Gap Between Potential and Actual Home Sales Narrows

According to a new report by First American, while existing-home sales continued to underperform their potential in December 2017, the gap between actual sales and that potential has continued to narrow.

First American’s proprietary Potential Home Sales model reports that potential existing-home sales decreased 0.2 month-over-month in December 2017, settling in at a 5.99 million seasonally adjusted annualized rate (SAAR). The market potential for existing-home sales is up 1.4 percent year-over-year, having gained 82,000 (SAAR) sales. According to First American, the December 2017 total of potential existing-home sales was 375,000 (SAAR), which puts it 6.3 percent below the pre-Recession peak that occurred in July 2005.

The market for existing-home sales did underperform its potential in December 2017, however, by 2.0 percent or an estimated 122,000 (SAAR) sales, per First American. First American also reported a market potential dip of an estimated 1,000 (SAAR) sales between November and December 2017.

Mark Fleming, Chief Economist at First American, said, “Faster economic growth, a healthy stock market, low unemployment, and low mortgage rates are fueling substantial home-buying demand. The pace of actual existing-home sales has surged in recent months and significantly narrowed the gap between actual market performance and market potential. Nonetheless, the market is still underperforming its potential. Existing-home sales have been restrained by an increasingly concerning shortage of properties for sale, which puts upward pressure on house prices. The shortage of homes for sale will likely continue in 2018 and continue to push prices higher.”

First American predicts that homebuilding and sales listings will have difficulty keeping up with demand in 2018, especially from the growing demand among millennials eager to find a home. Tight inventory will also continue to cause problems, as Realtor.com reports that the supply of homes has actually fallen year-over-year, down by 9.0 percent. Moreover, homes are selling 7.0 percent faster than a year ago.

All of these factors contributed to an 8.6 percent decrease in affordability in November 2017, according to the First American Real House Price Index, which tracks incomes, mortgage rates, and an unadjusted house price index.

You can read more of First American’s insights into the state of housing in December 2017 by clicking here.