Pre-Crash Peak is Within Reach for Existing Sales

The residential housing market is falling short of its potential due to increasingly tight inventory not keeping up with demand, but is making strides, according to the First American Financial Corporation Potential Home Sales Model for September 2016.

According to First American, potential existing-home sales increased to a seasonally-adjusted annual rate of 5.8 million, which represented a 92.6 percent increase from the trough reached in December 2008 right after the housing crash.

The potential existing-home sales rate of 5.8 million in September represented an increase of 6.5 percent compared to September 2015 (which calculates to approximately 352,000 in sales), but is still about 6 percent below its pre-recession peak of market potential, reached in July 2005 at the height of the housing bubble.

The existing-home sales market is underperforming its potential by 6.5 percent, or approximately 375,000, according to First American.

“Current  mortgage rates hovering near historic lows combined with increases in wages remain the key drivers to growth in the housing market, as they continue to soften the impact of rising prices and offer consumers increased leverage and buoyed home-buying power,” said Mark Fleming, chief economist at First American. “While this is contributing to greater consumer confidence in the housing market and providing a firm foundation for increased housing demand, tight inventory, particularly in the lower-priced segments, is keeping market activity from reaching its true potential.”

Continued tight inventory in the market (which declined to a 4.6-month supply in August) has put upward pressure on prices, which have increased by an average of 5.7 percent in the previous 12 months. The unemployment rate rose by 10 basis points up to 5.0 percent in September due to the number of people trying to re-enter the workforce, Fleming said. Wage growth over the past 12 months has helped, however.

“Incomes continue to trend upward with the Census Bureau reporting that average hourly earnings have increased 2.6 percent in the past year, coinciding with a boost in consumer confidence,” Fleming said.

The National Association of Realtors' existing-home sales report for September will be released on Thursday, October 20.