Existing-Home Sales Settle in June

June 2023 Potential Home Sales Highlights:

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

• Potential existing-home sales decreased to a 5.31 million seasonally adjusted annualized rate (SAAR), a 0.23% month-over-month decrease.
• This represents a 52.4% increase from the market potential low point reached in February 1993.
• The market potential for existing-home sales decreased 2.8% compared with a year ago, a loss of 152,400 (SAAR) sales.
• Currently, potential existing-home sales is 1,478,900 (SAAR), or 21.8%, below the peak of market potential, which occurred in April 2006.

Chief Economist Analysis: Housing Market Potential Decreased Modestly in June

“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, decreased modestly in June, and remains 2.8% lower than one year ago,” said Mark Fleming, Chief Economist at First American. “Mortgage rates have risen substantially since the spring of 2022, and higher rates have a dual impact on sales – pricing out buyers who lose purchasing power and keeping some potential sellers rate-locked in. Since the start of the latest rising mortgage-rate era, existing-home sales have declined by approximately 30%. While higher mortgage rates reduce affordability, existing-home sales, historically, do not always fall when rates rise. In fact, existing-home sales are often more influenced by why mortgage rates are rising.”

Examining Past Rising Mortgage-Rate Eras

“Over the past 50 years, we’ve tracked 12 rising mortgage-rate eras and existing-home sales declined in only half of them,” said Fleming. “The 1977-1981 rising-rate era stands out because mortgage rates increased dramatically from approximately 9% to 18.5%. During this period, the Federal Reserve hiked interest rates to tame out-of-control inflation. The result was a 43% decline in existing-home sales."

Fleming continued: "The 2005-2006 rising-rate era preceding the 2008 housing crisis also stands out because sales fell dramatically. Rising mortgage rates in that period were driven by the Federal Reserve’s efforts to tame above-target inflation,” said Fleming. “The Fed’s moves worked, as existing-home sales declined by more than 12% in approximately one year. Existing-home sales also decreased in the 1994 rising-rate era, as the Fed increased the federal funds rate to prevent strong economic growth from feeding inflation."

The good news is that home sales have likely already bottomed, and the pace of sales will begin to settle into a new normal below the breakneck pace of 2020 and 2021, but also not as low as earlier this year. The hope is that affordability will improve in the second half of 2023, so that the pace of sales can be not too hot, not too cold, but just right. 

“However, there are other examples when existing-home sales have proven resilient to rising-rate environments. For example, mortgage rates spiked in the summer of 2013 when the Fed indicated it would taper its quantitative-easing policy of buying Treasury bonds and mortgage-backed securities,” said Fleming. “But this ‘taper tantrum’ had little impact on existing-home sales. Most recently, in 2017-2018, it took almost a year of rising mortgage rates, before the pace of existing-home sales declined below the pace seen before rates started to rise.”

What’s Going on in Today’s Market?

In the current rising-rate era, mortgage rates have increased by over 3.5 percentage points since the Fall of 2021, while existing-home sales have declined by approximately 30% over that same period,” said Fleming. “This housing market is particularly unique because most homeowners refinanced into rock-bottom, likely never-to-be-seen-again, mortgage rates during the pandemic. More than 90% of homeowners in the U.S. have locked in a mortgage rate below 6%."

Mortgage rates have risen substantially since the spring of 2022, and higher rates have a dual impact on sales—pricing out homebuyers who lose purchasing power and keeping some potential sellers rate-locked in.

“As mortgage rates return to a not-so-new-normal of over 6%, those homeowners have a financial disincentive from selling, keeping a lid on the primary source of housing supply, and you can’t buy what’s not for sale. The good news is that home sales have likely already bottomed, and the pace of sales will begin to settle into a new normal below the breakneck pace of 2020 and 2021, but also not as low as earlier this year. The hope is that affordability will improve in the second half of 2023, so that the pace of sales can be not too hot, not too cold, but just right.”

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