Potential Home Sales Experience Largest Monthly Growth in a Year

First American Data & Analytics, a division of First American Financial Corporation has released its First American Data & Analytics’ proprietary Potential Home Sales Model for the month of November 2023.

November 2023 Potential Home Sales:

For the month of November, First American Data & Analytics updated its proprietary Potential Home Sales Model to show that:

• Potential existing-home sales increased to a 5.30 million seasonally adjusted annualized rate (SAAR), a 1.3% month-over-month increase.
• This represents a 52.1% increase from the market potential low point reached in February 1993.
• The market potential for existing-home sales increased 1.5% compared with a year ago, a gain of 80,000 (SAAR) sales.
• Currently, potential existing-home sales is 1,486,400 (SAAR), or 21.9%, below the peak of market potential, which occurred in April 2006.

Chief Economist Analysis: Largest Monthly Growth in Housing Market Potential in a Year

"In the month of October, existing-home sales hit the lowest level since 2010 as a result of the higher mortgage rate environment. Rising mortgage rates reduce affordability, all else held equal, for buyers and strengthen the rate lock-in effect for potential sellers. However, mortgage rates declined in November, igniting cautious optimism in the industry,” said Mark Fleming, Chief Economist at First American. “In fact, our Potential Home Sales Model, which measures what a healthy market for home sales should be based on the economic, demographic, and housing market environments, increased by 1.3% in November—that's the highest monthly growth since December 2022. The question remains: Will the recent decline in mortgage rates translate into growth in existing-home sales?"

Lower Mortgage Rates Drive the Market Forward

“The average 30-year fixed mortgage rate declined to 7.4% in November from a recent peak of 7.6% in October. The nearly 0.2 percentage-point monthly decline in mortgage rates combined with a 0.3% increase in median household income fueled a 2% ($6,500) month-over-month increase in house-buying power,” said Fleming. “Mortgage rates have fallen further in December to approximately 7%. Holding median household income constant at its November level, a 0.4 percentage point decline in the average 30-year fixed mortgage rate boosts house-buying power by approximately $13,000.

“One way to project whether lower mortgage rates will result in a boost in sales is by tracking mortgage applications," said Fleming. "Most home buyers purchase a home with a mortgage, and filling out a purchase mortgage application is an early step in the home-buying process. An increase in purchase mortgage applications, therefore, precedes an uptick in home sales as these applications reflect growing demand in the market."

Fleming went on to detail how mortgage applications have been affected in this whirlwind of a housing market this year:

“According to purchase mortgage application data from the Mortgage Bankers Association (MBA), average mortgage applications in the month of November increased 5% compared with October. Additionally, data from the first two weeks of December indicates a nearly 8% increase from November,” said Fleming. “A simple analysis based on the historical relationship between mortgage applications and existing-home sales indicates that home sales should accelerate and approach 4 million seasonally adjusted annualized sales (SAAR) as 2023 comes to a close.”

Expert Opinion: What’s Next?

“Existing-home sales of 4 million SAAR are still low from a historical perspective, but it represents a move in the right direction. Heading into 2024, existing-home sales may continue to drift higher if mortgage rates fall further or stabilize. However, it’s unlikely that existing-home sales will increase dramatically, as the bulk of existing homeowners will remain rate-locked in, even if rates drift closer to 6%,” said Fleming. “The road back to a market that is not too hot, not too cold, but just right will be a slow one, but recent mortgage application data indicates a thaw in the housing market is upon us.”

The next First American Data & Analytics Potential Home Sales Model is set to be released on January 18, 2024 with December 2023 data.

To read the full report, including all data, charts, and methodology, click here.