Existing-home sales outdid their potential as buying power rises

Existing-home sales outperformed their estimated potential for October on improved consumer buying power since the start of 2019 and lower mortgage rates, First American said.

However, buying power did decline on a month-to-month basis for the first time in 11 months, contributing in turn to a reduction in the estimate for potential sales.

Its Potential Home Sales Model found home sales during October outperformed what they should have been by 4.6% or 239,000 units on a seasonally adjusted annualized rate. This compares with September's 0.8% above market potential and 6.5% below market potential in October 2018.

Meanwhile, the potential for existing-home sales fell to 5.17 million SAAR units from September, a decline of 0.6%. Compared with one year ago, the market potential increased by 0.6% or 33,050 SAAR units.

"In 2019, consumer house-buying power, how much home one can afford to buy given household income and the prevailing mortgage rates, surged and provided a significant boost to housing market potential," Mark Fleming, First American's chief economist, said in a press release. "Since the start of 2019, income has grown by 1.9% and mortgage rates have fallen by 0.77 percentage points, both dynamics sending house-buying power higher. As a result, house-buying power jumped 12% between January and October 2019."

Interest rates rising 8 basis points between September and October reduced potential sales. Although household income increased 0.2% from the previous month, it did not offset the effects of higher mortgage rates, Fleming said.

That eliminated 22,000 potential sales. An additional 31,800 sales were removed from the equation because tenure length, the amount of time an existing homeowner elects to remain in their property, rose 0.7% from September.

That offset the positive contributions of 9,600 potential sales from rising home prices, 7,500 from looser credit standards, 6,500 from increased household formation and 1,300 from new home construction.

This month's findings are a mixed bag for housing going forward, Fleming noted.

"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," said Fleming. "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."

But low rates and rising prices also are an incentive for existing homeowners not to sell, he continued.

"This is the rate lock-in effect, and it means tenure length will likely continue to rise as well," said Fleming. "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."