Although the nation’s potential existing-home sales experienced a monthly
decline in October, data shows the rate improved from the previous year,
according to First American’s
Potential Home Sales Model.

“In
October 2019, the housing market exceeded its potential, as actual
existing-home sales exceeded market potential by 4.6%, or an estimated 239,000
seasonally adjusted annualized sales,” First American Chief Economist Mark
Fleming said. “Housing
market potential decreased relative to last month but increased 0.6% compared
with October of last year.”

According to the company’s analysis, the market potential for existing-home
sales fell by 0.6% from September but rose by 0.6% from 2018, equating a gain of
33,050 sales.

Two factors drove the month-over-month decline in the potential for existing-home sales – a month-over-month decline of 0.8% in consumer house-buying power and the continued impact of rising tenure length, meaning people are remaining in their houses longer.

The decline in house-buying power dampened market potential substantially, Fleming said.

“In October, mortgage rates increased by 0.08 percentage points, the first monthly increase since November 2018. While household income increased by 0.2% compared with one month ago, it was not enough to offset the negative impact of the increase in mortgage rates on house-buying power,” Fleming said. “The resulting decline in house-buying power dropped the market potential for existing-home sales by nearly 22,000 sales.”

During the month, tenure length, the average length of
time someone lives in their home, increased by 6% compared with January 2019,
and 0.7% compared with last month, Fleming said. Increasing tenure length
reduced the market potential for existing-home sales by 31,800, he said.

“Tenure length and house-buying power are two of the
most influential forces on market potential, and they combined to drag down the
market potential for existing-home sales by 0.6% compared with last month,
despite positive contributions from new home construction (1,300 potential home
sales), looser credit standards (7,500 potential home sales), rising house
prices (9,600 potential home sales), and increasing household formation (6,500
potential home sales).”

That being said, Fleming suggests improvements
heading into next year, as mortgage rates and consumer buying power are
projected to strengthen in 2020.

“One month of declining house-buying
power is not a trend. Mortgage rates are
currently hovering at 3.7% and forecasters currently expect rates will remain
somewhere between 3.7% to 3.9% in 2020 – still near historical lows,” Fleming
said. “Meanwhile, household
income is expected to
continue to grow as wages rise. It’s possible that house-buying power in 2020
may dip lower than in the spring and summer of 2019 but will likely remain near
historical highs.”

Nevertheless, Fleming warns tenure length is likely to
climb next year, which could dampen the housing market’s potential home sales.  

Overall, Fleming warns the market
potential for existing-home sales in 2020 will largely depend on the strength
of the rate lock-in effect and whether house-buying power can increase
sufficiently to offset it.  

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.

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