Is the Housing Market Missing its Fullest Potential?

An absence of affordable inventory for first-time homebuyers is preventing the housing market from reaching a higher level of activity and vitality, according to the results of First American Financial Corporation’s proprietary Potential Home Sales model for October.

First American reported potential existing-home sales increased in October to a 5.9 million seasonally adjusted, annualized rate (SAAR), while the market potential for existing-home sales grew by 6.7 percent compared with a year ago, an increase of 376,000 (SAAR) sales.

However, potential existing-home sales is 206,000 (SAAR) or 3.5 percent below the pre-recession peak of market potential, which occurred in July 2005, while the market for existing-home sales is underperforming its potential by 6.5 percent or an estimated 384,000 (SAAR) of sales.

“With mortgage rates still near-historic lows in September, wages growing at a brisker pace, and greater employment, the market potential for existing-home sales grew dramatically,” said Mark Fleming, chief economist at First American. “However, despite the increased consumer house-buying power fueled by lower rates and higher incomes, existing home sales remain below market potential, in part due to tight inventory. The supply of affordable entry-level homes is not keeping up with increasing first-time homebuyer demand. The increasing shortage of affordable inventory for first-time homebuyers is preventing market activity from reaching its true potential.”