First American Financial Corp., the title, settlement, and risk solutions provider, released its proprietary Potential Home Sales Model for May 2022. The model determines what the healthy market level of home sales should be based on economic, demographic, and housing-market fundamentals.
The model found that potential existing-home sales decreased to a 5.62 million seasonally adjusted annualized rate (SAAR), a 2% month-over-month decrease. It represents a 61.2% increase, however, from the market potential low point reached in February 1993.
The market potential for existing-home sales fell 10.5% compared to a year ago, marking a loss of 660,395 (SAAR) sales. Currently, potential existing-home sales is 1.17 million (SAAR) or 17.2% below pre-recession peak of market potential, which occurred in April 2006.
“Home purchase demand is declining as mortgage rates rise alongside still-strong house price appreciation,” said Mark Fleming, chief economist at First American. “While a decline in demand may reduce the pace of sales and lead to an increase in inventory, existing homeowners are less inclined to sell their homes as mortgage rates rise. Historically, nearly 90% of total inventory is existing-home inventory, and existing homeowners are staying put. Increasing the supply of homes for sale is key to slowing house price growth and restoring balance to the housing market.”
According to Fleming, there are two trends locking homeowners in place and preventing much-needed housing supply from reaching the market. First, many existing homeowners are rate-locked-in to historically low, sub-3% mortgage rates, and now that rates are rising there is a financial disincentive to sell and buy a new home at a higher mortgage rate.
“The golden handcuffs of low mortgage rates prevent more supply from reaching the market,” he said.
Furthermore, seniors are choosing to age in place, rather than downsize or move to another home. A 2019 study from Freddie Mac shows that if adults born between 1931-59 behaved like earlier generations, they would have released nearly 1.6 million additional housing units to the market by 2018.
“As seniors continue to choose to age in place, there will be fewer existing homes available for sale," Fleming said. "And with many of these senior homeowners also locked into historically low mortgage rates and sitting on historically high levels of equity, it’s more likely they will renovate the home they currently own than list their home for sale and move."
A moderation of housing price growth will signal that balance is returning to the housing market, he said. Yet, more housing supply is critical to meaningful moderation in house price appreciation. While mortgage rates continue to cool demand, it also keeps existing homeowners locked into their homes.
“You can’t buy what’s not for sale — and existing homeowners have little incentive to relieve the supply pressure, keeping a lid on housing market normalization,” Fleming added.
The next Potential Home Sales Model will be released on July 19, 2022 with June 2022 data.
