if at first you can’t afford to be a home seller.

2. Demand is lagging 

Homeownership levels are the lowest they have been in a quarter century, and household formation growth has almost exclusively been in rental households for the last six years. For now, Millennials remain a renter generation. Yet, Generation Y (millennials) is even bigger, in sheer numbers, than baby boomers and all the surveys suggest they will become homeowners, eventually.  It’s just a matter of time before this pent-up demand is released.

The National Association of Realtors Existing-Home Sales numbers for April will be released on Thursday, May 21.

Hopefully, they will show a strengthening market, but as long as existing homeowners struggle with insufficient equity, and Millennials continue to rent instead of buy, it will be hard for the housing market to overachieve and reach its full capacity.