High purchase demand that fuels the potential of the real estate market

The First American Financial Corporation released the First American Potential Home Sales Model for August 2022. The Potential Home Sales Model measures what the healthy market level of home sales should be based on economic fundamentals , demographics and the real estate market.

August 2022 Potential Home Sales Results

  • Potential existing home sales increased at a seasonally adjusted annualized rate (SAAR) of 5.61 million, up 2.1% on a monthly basis.
  • This represents a 60.8% increase from the minimum market potential reached in February 1993.
  • The market potential for existing home sales decreased 12.9% from a year ago, resulting in a loss of 832,800 sales (SAAR).
  • Currently, potential existing home sales are 1,183,000 (SAAR), which is 17.4% below the pre-recession peak of market potential, which occurred in April 2006.

Chief Economist Analysis: Market potential for existing home sales increased 2.1% in August

“August marked the first time in nearly a year that the potential of the housing market has increased on a monthly basis, increasing by 2.1% compared to July at an estimated pace of 5.61 million at a seasonally adjusted annualized rate (SAAR). “said Mark Fleming, chief economist at the First American. “The monthly increase was also the largest monthly increase in housing market potential since December 2020, but the housing market potential remains 12.9% lower than it was a year ago.”

“Using a dynamic simulation involving our potential home sales model, we can identify the market dynamics influencing potential existing home sales in August versus July and determine whether they reduce or increase the potential of the housing market,” he said. Fleming. “Although many dynamics can be closely monitored for their influence on the real estate market, some considerations that go into the decision to buy and sell a home are personal and difficult to quantify. In August, these softer dynamics help explain the discrepancy between the increased potential of the real estate market and the continued cooling of the real estate market. ”

The forces that increase the potential of the real estate market:

“Five of the six potential drivers of the housing market increased potential home sales in August compared to a month ago. One of the main forces that fueled the potential of the housing market in August was a modest increase in the purchasing power of homes. The 30-year fixed mortgage rate decreased by 0.19 percentage points, while the median household income increased by 0.3% compared to a month ago, “Fleming said.” The result was an increase of 2.5 % of home purchasing power, which increased the housing market potential by more than 47,000 sales. The welcome rebound in home purchasing power is expected to fade quickly, however, as mortgage rates again trended upward in the first weeks of September”.

“Household formation, a primary and long-term driver of home purchase demand, has also pushed up the market potential. Millennials are the largest generation in US history and most of them are aging in their prime years of buying homes and forming families, “said Fleming.” Family training continued to grow in August and helped build families. with over 4,000 potential home sales over the previous month. ”

“The supply of new homes has also increased potential home sales. Lack of supply and fear of not being able to find something to buy prevents many existing homeowners from selling. Therefore, as new home supplies enter the market, the risk of not being able to find something to buy decreases, strengthening homeowners’ confidence in the decision to sell their existing homes, ”said Fleming. “Compared to last month, more new home supplies have entered the market, increasing the potential of the real estate market by nearly 1,300 potential home sales.”

The forces holding back the potential of the real estate market:

“Sellers have largely remained stuck, as many enjoy a mortgage rate that could be nearly three percentage points lower than the current mortgage rate market,” Fleming said. “Since home sellers are also potential home buyers, homeowners who choose not to sell have reduced the potential of the real estate market by 10,000 sales compared to a month ago.”

“The other factor that probably holds back the potential of the market, but is difficult to quantify, is economic uncertainty. Buying a home is the most important financial decision a person can make, and that is based on their financial security and confidence in the economy, ”said Fleming. “The current inflationary environment and the risk of a recession with potential consequences on the labor market continue to cause concern, with a serious impact on consumer confidence. As potential home buyers and sellers await the period of economic uncertainty, purchase demand could be affected. ”

What does this mean for the future of the housing market potential?

“The increased potential of the real estate market indicates that market conditions can substantially support more sales than they did a month ago. But, while the decline in mortgage rates in August may have given buyers a brief respite from the rapid rate hike in recent months, it may not be enough to entice potential buyers to return to the market during uncertain economic times, ”Fleming said. “Potential sellers are also facing economic uncertainty, as well as being stuck in their homes. However, when the dust of economic uncertainty has settled, those buyers and sellers who were on the sidelines will be back in the real estate game. Demographic trends. support high purchase demand for years to come, so it’s a question of when, not if, for the housing market. ”

The next potential home sales model will be released on October 19, 2022 with data from September 2022.

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