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Potential Home Sales Model Reports Slowing Sales


First American Financial Corporation has released the latest Potential Home Sales Model for the month of July 2022, which uses proprietary data to measure what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals. 

For the month of July, potential existing-home sales decreased to a rate of 5.45 million seasonally adjusted, a 0.2% monthly decline. From a year ago, this number is down 14.4%, registering a loss of 918,400 home sales. 

Currently, potential existing-home sales is 1,336,000 (SAAR), or 19.7% below the pre-recession peak of market potential, which occurred in April 2006. 

“According to our Potential Home Sales Model, the market potential for existing-home sales in July was estimated to be 5.45 million at a seasonally adjusted annualized rate (SAAR), down 0.2% compared with last month, and 14.4% lower than one year ago,” said Mark Fleming, Chief Economist at First American. 

“It’s clear that the housing market has slowed from its pandemic-era frenzy, as buyers adjust to the new reality of higher mortgage rates. Excluding the spring of 2020 when the housing market came to a brief halt, existing-home sales in June declined to their lowest level since February 2019,” said Fleming. “The decline is not a crash, but rather an adjustment to a not-so-new normal. Potential home buyers are facing greater economic uncertainty and mortgage rate volatility, but there remains a deep-seated desire for homeownership, especially among millennials.” 

The housing market from the potential home buyer’s perspective 

According to Fleming, while household income increased by about 4.7% in July, it was not enough to offset the affordability loss from the 2.5 percentage point increase in the 30-year, fixed-rate mortgage. This resulted in a 23% decline in house-buying power, which was the main reasons behind the cooling demand. 

“Despite the year-over-year decline in affordability, household formation, a key and long-term driver of housing market potential, remained positive. The rise in household formation contributed 60,000 potential home sales in July because the decision to buy a home is both a financial and lifestyle decision, and many millennials are aging into marriage and family formation, which are highly correlated with the decision to become a homeowner,” said Fleming. “Many of these households are also facing rising rents, which may accelerate the decision to purchase a home. Rent cost pressure and lifestyle choices may help to explain why the homeownership rate for households under 35 years old increased the most among all other age cohorts, rising by 0.8 percentage points in the second quarter of 2022 compared with the fourth quarter of 2021, despite rising mortgage rates.” 

The housing market from the sellers perspective 

The majority of people who would be sellers are seemingly staying put as they are hesitant to let go of their low-interest loans. This also factored into the total market potential, dropping it by roughly 84,000 sales. 

“However, homeowners today have record levels of equity, and as their equity grows, they are more likely to consider using that equity to purchase another home that better suits their needs,” said Fleming. “Rising home prices contributed to an increase of 154,000 potential home sales compared with one year ago.” 

What does it all mean for housing potential? 

“The housing market is adjusting to a not-so-new normal. Slowing sales are a symptom of a housing market that’s coming off a two-year pandemic-influenced frenzy and settling into a pace that’s more in line with historical norms,” Fleming concluded. “From the perspective of home buyers and sellers, there are financial concerns that may hold them back from the market, but there are still plenty of reasons to jump in. Millennials continue to age into their prime home-buying years, which will keep long-run demand steady.” 

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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