Is this the Great Normalization of the Housing Market?

According to our Potential Home Sales Model, the market potential for existing-home sales in July was estimated to be 5.45 million at a seasonally adjusted annualized rate (SAAR), down 0.2 percent compared with last month, and 14.4 percent lower than one year ago.

“Slowing sales are a symptom of a housing market that’s coming off of a two-year pandemic-influenced frenzy and settling into a pace that’s more in line with historical norms.”


It’s clear that the housing market has slowed from its pandemic-era frenzy, as buyers adjust to the new reality of higher mortgage rates. Excluding the spring of 2020 when the housing market came to a brief halt, existing-home sales in June declined to their lowest level since February 2019. The decline is not a crash, but rather an adjustment to a not-so-new normal. Potential home buyers are facing greater economic uncertainty and mortgage rate volatility, but there remains a deep-seated desire for homeownership, especially among millennials.

The Housing Market from the Potential Home Buyer’s Perspective 

Relative to one year ago, median household income increased by approximately 4.7 percent in July, but it was not enough to offset the affordability loss from the 2.5 percentage point increase in the 30-year, fixed mortgage rate. The result was a 23 percent decline in house-buying power, which was one of the primary culprits behind cooling demand. The annual decline in house-buying power reduced market potential by nearly 520,000 sales compared with a year ago. However, the month-over-month trend offered a bright spot as house-buying power edged higher by 1.7 percent in July, as rates dipped lower and household income continued to rise. A decrease, or even stabilization, in mortgage rates may encourage some potential buyers to come off the sidelines.

Despite the year-over-year decline in affordability, household formation, a key and long-term driver of housing market potential, remained positive. The rise in household formation contributed 60,000 potential home sales in July because the decision to buy a home is both a financial and lifestyle decision, and many millennials are aging into marriage and family formation, which are highly correlated with the decision to become a homeowner. Many of these households are also facing rising rents, which may accelerate the decision to purchase a home. Rent cost pressure and lifestyle choices may help to explain why the homeownership rate for households under 35 years old increased the most among all other age cohorts, rising by 0.8 percentage points in the second quarter of 2022 compared with the fourth quarter of 2021, despite rising mortgage rates. 

The Housing Market from the Home Seller’s Perspective 

Sellers have largely been staying put as they are hesitant to let go of their low interest rate mortgages. Since home sellers are also prospective home buyers, homeowners choosing not to sell reduced housing market potential by 84,000 sales compared with one year ago.

However, homeowners today have record levels of equity, and as their equity grows, they are more likely to consider using that equity to purchase another home that better suits their needs. Rising home prices contributed to an increase of 154,000 potential home sales compared with one year ago.

081722 PHS

What Does it All Mean for Housing Market Potential?

The housing market is adjusting to a not-so-new normal. Slowing sales are a symptom of a housing market that’s coming off a two-year pandemic-influenced frenzy and settling into a pace that’s more in line with historical norms. From the perspective of home buyers and sellers, there are financial concerns that may hold them back from the market, but there are still plenty of reasons to jump in. Millennials continue to age into their prime home-buying years, which will keep long-run demand steady. 

July 2022 Potential Home Sales

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

  • Potential existing-home sales decreased to a 5.45 million seasonally adjusted annualized rate (SAAR), a 0.2 percent month-over-month decrease.
  • This represents a 56.4 percent increase from the market potential low point reached in February 1993.
  • The market potential for existing-home sales decreased 14.4 percent compared with a year ago, a loss of 918,400 (SAAR) sales.
  • Currently, potential existing-home sales is 1,336,000 (SAAR), or 19.7 percent below the pre-recession peak of market potential, which occurred in April 2006.

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.