Tightening Inventories Squeeze Market Potential

The housing supply shortage hindering the market today is likely to continue through 2018, said First American Financial Corp., Santa Ana, Calif.

The company’s Potential Home Sales model for November said despite this past week’s strong existing home sales report from the National Association of Realtors (which showed a 5.6 percent jump in sales in November), potential existing home sales decreased to a 5.96 million seasonally adjusted, annualized rate, a 2.0 percent month-over-month decrease. While this represents a 98.3 percent increase from the market potential low point reached in December 2008, First American said the market potential for existing-home sales decreased by 1.5 percent compared with a year ago, a loss of 93,000 sales.

First American Chief Economist Mark Fleming said currently, potential existing home sales is 404,000, or 6.8 percent, below the pre-recession peak of market potential, which occurred in July 2005. He said the market for existing home sales is underperforming its potential by 7.3 percent or an estimated 438,000 sales. Market potential decreased by an estimated 124,000 sales between October and November.

“Strong first-time homebuyer demand continues with the help of low mortgage rates,” Fleming said. “But, tight supply continues to be the biggest constraint on housing market growth. Existing homeowners are increasingly prisoners in their own homes, preventing additional existing-home supply from entering the market. Homebuilders are also struggling to add more new home inventory, so both sources of housing supply face challenges. The housing supply shortage hindering the market today is likely to remain in 2018.”

Fleming said the decrease was driven by a reduction in the expectation for future supply, even as mortgage rates, which remained below 4 percent for the sixth consecutive month, fuel demand. The number of homes for sale has declined on a year-over-year basis for the past 39 consecutive months.

“The housing market has been underperforming its potential since May, although the market performance gap improved this month relative to the 12-month peak in the market performance gap measured in October,” Fleming said. “The lack of inventory relative to demand is driving the fast pace of price appreciation. While rates have remained low and kept consumer house-buying power strong, the strength of house-buying power is not enough to offset rising prices, so affordability has suffered.”