First American Financial Corporation reported potential existing-home sales rose 0.2% in August from July to a seasonally adjusted rate of 5.18 million—over performing its potential by 0.8%.
The market potential for existing-home sales declined year-over-year by 1.9%. Potential existing-home sales currently is 1.55 million, which is 23.1% below the pre-recession peak of market potential from March 2004.
The most recent numbers also represents a 54.2% increase from the market’s low point in February 1993.
“The concept behind potential home sales is very similar. Our Potential Home Sales Model measures what a healthy level of home sales should be based on a variety of economic, demographic and housing market metrics,” said First American Chief Economist Mark Fleming. “The performance (output) gap indicates how much actual existing-home sales are over or underperforming market potential.”
Fleming said while there are several forces boosting market potential, the low supply of homes for sale continues to hold the market back. He added that existing-home sales make up about 90% of all home sales, meaning existing homeowners must sell their homes for more to become available.
“Rising tenure length means both fewer buyers and fewer homes on the market, and a reduction in the market potential for existing-home sales. You can’t buy what’s not for sale, and you won’t buy, if you don’t sell,” Fleming said.
Also, Fleming said while existing-home sales have outperformed market potential for the past six month, the performance gap has been very small.
“When the actual level of existing-home sales is significantly above the market potential for home sales, the likelihood of a market correction increases,” he said.
He added that today’s performance gap is not at the level that implies a possible market correct, and that the market potential for existing-home sales may begin to rise.
“The year-over-year growth in tenure length has been slowing since March of this year and it is conceivable that it could stabilize or even decline,” Fleming said. “Tenure length is largely the result of the rate ‘lock-in’ effect, and seniors aging in place.”