First American

How the ‘Delta Dip’ Boosted Housing Market Potential

Housing market potential strengthened in July, according to our Potential Home Sales Model, increasing 1.3 percent compared with June. It is now nearly 16 percent higher than in July of last year, when the housing market’s summer rebound began, following the initial pandemic-driven decline in the spring.


“You can’t buy what’s not for sale, even if your buying power says you can afford it.”


 

The bump in housing market potential can primarily be attributed to a decline in mortgage rates and an uptick in household income, both contributing to higher house-buying power. Five of the six elements of our Potential Home Sales Model swung in favor of increasing market potential, but these were partially offset by an increase in the average length of time people live in their homes and subsequent limiting impact on housing supply negatively influencing market potential. You can’t buy what’s not for sale, even if your buying power says you can afford it.

Two Primary Forces Boosting Housing Market Potential:

  • House-Buying Power Jumps Nearly 2 Percent: House-buying power, how much home one can afford to buy given household income and the prevailing mortgage rate, increased 1.9 percent since last month. The primary driver of the increase in house-buying power was the “Delta Dip” in mortgage rates, a 0.1 percentage point decline in the 30-year, fixed mortgage rate partly due to economic and health uncertainty from the Delta variant putting downward pressure on Treasury yields and, in turn, mortgage rates. Holding income constant at its June level, the “Delta Dip” in mortgage rates contributed to a $7,000 increase in house-buying power. Household income also ticked up, generating a $2,500 increase in house-buying power. The total $9,500 increase in house-buying power boosted market potential by a strong 41,300 potential home sales.

 

  • Household Formation Growth Continued: New household formation, primarily driven by millennials, continued to grow in July, boosting housing demand. Rising household formation increased housing market potential by 20,800 potential home sales in July compared with last month.

The Only Force Reducing Housing Market Potential:

  • Homeowners Staying in their Homes for a Record 10.6 Years: The average length of time someone lives in their home increased in July relative to one month ago, but at a slower pace than in the previous three months. Still, the increase had a negative impact on housing market potential, reducing it by 9,100 potential home sales compared with one month ago. Overall, the average length of time people stay in their home has been increasing since the aftermath of the housing market crash a decade ago, meaning fewer and fewer people are listing their homes for sale, which keeps housing supply tight and restrains potential sales. Many homeowners refinanced into record low mortgage rates in 2020. Despite rates being below 3 percent once again, those homeowners are less inclined to move because they face a financial penalty in the form of a higher mortgage rate and larger monthly payment, even if they borrow the same amount as their existing mortgage. The lack of housing supply also prevents homeowners from listing their homes for sale – you can’t buy what’s not for sale and you won’t sell if you can’t find something better to buy.

082021 PHS

Will Housing Market Potential Continue to Rise?

Millennials continue to age into their prime home-buying years, and house-buying power will remain high, even if rates begin to rise slightly in the months to come. Yet, while recent data has shown that more housing supply is coming to market, it is likely insufficient to satisfy all the pent-up demand. Home sales may moderate relative to the wave of pent-up demand that rushed to the market in the second half of 2020, but the fundamentals continue to support strong housing market potential.

July 2021 Potential Home Sales
For the month of July, First American updated its proprietary Potential Home Sales Model to show that:

  • Potential existing-home sales increased to a 6.41 million seasonally adjusted annualized rate (SAAR), a 1.3 percent month-over-month increase.
  • This represents an 82.0 percent increase from the market potential low point reached in February 1993.
  • The market potential for existing-home sales increased 15.8 percent compared with a year ago, a gain of 873,500 (SAAR) sales.
  • Currently, potential existing-home sales is 380,400 (SAAR), or 5.6 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 5.1 percent or an estimated 329,000 (SAAR) sales.
  • The market performance gap decreased by an estimated 21,160 (SAAR) sales between June 2021 and July 2021.

First American Deputy Chief Economist Odeta Kushi contributed to this post.

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.