Economist: Falling demand for home purchases


First American Financial Corporation has released First American’s proprietary Potential Home Sales Model (PHSM) for the month of May 2022. The PHSM measures what the healthy level of home sales in the market should be based on economic fundamentals, demographics and the housing market.

“The market potential for existing home sales in May fell 2% to 5.62 million at a seasonally adjusted annual rate (SAAR), compared to last month, and is 10.5% lower than in a year ago,” said Mark Fleming, chief economist at First American. “Yet the market potential for home sales remains 2.5% higher than in May 2019, before the pandemic hit.”

Fleming added: “Demand for home purchases is falling as mortgage rates rise alongside the still strong appreciation in house prices. While a drop in demand can reduce the pace of sales and lead to increased inventory, existing homeowners are less likely to sell their homes as mortgage rates rise,” Fleming said. “Historically, nearly 90% of total inventory is existing home inventory, and existing owners stay put. Increasing the supply of homes for sale is key to slowing house price growth and restoring equilibrium to the housing market.

Chief Economist Analysis: Market potential for existing home sales down 10.5% year-over-year, but still 2.5% above May’s pre-pandemic level 2019

“The time a typical homeowner lives in their home was up 2% from a year ago and 0.4% from a month ago, which was the biggest one-month increase on the other since August 2020 and contributed to a loss of 15,500 potential homes. sales compared to last month,” Fleming said. “As existing owners supply the majority of homes for sale and owners stay put longer, the housing market faces a continued shortage of supply.

Potential home sales in May 2022

  • Potential existing home sales fell to 5.62 million seasonally adjusted annualized rate (SAAR), down 2% month-over-month.
  • This represents a 61.2% increase from the potential market low point reached in February 1993.

“Before the housing crash of 2007, the average lifespan of a person in their home was about five years. In the aftermath of the housing market crisis between 2008 and 2016, the average length of time a person could live in their home rose to around eight years,” Fleming said. “The most recent data shows that the average length of time a person lives in their home hit an all-time high of 10.6 years in May 2022.”

Two trends limiting housing supply and housing market normalization

“Two trends are blocking homeowners, preventing much-needed housing supply from reaching the market and helping to tilt the market towards buyers. Many existing homeowners are stuck with historically low mortgage rates below 3%, and now that rates are rising there is a financial disincentive to sell their home and buy a new home at a higher mortgage rate,” said Fleming. “The golden handcuffs of low mortgage rates prevent more supply from reaching the market.

“Seniors who choose to age in place, rather than downsize or move to another home, further limit housing supply,” Fleming added. A 2019 study by Freddie Mac shows that if adults born between 1931 and 1959 behaved like previous generations, they would have released nearly 1.6 million more homes on the market by 2018,” Fleming said. “As older people continue to choose to age in place, there will be fewer existing homes available for sale. And, since many of these older homeowners are also locked into historically low mortgage rates and sitting on historically high levels of equity, they are more likely to renovate the home they currently own rather than upgrade their home. for sale and to move.

Potential home sales in May 2022

  • The potential market for existing home sales was down 10.5% from a year ago, a loss of 660,395 sales (SAAR).
  • Currently, existing home sales potential is 1,171,000 (SAAR), 17.2% lower than the pre-recession peak in market potential, which occurred in April 2006.
  • Chief Economist Analysis: Market potential for existing home sales down 10.5% year-over-year, but still 2.5% above pre-pandemic level in May 2019.

“A moderation in house price growth will signal that equilibrium is returning to the housing market. Yet increasing the supply of housing is critical to a meaningful moderation in house price appreciation. rising mortgage rates will continue to dampen demand, it will also keep current homeowners locked in their homes,” Fleming said. “You can’t buy what’s not for sale – and existing homeowners have little incentives to relieve supply pressure, which limits the normalization of the housing market.”

The next potential home sales model will be released on July 19, 2022 with June 2022 data.

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