Low Supply Keeps Market Below Potential

The housing market has been underperforming its potential since May, said First American Financial Corp., Santa Ana, Calif.–and it’s only getting worse.

The company’s Potential Home Sales model said despite an uptick in existing home sales, the market is underperforming its potential by 7.7 percent–or an estimated 455,000 sales.

“Tight supply and strong first-time home buyer demand continue to be the dominant factors driving the current state of the housing market,” said First American Chief Economist Mark Fleming. “Existing homeowners remain reluctant to list their homes for sale for fear of not being able to find a home to buy, keeping supply levels low. At the same time, a healthy number of potential home buyers continue to enter the market, so house prices are increasing and affordability is declining.”

The report said in October, the market potential for existing home sales decreased by 4.3 percent compared to a year ago, a loss of 262,000 sales. First American said currently, potential existing home sales is 481,000, or 8.2 percent, below the pre-recession peak of market potential, which occurred in July 2005.

“The housing market has been underperforming its potential since May and this month’s market performance gap is the largest since November 2016,” Fleming said. “Tight supply continues to weigh on the market, depressing actual existing-home sales, while the market’s potential gains strength. The number of homes for sale has declined on a year-over-year basis for 38 consecutive months.”

Fleming added the lack of inventory relative to demand is driving the fast pace of price appreciation. “While low rates have kept consumer house-buying power strong, it has not offset rising prices, so affordability has suffered,” he said.