Sustained lower mortgage rates could hold back potential home sales
December's potential for existing-home sales grew by 1.7% compared with November because of low mortgage rates, but in the future that factor could constrain the housing market, First American Financial said.
Low rates, along with increased household income drove a surge in purchase power. But if they remain low for the long term, current owners have less incentive to move as they don't benefit from increased purchase power, said First American Chief Economist Mark Fleming in a press release.
First American's potential home sales model determined that existing-home sales should run at a 5.3 million seasonally adjusted annualized rate. Compared with December 2018, the market potential increased by 2.6% or 134,600 SAAR units.
During the month, actual sales outperformed their potential by 1.2% or 64,830 units.
"Falling mortgage rates can help incentivize homeowners to sell their home and purchase a different home, but persistently low mortgage rates can have the opposite effect," Fleming said. "The decades-long decline in the 30-year, fixed mortgage rate, dropping from a high of 18% in 1981 to a low of nearly 3% in 2012, to just below 4% today, has helped prod the housing market. This long-run decline increased affordability and encouraged existing homeowners to move."
However, low rates also can discourage homeowners from deciding to sell and move. "There is little to no house buying power benefit for homeowners with an already low mortgage rate, so the only way existing homeowners can increase their house buying power is through household income growth," Fleming added. "This helps explain why more and more homeowners have decided to 'stay put,' reducing the inventory of homes for sale."
Tenure length — the time a person spends in their home before moving on — has gone to almost 12 years from less than six years for December 2018.
"However, that doesn't necessarily mean we should expect housing market potential to decline," Fleming said. "There are many considerations that go into one's housing tenure decision, which could result in the desire to move. The lack of housing supply has been the norm for several years, yet the housing market has endured."
A separate report from Attom Data Solutions said homeowners that sold in the fourth quarter had an average tenure of 8.21 years, up from 7.95 years for the fourth quarter of 2018. The fourth-quarter number was the longest since this data began being recorded in the first quarter of 2000, an Attom press release said.
But 42 of the 108 metro areas with a population of 200,000 had a year-over-year decrease in tenure length, led by Colorado Springs, Colo., down 9%; Modesto, Calif., down 7%; Visalia, Calif., down 5%; Oklahoma City, down 5%; and Olympia, Wash., down 5%.
However, the five longest tenures for home sellers were all in Connecticut: Norwich (13.49 years), New Haven (13.32 years), Bridgeport-Stamford (13.23 years), Torrington (12.33 years) and Hartford (12.25 years), Attom said.