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Potential Home Sales Increase Before Spring Buying Frenzy

The latest iteration of the Potential Home Sales Model published by First American Financial Corporation covering February 2023 has found that potential existing-home sales increased to a seasonally adjusted annualized rate of 5.74 million units, a 2.6% month-over-month increase. 

Further, this number represents a 56.7% increase from the market potential low point which occurred in February 1993. 

However, the market potential for existing-home sales decreased 11.4% year-over-year—a loss of 702,000 units. As of February, the current potential existing-home stands at a rate of 1,325,700 seasonally adjusted units, or a drop of 19.5% below the pre-recession peak of market potential which occurred in April 2006. 

“The spring season is typically the busiest time of the year for the housing market. According to data from First America Data & Analytics, historically approximately 36% of existing-home sales for the year occur from March through June. The housing market’s seasonal pattern is driven by factors such as weather, holidays and the traditional school year schedule, all of which make spring and summer a more optimal time for moving for many potential home buyers,” said Mark Fleming, Chief Economist at First American. “Yet, there are early signs that the spring home-buying season is off to a slow start. Comparing average mortgage applications in February of this year to February 2019—the last ‘normal’ year before the pandemic hit—reveals that purchase applications are down more than 30%.” 

“Whether the housing market remains frozen or begins to thaw during the crucial spring months is a function of many factors, ranging from mortgage rates to inventory,” Fleming continued. “Our Potential Home Sales Model, which measures what we believe a healthy market for home sales should be based on the economic, demographic and housing market environments, has now increased for four consecutive months alongside generally lower mortgage rates, providing some optimism. However, even if mortgage rates stabilize and demand drifts higher, you can’t buy what’s not for sale.” 

“The average 30-year, fixed mortgage rate has declined for four consecutive months since the peak in October 2022. The decline in mortgage rates has increased house-buying power, thus providing an affordability boost for potential first-time buyers and encouraging some who previously felt ‘rate locked-in’ to re-enter the market,” said Fleming. “Yet, those who are jumping back into the market are finding that there are very few existing homes available for sale. However, there is an alternative to purchasing an existing home – buying a new home.” 

Homebuilders are More Motivated to Sell than Homeowners 

“New home inventory as a share of total home inventory has increased rapidly since 2020, because homebuilders have built more homes and the supply of existing homes for sale has contracted. From 2000 until the pandemic, new homes on average made up about 11% of total inventory,” said Fleming. “In the January 2023 report, that share of new homes reached 27% . The reason why inventory is higher for new homes versus existing homes comes down to the seller. In an existing-home transaction, the seller is the homeowner, whereas in a new-home transaction, it’s a builder.” 

“When mortgage rates spike, as they have done over the last year, homeowners can choose to stay put for a while, especially when they are sitting on a cheap mortgage and are reluctant to drop the sale price of their existing home to attract potential buyers in a higher rate environment. On the other hand, builders are incentivized to move inventory as quickly as possible and therefore can be more flexible in a higher rate environment,” said Fleming. “For instance, builders can more easily offer incentives to bolster sales (such as rate buydowns, paying points and offering price reductions), or upgrades on appliances and other quality features. This essentially allows the buyer to get more home for the same amount of money.” 

“It is important to note that, while new home inventory has increased, only 15.5% of the total new home inventory as of the latest January report are completed and ready to occupy, down from more than 20% pre-pandemic,” said Fleming. “Nevertheless, when existing homes for sale are nearly non-existent, a new home at the right price may be an attractive option.” 

Data for March 2023 is expected to be released April 19. 

About Author: Kyle G. Horst

Kyle Horst
Kyle G. Horst is a reporter for DS News and MReport. A graduate of the University of Texas at Tyler, he has worked for a number of daily, weekly, and monthly publications in South Dakota and Texas. With more than 10 years of experience in community journalism, he has won a number of state, national, and international awards for his writing and photography. He most recently worked as editor of Community Impact Newspaper covering a number of Dallas-Ft. Worth communities on a hyperlocal level. Contact Kyle G. at [email protected].

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