Conditions (Mostly) Right For Strong Spring Home Buying Season

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Should mortgage rates and home prices continue to moderate, and household incomes continue to rise, it is likely we will see a strong spring home shopping season – possibly an early one – two recent reports from First American show.

Although existing-home sales fell in December and January, moderating mortgage rates and home prices are expected to combine with improving incomes and pent-up demand to boost home sales in the months to come, says Mark Fleming, chief economist for First American, in the firm’s Potential Home Sales Model report.

“The recent dip in mortgage rates has boosted the market potential for home sales,” Fleming says. “If today’s mortgage rate of 4.4 percent persists, we can expect … an early arrival to [the spring home buying season].”

The dip in rates in December not only boosted consumer sentiment toward home buying, it also means homeowners who were “rate locked-in” by rising rates are now more likely to re-enter the market, Fleming says.

Meanwhile, the job market continues to improve and wages continue to increase.

“In December, the labor market remained impressive,” Fleming says in the firm’s Real House Price Index Report. “Annual hourly wage growth increased by 3.5 percent compared with a year earlier, and the labor market’s record streak of job gains continued. The labor market has increased average household income by 55 percent since January 2000.”

The only major factor potentially holding back home sales this spring is the persistent lack of inventory.

“Supply shortages have been the primary culprit for [low existing home sales] – you can’t buy what’s not for sale,” Fleming says.

“However, mortgage rates declined over the last two months, causing the market potential for home sales to rise and prompting a brighter outlook for the spring home-buying season,” he adds.

Breaking the “rate lock” phenomenon might be the only way to overcome the lack of supply, should builders fail to ramp-up production.

“In 2018, rising mortgage rates and low housing supply contributed to homeowner tenure reaching its highest level in 18 years and a slowdown in existing-home sales,” Fleming says. “Existing homeowners, as well as first-time home buyers, have become increasingly mortgage-rate sensitive.”

Fleming adds that if rates continue to decrease at the current pace, “we can expect the market potential for existing-home sales to rise 2 percent compared with January, to a 5.6 million seasonally adjusted annualized rate.”

“In fact, if mortgage rates remain at 4.4 percent, we expect the market potential for existing-home sales this spring to be 7 percent higher than it was entering the 2018 spring home-buying season,” he adds.

Meanwhile, home prices appear to be moderating, which, in turn, is increasing affordability.

“Housing affordability is a function of three economic drivers: nominal house prices, household income and mortgage rates,” Fleming explains. “When incomes rise, consumer house-buying power increases.”

“Declining mortgage rates or declining nominal house prices also increase consumer house-buying power,” he adds.

As a result of the drop in mortgage rates and increase in household income in December, consumer home purchase power increased 3.1% or an average of $11,000, as per the index.

That’s the largest monthly gain in more than five years, First American says.

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