First American Financial Corporation has released the First American’s proprietary Potential Home Sales Model for the month of August 2022. The Potential Home Sales Model measures what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals.
August 2022 Potential Home Sales Findings
- Potential existing-home sales increased to a 5.61 million seasonally adjusted annualized rate (SAAR), a 2.1% month-over-month increase.
- This represents a 60.8% increase from the market potential low point reached in February 1993.
- The market potential for existing-home sales decreased 12.9 percent compared with a year ago, a loss of 832,800 (SAAR) sales.
- Currently, potential existing-home sales is 1,183,000 (SAAR), or 17.4% below the pre-recession peak of market potential, which occurred in April 2006.
Chief Economist Analysis: Market Potential for Existing-Home Sales Increased 2.1 percent in August
“August marked the first time in nearly a year that housing market potential increased on a monthly basis, increasing 2.1% compared with July to an estimated pace of 5.61 million at a seasonally adjusted annualized rate (SAAR),” said Mark Fleming, Chief Economist at First American. “The month-over-month increase was also the largest monthly increase in housing market potential since December 2020, yet housing market potential remains 12.9% lower than one year ago."
“Using a dynamic simulation involving our Potential Home Sales Model, we can identify the market dynamics influencing potential existing-home sales in August relative to July and determine whether they reduce or boost housing market potential,” said Fleming. “While many dynamics can be closely monitored for their influence on the housing market, some considerations that go into the decision to buy and sell a home are personal and difficult to quantify. In August, those softer dynamics help to explain the discrepancy between the increase in housing market potential and ongoing cooling in the actual housing market.”
The Forces Boosting Housing Market Potential:
“Five of the six drivers of housing market potential boosted potential home sales in August compared with one month ago. One of the primary forces fueling housing market potential in August was a modest rise in house-buying power. The 30-year fixed mortgage rate decreased by 0.19 percentage points, while median household income increased by 0.3% compared to one month ago,” said Fleming. “The result was a 2.5% increase in house-buying power, which increased housing market potential by over 47,000 sales. The welcome bounce in house-buying power is expected to fade quickly, however, as mortgage rates have once again trended upward in the early weeks of September."
“Household formation, a primary and long-term driver of homebuying demand, also pushed market potential upward. Millennials are the largest generation in U.S. history and the bulk of them are aging into their prime home-buying years and forming households,” said Fleming. “Household formation continued to rise in August and contributed over 4,000 potential home sales compared with the previous month."
“New-home supply also boosted potential home sales. The lack of supply and the fear of not being able to find something to buy keeps many existing homeowners from selling. Therefore, as more new-home supply enters the market, the risk of not being able to find something to buy lessens, strengthening homeowners’ confidence in the decision to sell their existing homes,” said Fleming. “Compared with last month, more new-home supply entered the market, increasing housing market potential by nearly 1,300 potential home sales.”
The Forces Holding Back Housing Market Potential:
“Sellers have largely been staying put, given many enjoy a mortgage rate that may be nearly three full percentage points lower than the current market for mortgage rates,” said Fleming. “Since home sellers are also prospective home buyers, homeowners choosing not to sell has reduced housing market potential by 10,000 sales compared with one month ago."
“The other factor that’s likely holding back market potential, but is difficult to quantify, is economic uncertainty. Buying a home is the largest financial decision a person will likely make, and that is predicated on one’s financial security and confidence in the economy,” said Fleming. “The ongoing inflationary environment and risk of a recession with potential labor market consequences remain a concern, severely impacting consumer confidence. As potential home buyers and sellers wait out the period of economic uncertainty, purchase demand may suffer.”
What Does This Mean for the Future of Housing Market Potential?
“The increase in housing market potential indicates that market conditions can fundamentally support more sales compared with one month ago. But, while the August decline in mortgage rates may have given buyers a brief reprieve from the rapid rise in rates over the last several months, it may not be enough to entice potential buyers to jump back into the market during uncertain economic times,” said Fleming. “Potential sellers are also facing economic uncertainty, in addition to being rate locked-in to their homes. Yet, when the economic uncertainty dust settles, those buyers and sellers who were on the sidelines will jump back in the housing game. Demographic trends support elevated purchase demand in the years to come, so it’s a question of when, not if, for the housing market.”
The next Potential Home Sales Model will be released on October 19, 2022 with September 2022 data.