Existing Homes Remain Scarce as Homeowners Stay Put

First American Financial Corporation released First American’s proprietary Potential Home Sales Model for the month of May 2023. The Potential Home Sales Model measures what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals.

May 2023 Potential Home Sales Overview:

For the month of May, First American updated its proprietary Potential Home Sales Model to show that:

• Potential existing-home sales increased to a 5.30 million seasonally adjusted annualized rate (SAAR), a 0.19% month-over-month increase.
• This represents a 52.1% increase from the market potential low point reached in February 1993.
• The market potential for existing-home sales decreased 5.7% compared with a year ago, a loss of 319,000 (SAAR) sales.
• Currently, potential existing-home sales is 1,486,600 (SAAR), or 21.9%, below the peak of market potential, which occurred in April 2006.

Chief Economist Analysis: Despite Supply Challenges, Housing Market Potential Increased Modestly in May

“Our Potential Home Sales Model, which measures what a healthy market for home sales should be based on the economic, demographic and housing market environments, increased modestly in May, but is still down 5.7% from a year ago,” said Mark Fleming, Chief Economist at First American. “The primary factor limiting housing market potential is existing homeowners staying put.

“Traditionally, existing homes make up nearly 90%of the total inventory of homes for sale nationally. Since the start of the pandemic, existing homes have made up on average 75% of all homes for sale,” said Fleming. “In April, the most recent data available, that share fell further to 71%. The persistent lack of existing-home inventory holds back housing market potential. You can’t buy what’s not for sale.”

Existing Homes, A Scarce Good

“One way to measure existing-home inventory is to track inventory turnover–the supply of existing homes for sale as a percentage of the total occupied residential inventory. Prior to the start of the pandemic in February 2020, existing-home inventory averaged 2.2%. In other words, 220 in every 10,000 existing homes were for sale,” said Fleming. “Inventory turnover hit a historic low of 0.77% in February 2022 and has made little progress since then. As of the most recent data available in April 2023, approximately 84 homes in every 10,000 were for sale, well below the historic average.

“Rising tenure length, a measure of the time someone lives in their home, can help to explain why existing-home inventory remains so constrained. Before the housing market crash in 2007, the average length of time someone lived in their home was approximately five years,” said Fleming. “Average tenure length grew to approximately eight years during the aftermath of the housing market crisis between 2008 and 2016, in part because homeowners who were underwater on their mortgage needed to wait for their home to appreciate before they sold.

“The most recent data shows that the average length of time someone lives in their home reached a record high of 10.8 years in May 2023. One of the primary reasons that tenure has increased is due to the higher mortgage rate environment,” said Fleming. “Higher mortgage rates keep existing homeowners feeling rate-locked into their homes. Additionally, existing owners are reluctant to sell because they don’t think they can find a better home to buy in a limited inventory market.”

Will Existing-Home Inventory Rise? 

“Despite the headwinds facing the housing market today, it’s important to note that the decision to buy and sell is more than just a financial calculation. An existing homeowner may choose to sell for lifestyle reasons, even if it means losing their low mortgage rate. Additionally, 42% of homeowners own their home free-and-clear, so they are not deterred by higher mortgage rates,” said Fleming. “Finally, existing homeowners are sitting on near historic levels of equity. For some of those equity-rich homeowners, moving and taking on a higher interest rate may not hinder their decision to sell–especially if they move to a more affordable place. Yet, in a higher mortgage rate environment where existing homeowners stay put and limit the supply of homes for sale, housing market potential will remain constrained. As a result, the new normal for existing-home sales will be lower than during the pandemic boom years.

“While recency bias may have caused many to forget, the pace of sales in late 2020 and 2021, which averaged over 6 million at a seasonally adjusted annualized rate (SAAR) of sales, was anything but normal,” said Fleming. “The pre-pandemic historic average pace of sales is closer to 5 million SAAR and, while the housing market today remains below that level, it is primarily a reflection of the historically low levels of inventory.”

To read the full report, including more data, charts and methodology, click here.