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Housing Market Potential Positioned for Growth

Housing market potential is positioned for growth in 2021, according to First American's potential home sales model.

First American, which provides title insurance, settlement services, and risk solutions for real estate transactions, reported in its January 2021 study that potential existing-home sales increased to a 6.17 million seasonally adjusted annualized rate (all stats represent SAAR), a 0.4% month-over-month increase. This represents a 77.1% increase from the market potential low point reached in February 1993.

Contributing factors include mortgage rates (which will remain close to 3%), millennials forming households, and more existing homeowners tapping into equity to upgrade.

Today, potential existing-home sales is 712,052 million, or 10.3% below the pre-recession peak of market potential, which occurred in April 2006.

Furthermore, the market for existing-home sales outperformed its potential by 3% or an estimated 183,790 sales, and the market performance gap increased by an estimated 136,731 sales from December 2020 to January 2021.

First American's Chief Economist Odeta Kushi says housing-demand dynamics offset the negative impact of the country's limited supply of for-sale homes.

"Millions more millennials will age into their prime home-buying age in 2021, and they will do so at a time of historically low mortgage rates,” said Kushi. “Working against them is the extremely limited supply of existing homes available for sale, especially homes priced for first-time homebuyers. In January, the positives of market demand overcame the negatives of supply, fueling a boost of approximately 512,000 potential home sales relative to one year ago."

She added that wage growth and historically low rates are combining to boost affordability.

"Soaring house-buying power, how much home one can afford to buy given household income and the prevailing mortgage rate, fueled the bulk of the increase in housing market potential compared with one year ago. In January, the 30-year, fixed-rate mortgage declined to 2.7%, 0.9% points lower than one year ago,” Kushi said. “At the same time, for those still employed, wages continued to grow. The low mortgage rates and income growth spurred an 18.9% increase in house-buying power compared with a year ago, boosting market potential by 363,000 potential home sales.”

Kushi pointed out that in a market so attractive to sellers, many can hardly resist the lure of listing their properties.

“Strong demand from homebuyers armed with robust buying power confronted with limited supply heightens competition and that bids up prices, fueling equity growth. As homeowners gain equity in their homes, the temptation grows to list their current home for sale and use the equity to purchase a larger or more attractive home,” Kushi said.

That, in part, explains why home sales in the highest price tiers experienced the greatest year-over-year growth in December, according to the most recent NAR existing-home sales report.

The lack of existing homes available for sale reportedly remains the only drag on housing market potential. There is a fear among homeowners that, despite wanting to upgrade, they won't be able to find a new home in this tight market. New construction will help, but "much more is needed."

"As new supply enters the market, the risk of not being able to find something to buy lessens and homeowners’ confidence in the decision to sell their existing home grows,” Kushi said. “Compared with last year, the additional new home supply increased housing market potential by a somewhat negligible 340 potential home sales."

About Author: Christina Hughes Babb

Christina Hughes Babb is a reporter for DS News and MReport. A graduate of Southern Methodist University, she has been a reporter, editor, and publisher in the Dallas area for more than 15 years. During her 10 years at Advocate Media/Dallas Magazine, she published thousands of articles covering local politics, real estate, development, crime, the arts, entertainment, and human interest, among other topics. She has won two national Mayborn School of Journalism Ten Spurs awards for nonfiction, and has penned pieces for Texas Monthly, Salon.com, Dallas Observer, Edible, and the Dallas Morning news, among others. Contact Christina at christina.hughesbabb@thefivestar.com.
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