Spring Real Estate Market Booming Despite Lack of Supply

The outlook for the spring sellers’ market looks favorable despite rising interest rates and lack of inventory in some areas. According to Mark Fleming, chief economist for First American Financial Corporation, “Demand from Millennials and first-time homebuyers remains robust despite rising rates, resulting in a shrinking underperformance gap, as the market aligns with its potential.”

Additionally, according to the most recent First American Real Estate Sentiment Index, there is increasing confidence among real estate professionals that buyer demand will remain strong, even if rates exceed 5 percent.

Fleming said, “The housing market’s potential for existing-home sales grew 2.4 percent over the past 12 months, despite increasing interest rates. Strong building permit activity and an increasing number of people returning to the workforce helped to increase market potential.”

Knowing the real estate market’s overall health, which is largely a function of supply and demand, is an important factor in deciding the right time to buy or sell a home, according to Fleming. “Knowing how close the market is to a healthy level of activity can help consumers determine if it is a good time to buy or sell, and what might happen to the market in the future,” he said.  

With this goal in mind, each month First Financial publishes a Potential Home Sales Model to understand the health of the market at a particular time. “Historical context is critically important,” said Fleming. “Our potential home sales model measures what we believe a healthy market level of home sales should be based on the economic, demographic, and housing market environments.”

The February 2017 Potential Home Sales Model stated the following:

• In February, the market potential for existing-home sales fell by 0.5 percent compared with a month ago, a decline of 28,000 (SAAR) sales.
• Currently, potential existing-home sales is 658,000 (SAAR) or 11.5 percent below the pre-recession peak of market potential, which occurred in July 2005.
• The market for existing-home sales is underperforming its potential by 2.5 percent or an estimated 142,000 (SAAR) of sales.
• Last month’s revised underperformance gap was 4.5 percent or 260,000 (SAAR) sales.

Fleming also said that limited supply, which remained steady at 3.6 months, continues to put upward pressure on prices, as current homeowners are caught in a “matching trap,” where they are reluctant to list their homes for sale out of concern they will not find a home to buy.

Nevertheless, he said, the outlook for further increases in market potential remains bullish, as strong job and income growth, and increasing demand from Millennials and first-time home buyers in general, bode well for the housing market.