In the latest report released by First American Data & Analytics, potential existing home sales in September 2023 have shown a slight decrease to a 5.37 million seasonally adjusted annualized rate (SAAR). This minor 0.03% decline from the previous month, however, represents a substantial 53.9% increase from the market potential low point of February 1993.
Mark Fleming, the chief economist at First American, attributes this slowdown to the increasing 30-year fixed mortgage rates, which have neared 8% in early October. These soaring rates, Fleming explains, negatively impact the housing market by reducing affordability for potential buyers and intensifying the rate lock-in effect for existing homeowners, leading to a suppressive effect on home sales.
Fleming draws a comparison of the current housing market dynamics to those of the 1980s, a period characterized by high inflation and interest rates. Despite the distinct conditions, the impact of these factors on home sales and affordability rhymes with the past, especially given the persistent demand from millennials, akin to the baby boomers of the 1980s.
Potential homebuyers today are grappling with a scenario reminiscent of the early '80s. Back then, the Fed’s strict stance to combat ‘Great Inflation’ led to skyrocketing mortgage rates, dampening home sales and affordability. A similar pattern is emerging, with potential existing-home sales in August barely surpassing a 4 million SAAR. The prediction is a dip below this figure for the first time since the Great Financial Crisis of 2010.
The significant disparity between the demand and supply of homes exacerbates the situation. Despite the market’s resilience compared to the mid-2000s, sales suffer as potential buyers are priced out, and homeowners find no incentive to sell.
“Demographic demand against a severely limited supply of homes for sale continues to put a floor on how low prices can go, but sales suffer as potential buyers are priced out and existing homeowners see no incentive to sell,” warns Fleming.
As the market grapples with these challenges, a silver lining appears in the industry’s forecast. The moderation of mortgage rates could occur if the Federal Reserve eases its monetary tightening grip, providing investors with more certainty. A stability in mortgage rates, even at higher levels, is crucial for the housing market’s eventual recovery, echoing the rebound from the 1980s.
