Housing Experienced a Supply and Demand ‘Conflict’ In May, Economist Says

The housing market experience experienced a "conflict" between supply and demand in May as increased home values resulted in sales, which subsequently increased supply – but at the same time, lack of affordability and economic uncertainty reduced demand, according to First American Chief Economist Mark Fleming.

The market capacity for existing-home sales increased by 0.3 percent month-over-month and 12.5 percent year-over-year in May, while rising interest rates and a slight jump in unemployment countered equity-enhancing home price appreciation, according to First American.

Still, given current market fundamentals, the housing market is underperforming, Fleming said.

“Our Existing-Home Sales Capacity model’s analysis of the fundamentals that influence capacity indicates that the market is experiencing both tail and headwinds," Fleming said. "The net effect is a very modest tail wind.  The appreciation in home prices, for example, is helping to improve the U.S. housing market, with recently released data showing declines in the levels of negative and insufficient equity.  As a result, true market values are beginning to meet or exceed the expectations that homeowners have for the value of their properties, encouraging them to sell and, therefore, reduce pent-up supply in the market today."

The rising interest rates and slight increase in unemployment counter the financial benefit of home price appreciation, thus reducing market capacity for existing-home sales, Fleming said. Additionally, increasing mortgage finance costs not only put homeownership out of reach for first-time buyers, but also makes moving unaffordable for existing homeowners to move.

In May, First American's seasonally-adjusted, annualized rate of Existing-Home Sales Capacity was up 91.4 percent from its historic low reached in November 2011. Overall in May, the seasonally adjusted annualized rate of sales increased by 17,000. Home price growth was the largest contributor with 95,000, with the increase in the number of people reaching homebuying age also contributing (2,000). Rising interest rates and economic uncertainty/labor market declines caused declines of 53,000 and 27,000, respectively, in the rate of Existing-Home Sales Capacity. The uncertainty around wage growth and job security has created reluctance among consumers to make big purchases, such as a home, Fleming said.