Higher Rates Are Dampening Housing Market's Potential

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Rising mortgage rates are offsetting higher demand and stifling the market potential for existing-home sales, according to First American Financial Corp.

Potential existing-home sales dropped 3.1% month over month to a seasonally adjusted, annualized rate of 5.8 million, First American said Monday. The market potential for existing-home sales is at a seasonally adjusted, annualized rate of 432,000, which is still 7.5% below the pre-recession peak.

Overall, First American calculated that the market for existing-home sales is underperforming its potential by 2.2%, or 129,000 sales.

"The market potential for existing-home sales fell…due to the post-election rate increase, offsetting increased demand caused by the strength of the broader economy, particularly wage growth and improving access to credit," said Mark Fleming, chief economist at First American, in a news release. "While low inventories are still responsible for higher prices, I expect the impact of the increasing mortgage rates will cause a modest cooling in house price growth in 2017."

Fleming also warned that as rates increase, a situation could develop where inventory gets even tighter.

"One thing to watch for in 2017 is evidence of a 'lockout effect,' where homeowners are hesitant to sell their home if their mortgage rate is lower than the current market rate," he said.

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