First American: Market ‘Missing Its Potential’ from Tight Supply

“Extremely limited” supply is stopping the housing market from reaching its full potential, counteracting positive increases in market fundamentals, such as employment and wages, Mark Fleming, chief economist with First American Financial Corp., Santa Ana, Calif.

“Current mortgage rates hovering near historic lows combined with increases in wages remain the key drivers to growth in the housing market, as they continue to soften the impact of rising prices and offer consumers increased leverage and buoyed home-buying power,” Fleming said. “While this is contributing to greater consumer confidence in the housing market and providing a firm foundation for increased housing demand, tight inventory, particularly in the lower-priced segments, is keeping market activity from reaching its true potential.”

The company’s Potential Home Sales model said potential existing home sales increased to a 5.8 million seasonally adjusted, annualized rate, representing a 92.6 percent increase from the market potential low point reached in December 2008.

The report said the market potential for existing-home sales grew by 6.5 percent in September compared to a year ago, an increase of 352,000 sales. Currently, potential existing-home sales is 351,000 or 6.0 percent below the pre-recession peak of market potential, which occurred in July 2005.

Fleming said the market for existing home sales is underperforming its potential by 6.5 percent, or an estimated 375,000 sales. “Tight inventories continue to be a drag on the housing market which dropped to a 4.6-month supply in August,” he said. “This put upward pressure on prices, which rose 5.7 percent over the past 12 months.”