Higher wages, lower mortgage rates boost home sales potential

If favorable interest rates and rising consumer incomes continue, market potential for home purchases will be boosted in the short term, according to First American Financial.

Assuming the 30-year fixed-rate mortgage stayed at 4.12% for the rest of April, "we expect house buying power to boost the market potential for home sales by more than 50,000 sales in April 2019," said First American Chief Economist Mark Fleming in a press release. "The 2019 thaw in mortgage rates bodes well for a strong spring home buying season."

The most recent Freddie Mac survey showed a 4.17% average for the 30-year FRM, the third week in a row it increased.

The ongoing inventory shortage continued to hold back March's potential for existing-home sales, although the gap narrowed from February as the market started the prime purchase season.

Existing-home sales underperformed their potential by 2.3% or an estimated 121,000 units on a seasonally adjusted annualized rate, compared with 2.5% or 127,000 units in February, the First American Potential Home Sales Model found.

Potential existing-home sales rose to a 5.24 million seasonally adjusted annualized rate, a 1.5% month-over-month increase.

"Ongoing supply shortages remain the main driver of the performance gap as the housing market continues to face an inventory impasse — you can't buy what's not for sale," said Fleming. "However, an unexpected affordability surge, driven primarily by lower-than-anticipated mortgage rates, rising wages and favorable demographics, has boosted housing demand. The result? The start of a surprisingly strong spring home buying season."

Average hourly earnings grew at an annual rate of 3.2%, which Fleming said was well above the annual average pace for the past 10 years of 2.3%.

And then, from December through the early part of 2019, mortgage rates fell and "that may have encouraged some homeowners, who were 'rate locked-in' by rising mortgage rates in 2018, to re-enter the market," Fleming said.

Between those two factors, "house buying power increased by approximately $6,000 from February to March 2019," he added.

The March Fannie Mae Home Purchase Sentiment Index, which found consumers are more positive about the direction of the housing market, Fleming said.

"In fact, the positive impact of rising house buying power has already begun, with purchase mortgage applications increasing 15% year-over-year in March," said Fleming. "We expect rising wages and lower mortgage rates to continue through the spring, boosting housing demand and spurring home sales."