Potential home sales growth could herald positivity ahead — if supply improves with demand

According to the Potential Home Sales Model curated by First American Financial Corp., the residential real estate market appears to be on the upswing — but with a caveat.

Potential sales of existing homes grew to a seasonally adjusted annual rate of 5.31 million units in December, according to First American’s proprietary metric, which aims to gauge the market’s “healthy” level of home sales based on economic and demographic fundamentals.

Although numbers were down 16.7% (or 1.07 million annualized sales) compared to the pace seen in December 2021, this pace was nonetheless up 3% month over month. The small increase from November meant that 2022 ended with a two-month upswing in market potential, due in part to some interest rate relief to close the year, according to First American chief economist Mark Fleming.

“Compared with the previous month, the average 30-year fixed mortgage rate eased by nearly half a percent while incomes increased, which boosted house-buying power by $16,000, fueling an increase in housing market potential by 87,000 home sales,” Fleming said. “While house-buying power remains $141,000 lower than one year ago, house buyers are rate sensitive and the incremental improvement in house-buying power is enough to entice some buyers back into the market.”

As proof, Fleming pointed to mortgage applications, which also have grown for two straight months as rates have come down.

“From a financial perspective, the decision to buy a home comes down to a payment-to-paycheck calculation, and lower rates may help to reduce the mortgage payment while higher incomes can increase one’s monthly paycheck,” he said.

The trending rebound in demand is certainly good news for a housing market that has been in sore need of some. More positivity could be ahead, according to First American, as improving affordability could soon combine with demographic tailwinds to further boost the recovery in demand.

“A large cohort of millennials are reaching prime buying age, and the new normal likely includes greater flexibility to work from home, helping to fuel demand for homes,” Fleming explained.

He also added, however, that for such factors to truly defrost the housing market’s currently frigid run, they need some assistance in the form of more housing supply. Simply put, “you can’t buy what’s not for sale,” according to Fleming.

“Inventory remains low, giving potential buyers and sellers few options to choose from as we enter 2023,” he said. “The good news is that new home inventory is on the rise and total inventory usually picks up heading into the spring season. The residential housing market suffered a deep freeze in the winter months of 2022, but there is reason to believe that it will begin to thaw as the spring homebuying season approaches.

“While existing home inventory remains limited, the silver lining for homebuyers is that new home inventory is on the rise, and a new home at the right price is a pretty good substitute,” Fleming added. “The National Association of Home Builders reported that nearly two-thirds of builders were offering incentives, including mortgage rate buydowns, paying points for buyers and price reductions, which could entice potential homebuyers.”


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