First American's report found that potential existing-home sales increased to 6.40 million, a 0.05% month-over-month increase. Currently, potential existing-home sales are 392,200 at a seasonally adjusted annualized rate, or 5.8% below the pre-recession peak of market potential, which occurred in April 2006.
With the economy facing such uncertainty given the recent increase in COVID-19 cases across the U.S., it's hard to imagine that potential existing-home sales and market potential would increase. However, First American revealed that the market for existing-home sales outperformed its potential by 6.4%, that's not all, housing market potential is up 9.9% year-over-year.
“Housing market potential continued to strengthen in August, according to our Potential Home Sales Model, increasing 0.05 percent compared with July,” said Mark Fleming, chief economist at First American. “The market potential for existing-home sales is now nearly 10% higher than in August of 2020, when the housing market’s summer rebound was ramping up following the initial pandemic-driven decline in the spring.
“This past year has shown us that the economy follows the path of COVID-19, and that was evident in August’s labor market data. The labor market recovery stalled, as the resurgent pandemic discouraged workers from re-entering the labor force,” said Fleming. “Additionally, consumer confidence fell to a six-month low as worries about rising COVID-19 infection rates weighed on consumers’ outlook for the economy. But is increased economic uncertainty bad news for housing market potential? Not necessarily.”
Fleming says uncertainty is actually boosting house-buying power, especially with rates continuing to hold steady under the 3% mark for the 30-year fixed-rate mortgage.
“In August, house-buying power increased 0.9 percent compared with July due to a 0.03 percentage point decrease in the 30-year, fixed mortgage rate and a 0.5 percent increase in median household income. Lower than anticipated labor force participation, combined with increased demand for labor, is increasing the pace of wage growth,” said Fleming. “The month-over-month jump in household income contributed to a $2,800 increase in house-buying power. Additionally, the decline in mortgage rates contributed to a $1,700 increase in house-buying power in August. The total $4,500 increase in house-buying power boosted market potential by approximately 19,000 potential home sales.”
Unfortunately, the increase in house-buying power is being combated by tightening credit and a lack of inventory.
“A downside of increased economic uncertainty that directly impacts housing is the potential for tightening credit conditions. When lending standards are tighter, fewer people can qualify for a mortgage, dampening first-time home buyer demand and increasing the likelihood that some homeowners stay in their current homes because they are ineligible for a new mortgage,” said Fleming. “In August, while credit conditions remained looser than average, they did tighten relative to July. Tighter credit conditions reduced potential home sales by approximately 54,000 compared with one month ago.”
Fleming also says that the average length of time someone lives in their home increased in August relative to July, cutting housing market potential by over 7,000 potential home sales. He added that existing homeowners don't have much incentive to sell their homes, following the boom in refinances thanks to lower rates.
”Approximately two-thirds of all home buyers are existing homeowners, so fewer homeowners listing their homes reduces housing supply.”
“The housing market’s relationship with this pandemic economy is complicated. While heightened economic uncertainty dims consumer confidence and may result in tighter credit, it also puts downward pressure on mortgage rates,” said Fleming. “The shortage of labor supply relative to the growing demand for labor has fueled household income growth. While the economy may be taking a ‘Delta dip,’ the unexpected burst of increased house-buying power has boosted housing market potential.”