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Study: Housing Market Underperforming by 6.5%

SANTA ANA, Calif. – Nov 19, 2018 – The First American Potential Home Sales Model for the month of October 2018 finds that the housing market is underperforming by 6.5 percent due largely to the lack of inventory.

“The primary culprit for the housing market’s performance gap remains severe supply shortages – homebuyers can’t buy what’s not for sale,” says Mark Fleming, chief economist at First American.

On the one hand, potential home sales increased month-to-month by 0.5 percent. However, thanks to home price and interest-rate increases, potential sales decreased 0.4 percent year-to-year.

The October report finds that the market for existing-home sales is underperforming its potential by 6.5 percent, or an estimated 391,600 seasonally adjusted annualized rate sales (SAAR).

“While the housing market continues to underperform its potential by 6.5 percent, the gap between actual existing home sales and the market potential for home sales narrowed by 1 percent in October compared with September, according to our Potential Homes Sales model,” says Fleming. “The housing market has the potential to support more than 391,000 additional home sales at a seasonally adjusted annualized rate (SAAR).

Fleming says rising mortgage rates impact the sellers’ side of transaction more than the buyers’ side.

“Rising mortgage rates create a financial disincentive for existing homeowners with low mortgage rates from selling their homes,” he says. “This phenomenon impacts both sides of the supply and demand dynamic – those who don’t sell, don’t buy either.”

While some buyers may drop out of the market as prices and interest rates rise, demand remains strong.

“The housing market is experiencing a wave of first-time home buyer demand, as millennials age into homeownership,” says Fleming. “According to the latest release of the American Enterprise Institute’s first-time home buyer index, more than 50 percent of all homes were purchased by first-time home buyers as of July 2018.”

The market potential for home sales has now outpaced actual sales for five years, according to the First American analysis. “However, this month, the market potential for home sales also saw its first year-over-year decline in over three years,” Fleming says. “It begs the question: What is driving the decline in the market potential for existing-home sales?”

©Florida Realtors® 
Reprinted with permission Florida Realtors. All rights reserved.

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Allen Thompson

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