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Economist: TRID is Not Affecting Housing Market Potential

home-for-sale-sign-threeWhile November’s substantial decline in existing-home sales was largely attributed to the impact of the TRID, or “Know Before You Owe” mortgage rule, which went into effect on October 3, one economist said the CFPB’s controversial rule is not affecting housing market potential.

While TRID may have been the main driver between November’s 10.5 percent drop in the annual pace of home sales from 5.32 million to 4.76 million, First American Financial Corporation Chief Economist Mark Fleming pointed out that the U.S. housing market has endured an existing-home sales decline for three Novembers in a row—and that the number of pending sales suggest the “TRID shock” on the housing market will be temporary.

“What’s unique about the decline this time is the increased magnitude of the month-over-month drop,” Fleming said. “In addition to the winter home sales woes we have seen in the past two years, the additional decline is being attributed to delayed closings caused by the implementation of the Know-Before-You-Owe rule.  Pending Home Sales, which measures contract signings and is a leading indicator of actual sales in the subsequent month, strongly indicates that existing-home sales will rebound in December as the delayed closing of signed contracts in November come to fruition in December.”

First American’s Potential Home Sales model, which gauges how far over or under existing-home sales are from their long-run potential, based on current market fundamentals, showed an increase by half a percentage point from November to December, compared to a decline of 5.1 percentage points from the same period in 2014. The 0.5 percentage point increase in December represents about 26,000 homes. Currently, the model of potential existing-home sales is up by about 78 percent from its low reached in February 2009. While the potential sales rate is down by about 631,000 from the most recent peak in February 2014, the underperformance gap is closing; it was estimated at 902,000 for December 2015, down from 1.8 million in February 2014.

“The winter home sales woes of late last year are not an indication of any structural change in market potential, but a temporary shock that will be quickly forgotten.”

Mark Fleming, Chief Economist, First American

Fleming stated that not only has the model for market potential remained stable, but also has the potential for significantly more sales activity. Mortgage rates began the year at under 4 percent and may rise if the Fed further increases the short-term federal funds rate, but are still expected to remain below 5 percent for the year. Fleming said he does not expect that the modest mortgage rate increase forecasted will not significantly affect the purchasing power of borrowers who are seeking mortgage loans.

Market potential will be affected in 2016 by steady but modest income growth and slowing home price appreciation, which indicates that existing-home sales are likely to stay in the range of 5.5 million to 6 million, Fleming said. The slowing pace of home price appreciation is good news for potential first-time homebuyers, since it reduces the gap between housing asset growth and income growth, according to Fleming.

“Regulatory shock aside, the existing-home market should benefit in 2016 from an environment marked by continued low rates, strong purchasing power, slowing price appreciation and continued economic improvement,” Fleming said. “The winter home sales woes of late last year are not an indication of any structural change in market potential, but a temporary shock that will be quickly forgotten.”

The National Association of Realtors (NAR) Existing-Home Sales report for December 2015 will be released on Friday, January 22.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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