The housing market has been underperforming its potential since May, and October's performance gap was the largest it's been since November of last year, according to First American Financial Corp.
Inventory shortages are keeping the housing market from reaching its capability. Potential existing-home sales rose 0.4% month-over-month in October to a seasonally adjusted, annualized rate of 8.2%, marking an almost 96% increase from the market potential low point of December 2008.
In October, the market for existing-home sales underperformed its potential by 455,000 sales, or 7.7%, and the volume of homes for sale has decreased annually for the past 38 consecutive months.
The market potential increased by an estimated 26,000 sales between September 2017 and October 2017, First American said.
"Tight supply and strong first-time home buyer demand continue to be the dominant factors driving the current state of the housing market. Existing homeowners remain reluctant to list their homes for sale for fear of not being able to find a home to buy, keeping supply levels low," said Mark Fleming, chief economist at First American, in a press release.
"At the same time, a healthy number of potential home buyers continue to enter the market, so house prices are increasing and affordability is declining," he continued.
Affordability is down 9.6% in August from the previous year, according to First American's Real House Price Index.
"The lack of inventory relative to demand is driving the fast pace of price appreciation. While low rates have kept consumer house-buying power strong, it has not offset rising prices, so affordability has suffered," said Fleming