Recovering economy is driving housing market’s potential: Study

Inman News

‘Potential existing-home sales’ rose to an adjusted annual rate of 6.31 million in April, up 1.3% from March, according to First American Financial’s Potential Home Sales Model.

Listings may be in short supply, but an index measuring the housing market’s potential was up nearly 30 percent from a year ago in April, thanks to a rise in “house-buying power.”

House-buying power — a function of changes in mortgage rates and household income — grew by $6,900 compared to March, contributing to a gain of nearly 49,000 potential home sales.

That’s according to First American Financial’s Potential Home Sales Model, which showed “potential existing-home sales” rising to a seasonally adjusted annual rate of 6.31 million in April, up 1.3 percent from March. That’s an increase of 1.45 million in the annual rate of sales posted a year ago, when the pandemic was getting underway.

“One of the primary drivers of housing market potential in April was the rise in house-buying power, which increased by $6,900 compared with the previous month,” First American Chief Economist Mark Fleming said in a statement.

Most of that increase was due to an increase in household income, driven by an increase in average hourly earnings and hours worked, Fleming said. But a slight pullback in mortgage rates also helped.

“While it may not seem like much … a 0.02 percentage point decline in mortgage rates increases house-buying power by more than $1,300,” Fleming said.

Higher mortgage rates in March contributed to a $13,000 decline in house-buying power nationally, First American reported last month.

In their latest monthly forecast, economists at Fannie Mae said they expect existing homes will sell at an annual pace of 5.88 million during April, May and June. That’s down from the previous forecast for second quarter sales to come in at 6.16 million, annualized.

Fleming said that what’s keeping the market from reaching its full potential is “the risk of selling in a market with a shortage of inventory prevents many existing homeowners from putting their homes on the market.”

That means homeowners are staying put longer than ever — average tenure length reached a historical high of 10.56 years in April, Fleming said.

“Existing homeowners staying put accounted for more than 15,000 fewer potential home sales in April. The problem in the market today is supply. You can’t buy what’s not for sale, even if you can afford it,” Fleming said.

One workaround for Realtors is the rise of alternative financing and transaction facilitation tools offered by companies like Knock, Ribbon and Homeward, which let homeowners buy their next home before putting their existing homes on the market.

This week Knock, which currently offers its Home Swap service in 40 markets in 10 states, said it plans to be in more than 100 markets by 2023.

At a Connect Now session this week, the founders of Ribbon and Homeward also laid out their expansion plans. Ribbon, currently available in North and South Carolina, Tennessee, Georgia and Texas, plans to be in half of U.S. states within the next 12 to 18 months. Homeward is currently available in Colorado, Georgia and Texas.