December Sales Improved but are Still 2.2 Percent Below Potential

December home sales were up from a shaky November, but they could have been better if not for the inventory shortage.

Tthe market for existing-home sales underperformed its potential by 2.2 percent or an estimated 129,000 (SAAR) of sales, an improvement from the 6.2 percent underperformance in November

The difference is the gap between actual and potential sales, as measured by First American’s proprietary Potential Home Sales model.

Potential home sales measures existing-homes sales, which include single-family homes, townhomes, condominiums and co-ops on a seasonally adjusted annualized rate. based on the historical relationship between existing-home sales and U.S. population demographic data, income and labor market conditions in the U.S. economy, price trends in the U.S. housing market, and conditions in the financial market.

When the actual level of existing-home sales are significantly above potential home sales the pace of turnover is not supported by market fundamentals and there is an increased likelihood of a market correction. Conversely, seasonally adjusted, annualized rates of actual existing-home sales below the level of potential existing-home sales indicate market turnover is underperforming the rate fundamentally supported by the current conditions.

November’s revised underperformance gap was -6.2 percent or 370,000 (SAAR) sales. In December, the market potential for existing-home sales grew by 2.9 percent compared with a year ago, an increase of 164,000 (SAAR) sales.   The December market for existing-home sales is underperforming its potential by 2.2 percent or an estimated 129,000 (SAAR) of sales.

“The market potential for existing-home sales fell 3.1 percent between November and December 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. However, the market continues to underperform its potential due to the highly limited inventory,” said Mark Fleming, chief economist at First American. “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. “The supply of homes for sale has declined for 18 consecutive months, falling to 4.0 months in November – a level not seen since the mid-2000s.”

Fleming said one thing to watch out 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.”

When considering the right time to buy or sell a home, an important factor in the decision should be the market’s overall health, which is largely a function of supply and demand. Knowing how close the market is to a healthy level of activity can help consumers determine if it is a good time to buy or sell, and what might happen to the market in the future. That’s difficult to assess when looking at the number of homes sold at a particular point in time without understanding the health of the market at that time,” said Fleming. “Historical context is critically important. Our potential home sales model measures what we believe a healthy market level of home sales should be based on the economic, demographic, and housing market environments.”What Insight Does the Potential Home Sales Model Reveal, Fleming said.

The next Potential Home Sales model will be released on February 21, 2017 with January 2017 data.

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