Home sales are 6.5% below their potential says report
US home sales should be running 6.5% higher than their current pace but supply issues and interest rates are stifling the market.
That’s one of the key findings of the latest Potential Home Sales Index from First American Financial Corporation, which shows that there should be 391,600 more sales on a seasonally-adjusted annualized rate.
However, the gap in October was narrower than in the previous month by around 64,800 sales.
“While the housing market continues to underperform its potential by 6.5%, the gap between actual existing home sales and the market potential for home sales narrowed by 1% in October compared with September, according to our Potential Homes Sales model,” said Mark Fleming, chief economist at First American.
Fleming added that its supply that remains the main cause of weaker-than-potential sales.
“While the discussion of rising mortgage rates tends to focus on their impact on the buyer’s affordability, rising mortgage rates create a financial disincentive for existing homeowners with low mortgage rates from selling their homes. This phenomenon impacts both sides of the supply and demand dynamic – those who don’t sell, don’t buy either,” he added.
While homeowners remain reluctant to sell, the dual benefits of rising demand and a strong economy cannot be realised, Fleming notes. Therefore, the potential for the market remains below actual sales.
“Rising mortgage rates have been detrimental to the market potential for existing-home sales, impacting the propensity to sell, as well as the ability to buy. Mortgage rates have risen nearly one percentage point in the past year, and will likely rise to 5% in 2019,” said Fleming. “The 30-year, fixed rate mortgage hasn’t been that high since 2009. Rising mortgage rates create a financial disincentive for existing homeowners with low mortgage rates from selling their homes.”
And, as Fleming points out – it’s hard to buy what’s not for sale!