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First American Financial Corporation released First American’s proprietary Potential Home Sales Model for the month of May 2021. The report found potential existing-home sales increased to a 6.34 million seasonally adjusted annualized rate (SAAR), increasing 0.8% month-over-month. The market potential for existing-home sales increased 22.7% compared to a year ago, representing a gain of 1,173,038 SAAR sales.
The year-over-year comparison is large for May because economic activity was curtailed during the same month last year due to the pandemic. Currently, potential existing-home sales is 453,138 SAAR. That is 6.7% below the pre-recession peak of market potential, which occurred in April 2006.
Mark Fleming, a chief economist at First American, said, “In May, housing market potential increased 0.8 percent compared with April, and is now nearly 23 percent higher than the pandemic-driven decline last May. Relative to two years ago, housing market potential is nearly 18 percent higher.”
The market for existing-home sales exceeded its potential by 4.3% or an estimated 272,588 SAAR sales. Between April 2021 and May 2021, the market performance gap increased by an estimated 31,341 SAAR sales.
“A dip in mortgage rates and a slight uptick in household income fueled an increase in house-buying power that was large enough to offset the largest monthly increase in tenure length since August 2020. Despite the pandemic-driven demand for more space and shift away from urban areas, the average tenure length – the amount of time a typical homeowner lives in their home – continues to set new records. You can’t buy what’s not for sale, even if your buying power says you can afford it,” said Fleming.
Fleming continued to explain that both mortgage rates and household income swung in favor of increased house-buying power in May, offsetting the low inventory. House-buying power increased by approximately $7,100 in May, contributing to a gain of nearly 31,000 potential home sales compared with last month.
“The primary cause of the lack of supply? Homebodies, existing homeowners choosing to remain in place and not list their homes for sale, a trend that has hampered housing market potential for several years and continues to worsen,” according to Fleming.
“Two trends are locking homebodies in place and driving the increase in tenure length,” Fleming continued. “First, for homeowners with rock-bottom rates, modestly higher rates in a historically low inventory environment may disincentivize some from selling their homes, thus preventing more supply from reaching the market. Second, seniors are choosing to age in place.”
Fleming described a 2019 study from Freddie Mac that shows if seniors and adults born between 1931-1959 behaved like earlier generations, they would have released nearly 1.6 million additional housing units to the market by 2018. However, as seniors continue to choose to age in place, there will be fewer existing homes available for sale.
“It all comes down to the fundamentals,” he said, “You can’t buy what’s not for sale – and the homebodies don’t seem ready to relieve the supply pressure, keeping a lid on market potential growth.”
To read the full Potential Home Sales Model for the month of May 2021, click the link provided.