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‘You Can’t Buy What’s Not For Sale’

David Krechevsky
Mar 21, 2023
Home Sales

First American's Potential Home Sales Model shows spring homebuying likely to be 'frozen.'

  • Potential existing-home sales increased to a 5.47 million seasonally adjusted annualized rate (SAAR), a 2.6% month-over-month increase.
  • The market potential for existing-home sales decreased 11.4% compared with a year ago, a loss of 702,000 (SAAR) sales.
  • Potential existing-home sales is 1.33 million (SAAR), or 19.5% below the pre-recession peak of market potential.

The spring housing market is typically busy, but this year it is likely to be “frozen,” First American Financial Corp. said Tuesday.

The provider of title, settlement, and risk solutions for real estate transactions released its monthly Potential Home Sales Model for February. The company says the model measures what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals.

Report Highlights

  • Potential existing-home sales increased to a 5.47 million seasonally adjusted annualized rate (SAAR), a 2.6% month-over-month increase.
  • This represents a 56.7% increase from the market potential low point reached in February 1993.
  • Still, the market potential for existing-home sales decreased 11.4% compared with a year ago, a loss of 702,000 (SAAR) sales.
  • Currently, potential existing-home sales is 1.33 million (SAAR), or 19.5% below the pre-recession peak of market potential, which occurred in April 2006.

“The spring season is typically the busiest time of the year for the housing market,” said Mark Fleming, chief economist at First American. “According to data from First America Data & Analytics, historically approximately 36% of existing-home sales for the year occur from March through June.”

The market’s seasonal pattern, he said, “is driven by factors such as weather, holidays, and the traditional school year schedule, all of which make spring and summer a more optimal time for moving for many potential home buyers.” 

And yet, he continued, “there are early signs that the spring home-buying season is off to a slow start. Comparing average mortgage applications in February of this year to February 2019 — the last ‘normal’ year before the pandemic hit — reveals that purchase applications are down more than 30%.”

Whether the housing market remains frozen or begins to thaw this spring is a function of many factors, Fleming said, ranging from mortgage rates to inventory. 

“Our Potential Home Sales Model — which measures what we believe a healthy market for home sales should be based on the economic, demographic, and housing market environments — has now increased for four consecutive months alongside generally lower mortgage rates, providing some optimism. However, even if mortgage rates stabilize and demand drifts higher, you can’t buy what’s not for sale.”

Fleming noted that the average 30-year, fixed mortgage rate has declined for four consecutive months since its peak in October. The decline has increased house-buying power, providing an affordability boost for potential first-time buyers and encouraging some who previously felt “rate locked-in” to re-enter the market.

“Yet, those who are jumping back into the market are finding that there are very few existing homes available for sale,” he said. “However, there is an alternative to purchasing an existing home — buying a new home.”

Homebuilders More Motivated

Fleming said the inventory of new homes as a share of total home inventory has increased rapidly since 2020, "because homebuilders have built more homes and the supply of existing homes for sale has contracted.”

From 2000 until the pandemic, he said, new homes, on average, made up about 11% of total inventory. In the January 2023 report, that share of new homes reached 27%. 

“The reason why inventory is higher for new homes versus existing homes comes down to the seller,” he said. “In an existing-home transaction, the seller is the homeowner, whereas in a new-home transaction, it’s a builder.”

Fleming noted that when mortgage rates spike, as they have over the last year, homeowners can choose to stay put for a while, “especially when they are sitting on a cheap mortgage and are reluctant to drop the sale price of their existing home to attract potential buyers in a higher rate environment. 

“On the other hand,” he continued, “builders are incentivized to move inventory as quickly as possible and therefore can be more flexible in a higher rate environment.”

For instance, he said, to bolster sales, builders can more easily offer incentives — such as rate buydowns, paying points, offering price reductions, or upgrades on appliances and other quality features — giving the buyer more home for the same amount of money.

“It is important to note that, while new home inventory has increased, only 15.5% of the total new home inventory as of the latest January report are completed and ready to occupy, down from more than 20% pre-pandemic,” Fleming said. “Nevertheless, when existing homes for sale are nearly non-existent, a new home at the right price may be an attractive option.”


First American’s Potential Home Sales Model measures existing-homes sales — which include single-family homes, townhomes, condominiums, and co-ops — on a seasonally adjusted annualized rate based on the historical relationship between existing-home sales and U.S. population demographic data, homeowner tenure, house-buying power in the U.S. economy, price trends in the U.S. housing market, and conditions in the financial market. 

When the actual level of existing-home sales are significantly above potential home sales, the pace of turnover is not supported by market fundamentals and there is an increased likelihood of a market correction, First American said. Conversely, seasonally adjusted, annualized rates of actual existing-home sales below the level of potential existing-home sales indicate market turnover is underperforming the rate fundamentally supported by the current conditions. 

Actual seasonally adjusted annualized existing-home sales may exceed or fall short of the potential rate of sales for a variety of reasons, it said, including non-traditional market conditions, policy constraints, and market participant behavior.

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