First American: Increasing Tenure Length Dampening Home Sales

Demand for existing homes is strong, but one can’t buy what’s not for sale, said First American Financial Corp., Santa Ana, Calif.

First American said its Potential Home Sales Model sees potential existing home sales decreased marginally to a 5.18 million seasonally adjusted annualized rate, a 0.3 percent month-over-month decrease. This represents a 54.4 percent increase from the market potential low point reached in February 1993. The market potential for existing-home sales declined by 1.2 percent compared with a year ago, a loss of 63,000 sales.

First American Chief Economist Mark Fleming said currently, potential existing home sales is 1.54 million, or 22.9 percent below the pre-recession peak of market potential, which occurred in March 2004. He said the market for existing home sales is marginally over-performing its potential by 0.05 percent or an estimated 2,740 sales.

“The housing market essentially reached its potential in July 2019, as actual existing-home sales were 0.05 percent above the market’s potential,” Fleming said. “Existing home sales in 2019 are running at a pace similar to 2015, even though rates have fallen and household income has increased this year. Housing market potential benefitted from a 10.6 percent year-over-year increase in consumer house-buying power in July, as the 30-year, fixed-rate mortgage, an important component of consumer house-buying power, fell to its lowest point since November 2016.

Fleming said a persistent headwind to existing home sales is rising tenure length. “While there were a flurry of forces boosting the market potential for existing home sales in July, the low supply of homes for sale continues to hold market potential back,” he said. “Existing home sales make up approximately 90 percent of all home sales, which means existing homeowners must sell their homes in order for homes to be available for sale. Rising tenure length, therefore, means both fewer buyers and fewer homes on the market, keeping existing-home sales below potential.”

First American noted from a year ago, tenure length increased by 11 percent and contributed to a loss of nearly 425,000 potential home sales, more than offsetting the nearly 395,000 potential existing home sales from the forces boosting market potential. “To a lesser extent, tightening credit also contributed to a loss of 33,000 potential existing-home sales. The result? An overall decline in potential existing-home sales compared with one year ago, despite boosts in demand and affordability.”

On the positive side, Fleming said increasing tenure length is largely the result of the rate “lock-in” effect, and seniors aging in place. “Additionally, existing homeowners are sitting on $5.7 trillion of tappable equity, money which could be used to fund the purchase of a move-up home,” he said. “If mortgage rates remain this low, more existing-home owners may be enticed to move. It’s clear that demand for existing homes is strong, but one can’t buy what’s not for sale. Declining mortgage rates could be the factor that moves the needle for those that still feel rate-locked in.”