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Housing Market Potential Strengthens Modestly

Navi Persaud
Nov 22, 2021

First American Financial Corporation's Potential Home Sales Model for October 2021 reported that potential existing-home sales increased 0.1% month-over-month to 6.27 million, with household formation continuing to grow, largely driven by millennials.

The market potential for existing-home sales increased 10.3% compared with a year ago, a gain of nearly 584,000 seasonally adjusted annualized rate sales. One of the four major reasons why housing market potential continues to rise falls with household formation growth, which according to FAFC chief economist Mark Fleming, has been largely driven by millennials. 

“Household formation continued to grow over the last year, largely driven by millennials, accelerating demand for housing,” said Fleming. “The increase in household formation enhanced market potential by nearly 134,000 potential home sales in October compared with a year ago.”

“As we approach the final weeks of the year, it’s important to reflect on how the housing market has performed,” added Fleming. “Analyzing the individual economic forces that have driven the continued growth of market potential for existing-home sales can provide insight into how the housing market may fare in 2022.”

Among other drivers of housing market potential growth, is the loosening of credit standards. Lending standards were tightened at the height of the pandemic to account for a greater risk of forbearance or delinquency, however, credit standards have been eased as the economy began to bounce back. 

“Since the peak of the pandemic in the spring of 2020, lending standards have bounced around but, ultimately, trended toward looser conditions,” said Fleming. “In October, credit loosened compared with one year ago as the economy continued to improve and lender confidence increased. Loosening credit conditions increased housing market potential by approximately 331,000 potential home sales compared with one year ago.”

Additionally, house price appreciation has also contributed to the rise in housing market potential according to the report.

“The historic imbalance in housing supply relative to demand over the last year fueled faster house price appreciation, which increased housing market potential by nearly 223,000 potential home sales in October compared with one year ago,” added Fleming. 

The report also revealed that house-buying power increased modestly by 0.6%, due to the 3.6% year-over-year increase in household income.

“Rates pushed back against the increase, as the average 30-year, fixed mortgage rate in October 2021 was 0.23 percentage points higher than one year ago. The increase in house-buying power boosted market potential by 12,000 potential home sales,” according to Fleming. 

Where will the housing market potential be in 2022? Well, that all depends on the battle between the labor market recovery and rising rates, according to Fleming. 

“In 2022, the average length of time someone lives in their home appears poised to rise again, especially as mortgage rates increase, which will prolong the housing supply shortage and dampen housing market potential. The labor market recovery is expected to continue, putting upward pressure on wages, helping consumer house-buying power. Yet, the improving economy is also likely to put upward pressure on mortgage rates,” said Fleming. “The winner of the tug-of-war between rising rates and higher household income will determine the direction of house-buying power. But, even if rising rates outpace the impact of higher incomes, buying a home is more than a financial calculation. Millennials are widely expected to continue to form households, boosting demand for homes. Strong demographic demand will continue to act as the wind in the housing market’s sails.”

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