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Comparing Pre-Pandemic Levels to Current Market Conditions

First American Financial Corporation [1] released First American’s proprietary Potential Home Sales Model (PHSM) for March 2022 [2], showing that potential existing-home sales decreased to a 5.97 million seasonally adjusted annualized rate (SAAR) — a 3.2% month-over-month decrease.

The market potential for existing-home sales decreased 3.9% compared to 2021, — a loss of 240,100 (SAAR) sales, while potential existing-home sales is 823,800 (SAAR), or 12.1% below the pre-recession peak of market potential.

“Since the start of the global pandemic in March 2020, we have weathered unprecedented pandemic-induced changes and the housing market has been no exception,” said Mark Fleming, Chief Economist at First American. “The typically hot spring home-buying season in 2020 was initially frozen by the pandemic’s impacts and shelter-in-place orders. As potential home buyers emerged from the stay-at-home orders, the housing market began to heat up. The rising tide of pent-up demand aligned with historically low mortgage rates and hesitant sellers constraining the supply of homes for sale, creating a perfect storm for rapid house price growth.”

Demand for Housing Skyrockets

“The ability to work-from-home further increased demand, as potential home buyers realized they had more geographic flexibility in their home searches. The result? The most competitive housing market in recent history,” said Fleming. “While housing market potential entering the 2022 spring home-buying season may be easing down from recent peaks, potential home sales remain strong and above pre-pandemic levels.”

“Perhaps a more insightful point of comparison is not last year’s spring home-buying season, and certainly not 2020, but rather the 2019 housing market. In 2019, the economy was growing, demographic demand was strong, rates were sitting at approximately 4 percent, and housing supply was constrained,” said Fleming. “Examining what’s changed since the pre-pandemic spring housing market offers helpful perspective on the 2022 spring home-buying season.”

Homeowners Are Staying Put Longer, Constricting Housing Supply

Housing supply vs. demand is likely another factor why some sellers are choosing not to list and relocate. With rents rising, many homeowners are opting to rent out their properties instead of selling, which is another tactic for them to secure their low mortgage rates. Overall, Americans are also staying in their homes for longer [3], as the typical U.S. homeowner in 2021 had spent 13.2 years in their home — up from 10.1 years in 2012.

“The majority of our for-sale housing supply comes from existing homes, and existing homeowners are staying put. The average length of time someone lives in their home continues to set new records, rising to approximately 10.5 years in March, up from 9.75 years in the spring of 2019,” said Fleming. “The longer people live in their homes, the fewer and fewer homes are listed for sale, compounding the housing supply shortage – you can’t buy what’s not for sale, and you won’t sell if you can’t find something better to buy. Homeowners staying put reduced housing market potential by 288,000 potential home sales compared with March 2019.”

Evaluating Effects of Limited Supply

“While the lack of housing supply holds back sales activity, three forces have continued to propel the housing market forward,” said Fleming.

Housing Market Potential for 2022

“As mortgage rates continue to rise and dampen affordability and the historically low level of homes for sale limits purchase activity, it’s normal to see moderation in the market potential for existing-home sales. Yet, let’s keep the moderation in perspective,” said Fleming. “Housing market potential today remains above 2019 levels, which was the housing market’s strongest year in over a decade at the time thanks to the strengthening demographic tailwind and strong house-buying power. While comparisons to 2021 may not flatter the housing market entering the 2022 spring home-buying season, historical context matters. So far, the 2022 housing market is looking very 2019. The recent pandemic years are anomalous, so comparing today’s housing market with the pre-pandemic era provides helpful insight.”

The PHSM measures what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals.

The next Potential Home Sales Model will be released on May 18, 2022, with April 2022 data.