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What is Keeping the Market Potential Down?

The month of December experienced a lower number of home sales than potentially possible, according to the Potential Home Sales model for November issued by the First American Financial Corporation.

The model was created to assist consumers in deciding whether or not it is a good time to buy or sell a home based on the future outlook of the market. “That’s difficult to assess when looking at the number of homes sold at a particular point in time without understanding the health of the market at that time,” stated First American Chief Economist Mark Fleming.

The data shows that the higher mortgage rates over the last two months have substantially hampered the number of home sales which potentially could have occurred in December. The number of potential existing-home sales decreased to a seasonally adjusted, annualized rate (SAAR) of 5.8 million, a 92.5 percent increase from the low incurred in December of 2008.

The model estimates that December missed out on 129,000 SAAR potential existing-home sales, which equates to a 2.2 percent underperformance. “As I highlighted last month, the post-election increase in mortgage rates is contributing to the slower growth in sales activity,” Fleming stated.

Fleming also talked about how rising mortgage rates can significantly counter the appreciation of home prices. “Rising rates may slow the house price growth rate by as much as 2 percent by the end of 2017,” he stated.

However, rising mortgage rates are just one of the many factors which are causing sluggish homes sales, and some of these factors have a more potent effect than others. “…the most significant influence on sales is the lack of homes listed for sale, particularly entry-level homes,” Fleming stated. “The supply of homes for sale has declined for 18 consecutive months, falling to 4.0 months in November – a level not seen since the mid-2000s.”

Fleming further cautioned about a “lockout effect,” a scenario in which potential home sellers are resistant to listing their homes because their current mortgage rate is lower than the rate in the prevailing market. This could cause a more severe shortage in the amount of homes for sale going forward into 2017.

About Author: Timothy McNally

Tim McNally is a journalist with experience in business reporting. His journalism career began with Houston Energy Insider as an Energy Reporter, which eventually led him to secure a position with OILMAN Magazine as Digital Content Manager. McNally is a native Texan, and he received his degree in Finance from the University of St. Thomas. He is a staff writer for the MReport.

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