First American Financial Corporation (NYSE: FAF), a Santa Ana-based rovider of title insurance, settlement services and risk solutions for real estate transactions, today released First American’s proprietary Potential Home Sales Model for the month of June 2018. It found:
- Potential existing-home sales increased to a 6.12 million seasonally adjusted annualized rate (SAAR), a 1.1 month-over-month increase.
- This represents a 63.8% increase from the market potential low point reached in February 2011.
- The market potential for existing-home sales increased by 3.3% compared with a year ago, a gain of 194,100 (SAAR) sales.
- Currently, potential existing-home sales is 1.17 million (SAAR), or 16.1% below the pre-recession peak of market potential, which occurred in July 2005.
- The market for existing-home sales is underperforming its potential by 4.2% or an estimated 256,000 (SAAR) sales.
- The market performance gap decreased by an estimated 26,000 (SAAR) sales between May 2018 and June 2018.
“The lack of housing supply is the primary culprit for the persisting gap,” said Mark Fleming, chief economist at First American. “The inventory of homes for sale in most markets remains historically tight, yet demand continues to rise as millennials further age into homeownership, as explained in our Homeownership Progress Index. The housing market is not plagued by a decline in demand, but rather a shortage of supply. The result — surging house prices.
“As house prices rise and homeowner equity reaches its highest level on record, it’s reasonable to expect more homeowners to list their homes for sale and leverage their equity for a new home. So, why are existing homeowners not selling their homes?” asked Fleming.
“Many existing homeowners today are ‘rate-locked.’ The majority of existing homeowners have mortgages with historically low rates and, now that rates are rising, they are hesitant to sell their homes,” said Fleming. “If they sell and purchase a new home, they will have a higher mortgage rate. There is limited incentive to sell when, due to higher mortgage rates, it will cost you more each month just to borrow the same amount from the bank. As mortgage rates rise further, more existing homeowners may become rate-locked into their existing homes.
“Additionally, existing homeowners are facing a ‘prisoners dilemma.’ Many homeowners may want to sell their home and buy another, but do not, for fear that they will not be able to find a home to buy, which prevents more supply from reaching the market and further exacerbates the lack of inventory,” said Fleming. “Because many homeowners are increasingly rate locked-in and fear not being able to find something to buy, their home is becoming their prison.”
“One solution is to build more new homes and increase the overall stock of housing units, but the number of new homes constructed per household is at its lowest level in 60 years of record-keeping, according to the Federal Reserve Bank of Kansas City. If existing homeowners won’t supply their homes for sale then increasing the pace of new home construction is necessary to alleviate the supply shortage in the long run,” said Fleming. “However, existing homeowners will need to start selling their homes to provide any immediate supply relief to the market.”
