Housing market – two trends hit normalization

Key findings from First American’s May 2022 potential home sales report buttress the two-pronged observation:

Potential existing-home sales decreased to a 5.62 million seasonally adjusted annualized rate (SAAR), a 2.0% month-over-month decrease.
This represents a 61.2% increase from the market potential low point reached in February 1993.
The market potential for existing-home sales decreased 10.5% compared with a year ago, a loss of 660,395 (SAAR) sales.
Currently, potential existing-home sales is 1,171,000 (SAAR), or 17.2% below the pre-recession peak of market potential, which occurred in April 2006.

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

Continually rising mortgage rates only exacerbate the problem, Fleming suggested: “While rising mortgage rates will continue to cool demand, it will also keep existing homeowners locked into their homes,” Fleming said. “You can’t buy what’s not for sale – and existing homeowners have little incentive to relieve the supply pressure, keeping a lid on housing market normalization.”

To buttress his point further, Fleming expounded on the disincentive to sell homes amid rising mortgage rates. “Home purchase demand is declining as mortgage rates rise alongside still-strong house price appreciation. While a decline in demand may reduce the pace of sales and lead to an increase in inventory, existing homeowners are less inclined to sell their homes as mortgage rates rise. Historically, nearly 90% of total inventory is existing-home inventory, and existing homeowners are staying put. Increasing the supply of homes for sale is key to slowing house price growth and restoring balance to the housing market.”