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Existing Home Sales Outperform Market Potential

First American Financial Corporation released its First American’s Potential Home Sales Model for the month of February 2022. The Potential Home Sales Model measures what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals.

For the month of February, First American updated its Potential Home Sales Model to show that:

  • Potential existing-home sales decreased to a 6.17 million seasonally adjusted annualized rate (SAAR), a 2.8% month-over-month decrease.
  • The market potential for existing-home sales increased 0.04% compared with a year ago, a gain of 2,300 (SAAR) sales.
  • Currently, potential existing-home sales is 9.1% below the pre-recession peak of market potential, which occurred in April 2006.
  • This represents a 77.1 percent increase from the market potential low point reached in February 1993.

The market for existing-home sales outperformed its potential by 13.8%, or an estimated 853,000 (SAAR) sales, with the market performance gap increasing by an estimated 291,400 (SAAR) sales between January 2022 and February 2022.

Market potential for existing-home sales was nearly unchanged year-over-year, meanwhile experts predict homes will continue selling rapidly throughout the Spring season.

“Following nearly two years of a soaring housing market, the 2022 spring home-buying season will be watched closely for signs that more balance may be returning to the housing market. Our Potential Home Sales Model estimates the expected level of existing-home sales based on market fundamentals, providing a helpful tool to assess the state of the housing market as spring home-buying ramps up,” said Mark Fleming, Chief Economist at First American.

“In February, the market potential for existing homes sales was estimated to be 6.17 million at a seasonally adjusted annualized rate (SAAR), down 2.8% from January, but nearly flat with a year ago. We can use the Potential Home Sales Model to identify the tailwinds propelling the housing market forward, and the headwinds pushing back on market potential. Among the headwinds, there are both long-term and short-term dynamics impacting housing market potential to consider.”

A severe housing supply shortage remains the housing market’s most significant long-term headwind, as homes for sale reached another record-low in February.

“The majority of the supply of homes for sale are existing homes, so existing homeowners are critical influencers of housing supply. However, existing homeowners are increasingly staying put. The average length of time someone lives in their home continues to set new records, rising to approximately 10.4 years in February, up from 10.3 years one year ago. When existing homeowners live in their homes longer, fewer and fewer homes are listed for sale, compounding the housing supply shortage – you can’t buy what’s not for sale, and you won’t sell if you can’t find something better to buy,” said Fleming.

“Additionally, mortgage rates increased by the second largest month-over-month total since 2016 in February. Because so many existing homeowners have refinanced into rock-bottom mortgage rates, an increase in mortgage rates can leave existing homeowners feeling ‘rate locked-in,’" said Fleming. “When the prevailing mortgage rate is greater than homeowners’ existing rate, it will cost homeowners more each month to borrow the same amount of money, disincentivizing them from selling their homes – why move out, if you can’t move up? Homeowners staying put reduced housing market potential by 8,600 potential home sales compared with one month ago. The lack of supply remains the primary long-run constraint to housing market potential.”

Fleming added that despite current market headwinds, house price appreciation is expected to remain strong and may motivate more existing homeowners to sell. Homeowners gaining equity in their homes may be more likely to consider using the equity to purchase a larger or more attractive home.

“While the housing market potential headwinds exceeded the tailwinds in February, it’s clear that demographic demand for homes remains robust, and the primary constraint to more sales is the lack of housing supply,” said Fleming. “There are several unknowns as the spring home-buying season begins, but one thing is clear – if you sell it, they will buy it.”

The next Potential Home Sales Model will be released on April 19, 2022 with March 2022 data.

To read the full report, click here.

About Author: Demetria Lester

Demetria C. Lester is a reporter for DS News and MReport magazines with more than eight years of writing experience. She has served as content coordinator and copy editor for the Los Angeles Daily News and the Orange County Register, in addition to 11 other Southern California publications. A former editor-in-chief at Northlake College and staff writer at her alma mater, the University of Texas at Arlington, she has covered events such as the Byron Nelson and Pac-12 Conferences, progressing into her freelance work with the Dallas Wings and D Magazine. Currently located in Dallas, Texas, Lester is an avid jazz lover and likes to read. She can be reached at [email protected].

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