At the onset of 2021, positive housing market dynamics powered growth in the market potential for existing-home sales, offsetting negative market supply dynamics. Millions more millennials will age into their prime home-buying age in 2021, and they will do so at a time of historically low mortgage rates. Working against them is the extremely limited supply of existing homes available for sale, especially homes priced for first-time home buyers. In January, the positives of market demand overcame the negatives of supply, fueling a boost of approximately 512,000 potential home sales relative to one year ago.

“Build it and the homebodies just might buy it.”

Historically Low Rates and Wage Growth Boost Affordability

Soaring house-buying power, how much home one can afford to buy given household income and the prevailing mortgage rate, fueled the bulk of the increase in housing market potential compared with one year ago. In January, the 30-year, fixed-rate mortgage declined to 2.7 percent, 0.9 percentage points lower than one year ago. At the same time, for those still employed, wages continued to grow. The low mortgage rates and income growth spurred an 18.9 percent increase in house-buying power compared with a year ago, boosting market potential by 363,000 potential home sales.

Household Growth Boosts Demand for Homes

As millennials have continued to form new households, they have also boosted demand for housing. The increase in household formation compared with a year ago increased market potential by approximately 91,000 potential home sales in January. The multi-year demographic tailwind that the housing market has experienced for the last three years remains strong and will continue throughout 2021. Indeed, a recent survey shows that millennials are prioritizing saving for homeownership over marriage or children.

Rapid House Price Appreciation Is a Temptation That Can’t Be Resisted

Strong demand from home buyers armed with robust buying power confronted with limited supply heightens competition and that bids up prices, fueling equity growth. As homeowners gain equity in their homes, the temptation grows to list their current home for sale and use the equity to purchase a larger or more attractive home. This partially explains why home sales in the highest price tiers experienced the greatest year-over-year growth in December, according to the most recent NAR existing-home sales report. Rising equity levels due to faster house price appreciation generated a gain of approximately 238,000 potential home sales in January. The limited supply and strong demand dynamics are expected to continue in 2021, keeping upward pressure on house prices.

Blame the Homebodies

The lack of existing homes available for sale remains the only drag on housing market potential. Many homeowners may want to upgrade, but do not for fear that they will be unable to find a home to buy, preventing more supply from reaching the market and exacerbating the lack of inventory. As a result, everyone “stays put” and the supply of homes for sale dwindles further. Year-over-year growth of tenure length was 4.0 percent higher in January than a year ago. The increase in tenure length had the largest negative impact on housing market potential this month, reducing it by 167,000 potential home sales compared with a year ago.

Build it and The Homebodies Just Might Buy It

Homebuilding took a sharp turn upward at the end of 2020, but the pace of new home construction, specifically much needed single-family homes, remains below what is needed to satisfy demand. As new supply enters the market, the risk of not being able to find something to buy lessens and homeowners’ confidence in the decision to sell their existing home grows. Compared with last year, the additional new home supply increased housing market potential by a somewhat negligible 340 potential home sales. Much more is needed.

Housing market potential is likely to increase in 2021, as mortgage rates are expected to remain near 3 percent, millennials continue to form households and more existing homeowners tap their equity for the purchase of a better home. While the fear of not being able to find something to buy will not disappear in a limited supply environment, new housing supply can incentivize existing homeowners to move. Build it and the homebodies just might buy it.

January 2021 Potential Home Sales

For the month of January, First American updated its proprietary Potential Home Sales Model to show that:

• Potential existing-home sales increased to a 6.17 million seasonally adjusted annualized rate (SAAR), a 0.4 percent month-over-month increase.
• This represents a 77.1 percent increase from the market potential low point reached in February 1993.
• The market potential for existing-home sales increased 9.0 percent compared with a year ago, a gain of 512,083 (SAAR) sales.
• Currently, potential existing-home sales is 712,052 million (SAAR), or 10.3 percent below the pre-recession peak of market potential, which occurred in April 2006.

Market Performance Gap

• The market for existing-home sales outperformed its potential by 3.0 percent or an estimated 183,790 (SAAR) sales.
• The market performance gap increased by an estimated 136,731 (SAAR) sales between December 2020 and January 2021.

What Insight Does the Potential Home Sales Model Reveal?

When considering the right time to buy or sell a home, an important factor in the decision should be the market’s overall health, which is largely a function of supply and demand. Knowing how close the market is to a healthy level of activity can help consumers determine if it is a good time to buy or sell, and what might happen to the market in the future. That is difficult to assess when looking at the number of homes sold at a particular point in time without understanding the health of the market at that time. Historical context is critically important. Our potential home sales model measures what we believe a healthy market level of home sales should be based on the economic, demographic and housing market environments.

About the Potential Home Sales Model

Potential home sales measures existing-home 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. 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, including non-traditional market conditions, policy constraints and market participant behavior. Recent potential home sale estimates are subject to revision to reflect the most up-to-date information available on the economy, housing market and financial conditions. The Potential Home Sales model is published prior to the National Association of Realtors’ Existing-Home Sales report each month.