According to First American Financial Corporation’s latest Potential Home Sales Model for the month of August 2023, potential existing-home sales decreased to a 5.34 million seasonally adjusted annualized rate (SAAR), a 0.2% month-over-month decrease—a 53.2% increase from the market potential low point reached in February 1993.
First American also reported the market potential for existing-home sales decreased 3.4% compared with a year ago, a loss of 191,000 (SAAR) sales. Currently, potential existing-home sales is 1,449,000 (SAAR), or 21.3% below the peak of market potential, which occurred in April 2006.
“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 by 0.2% in August, and remains 3.4% lower than one year ago,” said Mark Fleming, Chief Economist at First American. “While it seems that the steep decline in sales driven by the rapid rise in mortgage rates is behind us, sales remain low.
First American’s Potential Home Sales Model measures what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals.
“Existing-home sales will have a tough time gaining real momentum in a limited inventory environment where most homeowners are rate-locked into their homes–you can’t buy what’s not for sale,” added Fleming. “A higher mortgage rate environment resulting in limited sales helps to explain why the housing market has slipped back into a housing recession.”
Freddie Mac reported that the 30-year, fixed-rate mortgage (FRM) pushed back up last week, topping 7% for the fifth consecutive week, as the GSE reports the FRM averaging 7.18%, up six basis points from last week’s average of 7.12%. A year ago at this time, the 30-year FRM averaged 6.02%.
“Mortgage rates increased in August, which means we expect the housing recessionary pressures to continue in the near-term until mortgage rates stabilize,” said Fleming. “However, industry forecasts predict that mortgage rates will moderate later in the year if the Federal Reserve stops further monetary tightening and provides investors with more certainty. Mortgage rate stability, even if the stabilization occurs at a higher level, is the key to a housing recovery.”
The industry eagerly awaits the next move by the Federal Reserve, as the Federal Open Market Committee (FOMC) concludes its meeting this coming Wednesday, and at that point, will determine whether to raise, drop of hold steady the federal funds rate.
And with rates lingering above the 7% mark, overall mortgage application volume fell yet again last week as the Mortgage Bankers Association (MBA) reported apps falling for the seventh time in eight weeks, reaching levels last reported since 1996.
“According to our Housing Recession indicator, a comprehensive, rule-based model based on the National Bureau of Economic Research Business Cycle Dating Committee’s (NBER BCDC) method of calling recessions that relies on eight economic indicators, the housing market dipped back into recession in May,” said Fleming. “The housing market was in recession last year between May and November but pulled out of recession when mortgage rates eased late last year, and the new-home market recovered. The resurgence in mortgage rates, constrained affordability, a slowing pace of sales, fewer residential housing jobs and less residential housing investment returned the housing market to recession.”
For the week ending September 9, the U.S. Department of Labor reported that the advance figure for seasonally adjusted initial unemployment claims was 220,000, an increase of 3,000 from the previous week's revised level. The previous week's level was revised up by 1,000 from 216,000 to 217,000. The four-week moving average was 224,500, a decrease of 5,000 from the previous week's revised average. The previous week's average was revised up by 250 from 229,250 to 229,500.
“The last time the housing market double dipped in and out of recession was during the Global Financial Crisis (GFC),” added Fleming. “The brief pause during the GFC housing recession, between July and November 2009, was precipitated in large part by a decline in mortgage rates from about 5.5% to 4.7%, which improved affordability and sparked a brief surge in existing-home sales. The GFC double-dip and the current double-dip highlights the sensitivity of the housing market to mortgage rate volatility. Sales, affordability, residential construction, and the real estate-related labor market are all sensitive to mortgage rate trends.”