First American Financial Corporation has released their latest iteration of the proprietary Potential Home Sales Model (PHSM) for April 2022 and found that potential existing-home sales decreased to a 5.74 million seasonally adjusted annualized rate (SAAR), a 3.0% month-over-month decrease.
The reported market potential for existing-home sales decreased 8.1% compared with a year ago, a loss of 503,350 sales.
This reduction represents a 64.6% increase from the market potential low point that occurred in February 1993.
“The market potential for existing-home sales in April declined 3% compared with last month, falling to 5.74 million at a seasonally adjusted annualized rate. Housing market potential is down 8.1%, compared with the roaring housing market in April 2021, but today’s housing market is still very 2019, which was the housing market’s strongest year in a decade at the time,” said Mark Fleming, First American’s Chief Economist. “In fact, the market potential for existing-home sales remains 4.2% higher than April 2019.”
“Mortgage rates increased significantly in April,” Fleming continued. “The jump in mortgage rates came as the Federal Reserve signaled it would soon tighten monetary policy to intensify its fight against inflation.”
Market Potential for Existing-Home Sales Declines 3.0% from March
“The market potential for existing-home sales in April declined 3% compared with last month, falling to 5.74 million at a seasonally adjusted annualized rate (SAAR). Housing market potential is down 8.1%, compared with the roaring housing market in April 2021, but today’s housing market is still very 2019, which was the housing market’s strongest year in a decade at the time,” said Fleming. “In fact, the market potential for existing-home sales remains 4.2% higher than April 2019.”
But April also saw mortgage rates rise significantly in preparation for the next Federal Reserve meeting, which occurred on May 4, who is expected to continue increasing the base interest rate until inflation is under control.
The Dual Impact of Rising Mortgage Rates
“Rising mortgage rates impact housing market potential in two ways—reducing affordability and increasing the number of homeowners that are rate locked-in,” said Fleming. “While these forces may reduce existing-home sales, they will also bring much-needed balance to the housing market.”
Higher rates reduce affordability
But with higher rates, affordability concerns begin to emerge; a problem which is already pushing people out of the market.
“In April 2022, the average 30-year, fixed mortgage rate was 4.98%, which is almost two percentage points higher than one year ago. Holding household income constant at its April 2021 level, the increase in the average mortgage rate since last April reduced house-buying power by nearly $96,000,” said Fleming. “However, household income increased by 5% year over year, which helped ease the loss in house-buying to $77,000. The year-over-year decline in house-buying power reduced housing market potential by nearly 380,000 potential home sales.
“Even though that is a significant decline in the potential number of home sales, it is relative to an unusually high level of potential sales in April 2021, which were fueled by pandemic-driven demand and historically low mortgage rates,” said Fleming. “Comparing today’s potential home sales levels to April 2019, before the pandemic, provides some helpful perspective. In fact, the market potential for existing-home sales is approximately 230,000 above the pre-pandemic benchmark of April 2019.”
A Return to Not-So-New Normal
“The frenzy of the pandemic-era housing market appears to be the historical exception, not the rule. Recency bias may have many believing that mortgage rates below 4 percent is normal, but it is anything but normal from a historical perspective,” said Fleming. “In fact, the historical average for the 30-year, fixed mortgage rate is nearly 8 percent.
“The rate lock-in effect will constrain supply below demand, making real house price declines unlikely. The good news for potential home buyers is that rising mortgage rates may help to cool the rapid pace of house price appreciation as some potential buyers will pull back from the market,” said Fleming. “As higher mortgage rates slow the housing market from its 150-mile-per-hour pace to something more in the line with its historical speed limit, sellers’ market conditions should ease, and home buyers will benefit from a not-so-new normal.”
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 June 20, 2022, with May 2022 data.