Home Sales are likely to rise this spring buying season, even though supply constraints could likely hold them back from reaching their potential, according to data from First American's Potential Home Sales Model  for February.
The model analyzes existing-homes sales on a seasonally adjusted annualized rate (SAAR) based on the historical relationship between existing-home sales and U.S. population demographic data, homeowner tenure, house-buying power in the U.S. economy, price trends in the U.S. housing market, and conditions in the financial market.
According to the analysis, Potential existing-home sales increased marginally to a 5.17 million SAAR, reflecting a month-over-month increase of 1.5 percent.
However, it found that the market potential for existing-home sales declined by 2.9 percent compared with a year ago. Currently, potential existing-home sales was 23.2 percent below the pre-recession peak of market potential, which occurred in March 2004.
Though the market is currently underperforming its potential by 2.5 percent, the analysis indicated that home sales were poised for a strong spring buying season in 2019.
"In February 2019, the housing market continued to underperform its potential but showed signs of promise leading into the spring homebuying season," said Mark Fleming, Chief Economist at First American. "That means the market has the potential to support 127,000 more home sales at a seasonally adjusted annualized rate."
According to Fleming, the "performance gap" in home sales over the past few months was due to supply shortages. "However, so far in 2019, we’ve seen mortgage rates decline and wages rise–both trends work to boost house-buying power and fuel greater market potential for home sales, setting the stage for a stronger than expected spring homebuying season," he said.
The decline in mortgage rates is also likely to encourage some homeowners who might have felt locked-in due to high rates in 2018, to re-enter the market, according to Fleming. Millennials too are likely to take advantage of the low rates and jump back into the market. "The increase in house-buying power directly contributed to a gain of nearly 131,000 potential home sales in the last three months, by far the strongest driver of market potential."
Despite these trends, the shortage of housing supply is likely to remain a challenge for home sales. "The supply squeeze is two-fold: The existing homeowner’s dilemma and the lack of new construction," Fleming observed. "The majority of existing homeowners have mortgages with historically low rates, and there is limited incentive to sell if it will cost them more each month to borrow the same amount of money from the bank. This rate-lock phenomenon has led to a 9 percent yearly increase in tenure length, which reduced market potential by 99,000 sales in the last three months."