Lack of Affordable Inventory Keeps Market Below Potential

October 2016 Potential Home Sales

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

  • Potential existing-home sales increased to a 5.9 million seasonally adjusted, annualized rate (SAAR).
  • This represents a 97.4 percent increase from the market potential low point reached in December 2008.
  • In October, the market potential for existing-home sales grew by 6.7 percent compared with a year ago, an increase of 376,000 (SAAR) sales.
  • Currently, potential existing-home sales is 206,000 (SAAR) or 3.5 percent below the pre-recession peak of market potential, which occurred in July 2005.

Market Performance Gap

  • The market for existing-home sales is underperforming its potential by 6.5 percent or an estimated 384,000 (SAAR) of sales.
  • Last month’s revised performance gap was -10.2 percent or 614,000 (SAAR) sales.

"Increases in employment and post-crisis, record-breaking wage growth, alongside historically low mortgage rates, continue to buoy the housing market. However, the increasing shortage of affordable inventory for first-time homebuyers is preventing market activity from reaching its true potential."

Wage Growth, Higher Employment and Low Rates Keep Buying Power Strong as Low Inventories Restrict Sales

“With mortgage rates still near-historic lows in September, wages growing at a brisker pace, and greater employment, the market potential for existing-home sales grew dramatically. However, despite the increased consumer house-buying power fueled by lower rates and higher incomes, existing home sales remain below market potential, in part due to tight inventory. The supply of affordable entry-level homes is not keeping up with increasing first-time homebuyer demand. The increasing shortage of affordable inventory for first-time homebuyers is preventing market activity from reaching its true potential,” said Mark Fleming, chief economist at First American.

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Chief Economist Analysis Highlights

  • According to the National Association of Realtors, existing-home sales grew 3.2 percent between August and September to 5.47 million (SAAR). The growth in sales was broad-based, with gains seen across all four Census Regions.
  • Sales of starter homes (homes under $100,000) continued to decline, dropping 10.2 percent year-over-year, while sales of homes in all other price ranges increased year-over-year.
  • Tight inventories continue to be a drag on the housing market, which dropped to a 4.5-month supply in September, down from 4.6 in August. The inventory shortage continues to put upward pressure on prices, which rose 5.3 percent over the past 12 months.
  • Incomes continue to trend upward, with the Census Bureau reporting that average hourly earnings have increased 2.8 percent in the past year to a post-crisis high point.
  • The unemployment rate remained steady between September and October at 4.9 percent, with a growing number of people trying to re-enter the workforce after spending an extended period of time unemployed.
  • Mortgage rates ticked up slightly to 3.47 percent, a rise of 0.01 percent between September and October. While mortgage rates have been creeping up as of late, they still remain at near historic lows. The low rates combined with increases in wages remain the key drivers to growth in the housing market, continuing to soften the impact of rising prices, offering consumers increased leverage and buoyed home-buying power.


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’s 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-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, income and labor market conditions 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 in order 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.