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Bridging the Performance Gap

homesThe U.S.economy is in the middle of its second-longest economic expansion in history, exceeding economists’ forecast of 2 percent with an increase in its gross domestic product at 3.5 percent. Despite a surge in demand and a positive economic environment, the market potential for home sales has outpaced actual existing-home sales for five straight years according to a First American [1] report.

First American in its Potential Home Sales Model [2] for October 2018 points out that potential existing-home sales increased to a 6.04 million seasonally adjusted annualized rate (SAAR)  experiencing a 0.5 percent month-over-month increase. This upward trend is reflective of a 61.7 percent increase from the market potential low point reached in February 2011. The release also notes that the market potential for existing-home sales decreased by 0.4 percent compared with a year ago representing a loss of 24,600 (SAAR) sales. The current potential existing-home sales are 1.25 million (SAAR), which is 17.1 percent below the pre-recession peak of market potential in 2005.

The potential home sales model measures what home sales should be based on the economic, demographic and housing market environments.

Indicating the market performance gap, the data revealed the market for existing-home sales underperforming its potential by 6.5 percent or an estimated 391,600 (SAAR) sales. The release found that the gap also declined by an estimated 64,800 (SAAR) sales between September to October in 2018.

“The primary culprit for the housing market’s performance gap remains severe supply shortages—home buyers can’t buy what’s not for sale. While the discussion of rising mortgage rates tends to focus on their impact on the buyer’s affordability, rising mortgage rates create a financial disincentive for existing homeowners with low mortgage rates from selling their homes. This phenomenon impacts both sides of the supply and demand dynamics—those who don’t sell, don’t buy either,” said Mark Fleming, chief economist at First American.

Fleming also indicated that the housing market is experiencing a wave of first-time home buyer demand, as millennials age into homeownership. “According to the latest release of the American Enterprise Institute’s first-time homebuyer index, more than 50 percent of all homes were purchased by first-time homebuyers as of July 2018”, he said.

Sharing his insight on the potential home sales model, Fleming stated that “an important factor while considering the right time to buy or sell a home should be the market’s overall health, which is largely a function of supply and demand.”