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Why Home Sales Aren’t Living up to Their Potential

HousingDespite the robust reports and legendary numbers logged, today’s vigorous economy isn’t boosting home sales, according to First American’s Potential Home Sales Model for July, which estimates the expected level of existing-home sales based on market fundamentals.

According to the report, published on Tuesday, potential existing-home sales in July jumped to a 6.08 million seasonally adjusted annualized rate (SAAR), a 0.3 percent month-over-month upswing—a 62.8 percent gain from the market potential low-point recorded in February 2011. The market potential for existing-home sales edged up by 3.5 percent compared with a year ago, representing an increase of 208,900 (SAAR) sales. Now, potential existing-home sales equal 1.21 million (SAAR), or 16.6 percent under the pre-recession peak of market potential, which happened in July 2005.

All that said, the market for existing-home sales is underperforming its potential by 5.8 percent, or an estimated 352,000 (SAAR) sales, the report indicated.

While there’s no denying that both the economy and the housing markets are hot, home sales, by sharp contrast, are not, Mark Fleming, Chief Economist at First American said. Why the dichotomy? Even though expanding rates don’t spook homebuyers much, they do seem to scare off home sellers, he explained.

“Rising rates reduce the incentive for current homeowners to sell their homes,” Fleming said. “There are limited reasons to sell when, due to higher mortgage rates, it will cost you more each month just to borrow the same amount from the bank.”

Plus existing owners are reluctant to sell because they’re scared they won’t be able to find another abode to buy, he notes. “The game of musical chairs that is the housing market today needs more chairs,” Fleming said.

The solution to the supply shortage, is, quite simply, to build new homes, he suggests.

Additional supply, particularly of new entry-level homes to meet the needs of the first-time buyers who remain interested in buying even as rates increase, is critical to satisfying the rising demand for housing,” Fleming said. “If existing homeowners remain hesitant to list their homes for sale, then increasing the pace of new home construction is necessary to alleviate the supply shortage that the housing market faces today.” 

About Author: Alison Rich

Alison Rich has a long-time tenure in the writing and editing realm, touting an impressive body of work that has been featured in local and national consumer and trade publications spanning industries and audiences. She has worked for DS News and MReport magazines—both in print and online—since they launched.
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