First American Financial Corp. released First American’s Potential Home Sales model for the month of July 2016. The model provides a gauge on whether existing-home sales are under or over their long-run potential level based on current market fundamentals. For July, the model showed that the market for existing-home sales is underperforming its potential by 1.3 percent or an estimated 92,000 seasonally adjusted, annualized rate (SAAR) of sales, an improvement over last month’s revised under-performance gap of 1.8 percent, or 104,000 SAAR sales.
In July, the market potential for existing-home sales grew by 0.15 percent compared with June, an increase of 8,000 (SAAR) sales, and increased by 5.4 percent compared with a year ago. This month, potential existing-home sales increased to 5.71 million SAAR. This represents an 89.9 percent increase from the market potential low point reached in December 2008, but is down 433,000 SAAR or 7.6 percent from the pre-recession peak of market potential, which occurred in July 2005.
According to the National Association of Realtors (NAR), existing-home sales rose for the third consecutive month in June, with a reported level of 5.57 million SAAR, up from a downwardly revised 5.51 million SAAR sales in May, according to First American’s press release. The 1.1 percent month-over-month increase and the moderating year-over-year increase of 3.1 percent brought existing-home sales to the more normal level of sales that occurred in the early 2000s.
“The West, which continues to be hampered by tight supply and large price gains, was the only region to experience a year-over-year decline in sales of 0.8 percent,” First American Chief Economist Mark Fleming said in a press release. “Meanwhile the Midwest, Northeast and South charged ahead with year-over-year increases in sales of 4.7 percent, 5.6 percent and 3.2 percent, respectively.”
“Low inventories still remain an issue, dropping to a 4.6-month supply, down from the 4.7-month supply seen in April and May, and from the 4.9-month supply of June 2015,” he continued. “The constrained supply in this sellers’ market continues to frustrate potential homebuyers and adds further upward pressure to nominal home prices, which rose an estimated 5 percent year-over-year in May.”
Fleming went on to say consumers appear to be more optimistic about the housing market. The Fannie Mae Home Purchase Sentiment Index reached a new high in July, up 3.3 points from June to 86.5, with large gains in consumers’ expectations for lower rates and continued house price growth according to the press release. The survey also showed a growing number of consumers leaning towards purchasing rather than renting if they were to relocate. There was also a notable and similarly positive shift in sentiment amongst younger households.
“This is coming at a time when credit is slowly becoming more available across the board. The Mortgage Bankers Association (MBA) reported a loosening of credit in July,” Fleming said. “While increases were seen in all four of their sub-indices, the Jumbo and Government (FHA/VA/USDA) segments showed particularly strong growth in credit availability, with both growing by 1.3 percent month-over-month. The American Enterprise Institute reported similar loosening of lending requirements.”
Mortgage rates have continued to move lower, absorbing the impact of rising prices and giving consumers increased leverage and buoyed house-buying power. The average rate for a 30-year, fixed-rate mortgage fell further in July, dropping to 3.44 percent from 3.57 percent in June. Except for a brief four-month period between October 2012 and January 2013, this marks the lowest mortgage rates have been since Freddie Mac began tracking mortgage rates in 1971, according to Fleming.
Global economic uncertainty and negative yields on government bonds overseas continue to drive demand for U.S. Treasuries, including the 10-year Treasury note, driving down yields and keeping mortgage rates low for U.S. consumers for the foreseeable future. The Bureau of Labor Statistics (BLS) put out another strong jobs report, average hourly earnings continued to rise, and the labor force participation rate increased.
“Historically low real house prices, increases in jobs, rising wages, low mortgage rates and greater credit availability are fueling consumer optimism about the housing market,” Fleming said.