Housing Market Potential Reaches 13-Year High

October 21, 2020
Housing Market Potential
August’s market for existing-home sales underperformed its potential by 4.8%.

Potential existing-home sales increased to a seasonally adjusted annualized rate of 5.92 million units in late summer, according to First American Financial Corporation. That’s the highest level since 2007 for First American’s potential home sales model, which estimates what a healthy level of home sales should be based on economic, demographic, and housing market conditions. When the actual level of existing-home sales surpasses potential existing-home sales considerably, the sales pace isn’t supported by market fundamentals. When potential sales exceed existing-home sales, market turnover is underperforming the rate supported by current conditions. According to First American’s data, August’s market for existing-home sales underperformed its potential by 4.8%, equating to an estimated 282,430 sales on a seasonally adjusted annual basis. That market performance gap grew by an estimated 271,060 sales (seasonally adjusted annual rate) between July and August, suggesting that market fundamentals could support even more turnover than the current sales pace. Several factors helped drive housing market potential to its 13-year high, according to Mark Fleming, First American’s chief economist. “House-buying power — how much home one can afford to buy given household income and the prevailing interest rate — increased 1.3% month over month,” said Fleming. “The house-buying power increase was driven by the combined impact of lower rates, which were 0.08 percentage points lower than the previous month, and a moderate increase in month-over-month household income.” That increase in house-buying power boosted market potential by about 28,180 potential home sales, Fleming added. The growing wealth effect of homeowners gaining equity in their homes added another 17,270 potential home sales, while rising household formation contributed another 24,255 potential home sales.

Source: Scotsman Guide