December’s potential home sales whipsawed by low mortgage rates and dwindling housing supply
In December, potential existing-home sales increased slightly from the previous month, pushing the market’s potential above its 2018 rate, according to First American’s Potential Home Sales Model.
The final month of 2019 saw actual existing-home sales exceed housing market potential by 1.2%, representing an estimated 64,830 seasonally adjusted annualized sales, said Mark Fleming, First American’s chief economist.
“According to our Potential Home Sales Model, housing market potential increased 1.7% in December 2019 relative to the previous month, and grew 2.6% year over year, an increase of 134,460 potential existing-home sales,” Fleming said.
Although potential existing-home sales are still 21.3% below the pre-recession peak of March 2004, December’s rate represents a 57.8% increase from the market potential low point reached in February 1993.
Fleming attributes this boost to consumer house-buying power, which boosted overall affordability in the month of December.
In December, the primary driver of rising housing market potential compared with one year ago was increased house-buying power, Fleming said. House-buying power was 12.5% higher than a year ago, which boosted market potential by 316,000 potential home sales, he said.
“The house-buying power surge was driven by the combined impact of lower mortgage rates, which were 0.92% lower in December than they were a year ago, and a 2.4% increase in annual household income,” Fleming said. “Clearly, lower mortgage rates result in considerable affordability gains for potential home buyers, which boost home-buying demand and, in turn, market potential.”
Nevertheless, Fleming warns that low mortgage rates stand to threaten future growth as the demand for more affordable housing continues to weaken supply.
“Falling mortgage rates can help incentivize homeowners to sell their home and purchase a different home, but persistently low mortgage rates can have the opposite effect,” Fleming said. “The decades-long decline in the 30-year, fixed mortgage rate, dropping from a high of 18% in 1981 to a low of nearly 3% in 2012, to just below 4% today, has helped prod the housing market. This long-run decline increased affordability and encouraged existing homeowners to move.”
“However, the 30-year fixed-rate mortgage has hovered below 5% since the end of the Great Recession – nearly a decade ago! While historically low rates increase buying power and make it more affordable for potential buyers to purchase a home, they also discourage many existing homeowners from selling,” Fleming said.
As there is little to no house-buying power benefit for homeowners with an already low mortgage rate, the only way existing homeowners can increase their house-buying power is through household income growth, according to Fleming.
This has resulted in increased tenure length; which Fleming says has increased dramatically over the past year.
“Prior to the recession, tenure length was less than six years on average. In December 2019, tenure length approached 12 years, up 8% compared with one year ago,” Fleming said. “According to our analysis, lower rates boost housing market potential, but also discourage homeowners from selling and increase tenure length, thus reducing the supply of existing homes for sale – this is the duality of low mortgage rates.”
Moving forward in the new year, Fleming warns while low mortgage rates will continue to boost demand, they’ll also discourage homeowners from selling, further clogging the supply pipeline.
“Low mortgage rates and increased house-buying power will continue to boost demand, as will demographic tailwinds from Millennials entering their prime home-buying years,” Fleming said. “On the other hand, those persistently low rates will discourage existing homeowners from selling, pushing up tenure length and limiting the inventory of homes available for sale.”
“However, that doesn’t necessarily mean we should expect housing market potential to decline,” Fleming said. “There are many considerations that go into one’s housing tenure decision, which could result in the desire to move. The lack of housing supply has been the norm for several years, yet the housing market has endured.”
NOTE: First American’s potential home sales report measures existing-homes sales, based on the historical relationship between existing-home sales and U.S. population demographic data, including income and labor market conditions, price trends in the housing market and conditions in the financial market.