Why has Housing Market Potential Rebounded During the Pandemic?

With a July unemployment rate of 10.2 percent and roughly 30 million Americans claiming unemployment benefits, it’s clear that the domestic economy continues to feel the pain inflicted by the coronavirus pandemic. Yet the housing industry, at least for now, continues its impressive V-shaped rebound. Weekly purchase applications have surpassed their levels from one year ago for 12 straight weeks as potential buyers respond to record low mortgage rates. The market potential for existing-home sales reflects the accelerated activity, according to our Potential Home Sales Model.

“Bolstered by record low mortgage rates and demand stemming from millennials aging into homeownership the potential for existing-home sales will likely continue to rise. Yet, you can’t buy what’s not for sale.”


After hitting a 2020 low point in April, the market potential for existing-home sales steadily increased, reaching 5.6 million sales at a seasonally adjusted annualized rate (SAAR) in July, up 1.9 percent from June and 4.0 percent from one year ago. Record low mortgage rates and millennials continuing to age into their prime home-buying years has boosted demand, but a lack of housing supply remains a challenge. Examining the dynamics fueling the rebound in housing market potential provides insight into the overall health of the housing market and the sustainability of the rebound.


Forces Boosting Housing Market Potential:

  • Household Formation Growth Continued: Household formation continued to grow in July, as millennials continued to form new households, increasing demand for housing. Rising household formation increased market potential by 289,160 potential home sales in July compared with last year.


  • House-Buying Power Increases 15%: House-buying power, how much home one can afford to buy given household income and the prevailing mortgage rate, increased 15 percent since July 2019. The house-buying power surge was driven by the combined impact of lower mortgage rates, which were 0.75 percentage points lower in July than they were a year ago, and a continued increase in annual household income. The increase in house-buying power boosted market potential by approximately 282,000 potential home sales.


  • House Price Appreciation Continues: As homeowners gain equity in their homes, they are more likely to consider using that equity to purchase a larger or more attractive home – the wealth effect. In today’s housing market, fast rising demand against the limited supply of homes for sale has resulted in continued house price appreciation. Compared with one year ago, the growing wealth effect caused by house price appreciation increased housing market potential by nearly 105,000 potential home sales.


Forces Reducing Housing Market Potential:

  • Credit Tightening: Due to the increased economic uncertainty driven by impacts from the pandemic, lenders have tightened credit standards. When lending standards are tight, fewer people can qualify for a mortgage to buy a home. Likewise, when standards are loose, more people can qualify for a mortgage and buy a home. In July, credit tightened compared with last year, which reduced housing market potential by nearly 295,000 potential home sales.


  • Tenure Length Continues to Rise: Tenure length, the average length of time someone lives in their home, increased 4.2 percent in July relative to one year ago. The increase in tenure length had a negative impact on housing market potential, reducing it by 163,000 potential home sales compared with one year ago. Overall, tenure length has been increasing since the aftermath of the housing market crash, meaning fewer and fewer people are listing their homes for sale, keeping housing supply tight and restraining potential sales.


  • More New Home Supply Needed: The lack of inventory for sale and the fear of not being able to find something to buy keeps many existing homeowners from selling their homes, further preventing inventory for sale from reaching the market. Home builders don’t have this fear and are a critical source of inventory for sale when existing homeowners are not. Home builders have accelerated construction since hitting a low point in April, but more building is needed to bridge the gap between supply and demand. Compared with last year, the lack of new home supply reduced housing market potential by 2,100 potential home sales.

082020 PHS

Will Housing Market Potential Continue to Rise?
Bolstered by record low mortgage rates and demand stemming from millennials aging into their household formation years, the potential for existing-home sales will likely continue to rise. Yet, you can’t buy what’s not for sale. The limited supply of existing homes for sale will continue to be an issue, and it will take builders years at a faster pace to build enough new supply to make up for the imbalance between supply and demand. Even though credit standards have loosened in recent months, they are anticipated to remain tight by historical standards, as long as economic uncertainty persists. The economy will follow the path of the virus, but the housing market has largely bucked that trend, and we remain cautiously optimistic for what’s to come.


Note: This month’s report includes an update to the model, which may result in revised PHS values. Additionally, input data has been especially volatile in recent months, which may result in strong revisions.


July 2020 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 5.59 million seasonally adjusted annualized rate (SAAR), a 1.9 percent month-over-month increase.
  • This represents a 61.3 percent increase from the market potential low point reached in February 1993.
  • The market potential for existing-home sales increased 4.0 percent compared with a year ago, a gain of nearly 215,800 (SAAR) sales.
  • Currently, potential existing-home sales is 1.21 million (SAAR), or 17.7 percent below the pre-recession peak of market potential, which occurred in April 2006.


Market Performance Gap

  • The market for existing-home sales underperformed its potential by 1.0 percent or an estimated 56,600 (SAAR) sales.
  • The market performance gap increased by an estimated 16,000 (SAAR) sales between June 2020 and July 2020.

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.