After hitting its highest point since 2007 last month, housing market potential fell modestly in March, according to First American’s monthly Potential Home Sales Model and analysis for March.
First American Chief Economist Mark Fleming explains the modest dip in housing market potential and what that means for a searing spring homebuying season.
Fleming points to a couple of factors fueling demand, that is, millennials and still-low mortgage interest rates.
"Housing market potential remains near the 13-year high point, but the severely limited supply of homes for sale and an uptick in mortgage rates pulled market potential for existing-home sales off its February peak,” Fleming said. “Annual comparisons of housing market potential will be very large for the next few months, as the housing market came to a halt last year at this time when the pandemic shut down the economy. However, housing market potential is 16.5% higher than two years ago and will remain strong due to a demographic-fueled shift away from renting to homeowning driven by millennials aging into homeownership and accelerated by still low mortgage rates.”
Further expounding on the impact of rate evolution on the market, Fleming says even the modest rate increase in the last month has been the largest since 2018 and contributes to a $13,000 decline in house-buying power.
While rates remain relatively low, Fleming explains that "for homeowners who locked in rates below 3%, modestly higher rates in a historically low inventory environment may disincentivize some from selling their homes thus preventing more supply from reaching the market. In March, the dip in house-buying power resulted in a decline of 55,600 potential home sales."
He says that due to the changing rates, first-home shoppers may need to adjust their price points.
"But rates aren’t everything, Fleming said. "Buying a home is a lifestyle choice and a large cohort of millennials are reaching prime buying age, and the new normal likely includes more work-from-home options, giving potential homebuyers more geographic flexibility, helping to boost home sales. In March, household formation contributed to a gain of approximately 4,300 potential home sales. This demographic tailwind is expected to persist."
Fleming continues that the increase in the personal savings rate is "adding fuel to housing-demand fire," which climbed to an all-time high in April and remains above the historical average as pandemic-driven restrictions have limited discretionary spending.
“For young people that are still employed, increased savings can be used as a down payment, which is typically the biggest hurdle for first-time homebuyers.”
A few more highlights from the report:
- Potential existing-home sales decreased to a 6.26 million seasonally adjusted annualized rate (SAAR), a -0.1% month-over-month decrease.
- This represents a 79.7% increase from the market potential low point reached in February 1993.
- The market potential for existing-home sales increased 23.6% compared with a year ago, a gain of 1,197,267 (SAAR) sales. Year-over-year comparisons will be very large in the months to come, as the housing market came to a halt last year at this time when the pandemic shut down the economy. Housing rebounded sharply in the summer.
- Currently, potential existing-home sales is 527,022 million (SAAR), or 7.8% below the pre-recession peak of market potential, which occurred in April 2006.