First American: Rising Mortgage Rates Dampen Market
The market potential for existing-home sales declined due to the rise in mortgage rates, offsetting increased demand generated by broader economic strength, said First American Financial Corp., Santa Ana, Calif.
The company’s Potential Home Sales model for December reported potential existing-home sales decreased by 3.1 percent to a 5.8 million seasonally adjusted, annualized rate. First American Chief Economist Mark Fleming said the market for existing home sales is underperforming its potential by 2.2 percent or an estimated 129,000 of sales. Last month’s revised underperformance gap was -6.2 percent or 370,000 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,” Fleming said.
Fleming said the lack of homes listed for sale is particularly hurting entry-level homes, noting 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.”
“The low inventory of homes for sale continues to be a concern, as it is putting upward pressure on house prices and could counteract the downward price pressure caused by higher mortgage rates,” Fleming said. “Home price appreciation is typically more sensitive to mortgage rate increases. Rising rates may slow the house price growth rate by as much as 2 percent by the end of 2017.”
On the plus side, the potential market represents a 92.5 percent increase from the market potential low point reached in December 2008. In December, the market potential for existing-home sales grew by 2.9 percent compared to a year ago, an increase of 164,000 sales. Currently, potential existing-home sales is 432,000 or 7.5 percent below the pre-recession peak of market potential, which occurred in July 2005.
“One thing to watch 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,” Fleming said. “Even though rising rates reduce affordability for potential first-time homebuyers, the expected moderation of price appreciation will align house price growth more closely with recently increasing income growth to help offset reduced affordability.”
