SANTA ANA, CA—A low supply of housing stock due to homeowners' hesitation to sell and increasing mortgage rates has been keeping the market as a whole below its potential, according to a recent report from First American Financial Corp. The firm's chief economist Mark Fleming tells GlobeSt.com, “It's likely that the market will continue to underperform its potential while these conditions exist.”
The market has been underperforming its potential since May, and this month's market performance gap is the largest since November 2016, according to Fleming. Moreover, the situation is expected to worsen next year. “Rising mortgage rates next year and the continued reluctance of existing homeowners to sell will create supply constraints that will be challenging for potential homebuyers next spring,” he tells us.
There were some pluses to report. First American's October 2017 Potential Home Sales model found that potential existing-home sales increased to a 5.89-million seasonally adjusted annualized rate, a 0.4% month-over-month increase. This represents a 95.7% increase from the market-potential low point reached in December 2008 at the start of the recession. Also, market potential increased by an estimated 26,000 SAAR sales between September and October 2017.
However, in October, the market potential for existing-home sales decreased by 4.3% compared with a year ago, a loss of 262,000 SAAR sales. Currently, potential existing-home sales is 481,000 SAAR, or 8.2%, below the pre-recession peak of market potential, which occurred in July 2005. The market for existing-home sales is underperforming its potential by 7.7% or an estimated 455,000 SAAR sales.
In the report, Fleming says, “Tight supply and strong first-time home-buyer demand continue to be the dominant factors driving the current state of the housing market.” He says existing homeowners remain reluctant to list their homes for sale for fear of not being able to find a home to buy, keeping supply levels low. At the same time, a healthy number of potential home buyers continue to enter the market, so house prices are increasing and affordability is declining. “Historically low rates offer some relief in the form of strong borrowing power, however, rates are expected to rise in the months to come, so if you are renting and thinking of buying, now is the time.”
Fleming says 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.” He adds that historical context is critically important when considering a move in the housing market.
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
