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.