Recent Drop in Rates Bodes Well For Spring Home Sales

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With mortgage rates at new lows for the year, home prices stabilizing, unemployment falling and wages on the rise, things are looking rosy for the spring home buying season.

As such, First American’s monthly Potential Home Sales Model is forecasting that home sales in February reached a seasonally adjusted annual rate of 5.17 million, an increase of 1.5% compared with January but down 2.9% compared with February 2018.

“In February 2019, the housing market continued to underperform its potential, but showed signs of promise leading into the spring home-buying season,” says Mark Fleming, chief economist for First American, in a statement. “Actual existing-home sales are 2.5 percent below the market’s potential, according to our Potential Home Sales model. That means the market has the potential to support 127,000 more home sales at a seasonally adjusted annualized rate.

“Supply shortages have been the primary culprit for this performance gap – you can’t buy what’s not for sale,” Fleming adds. “However, so far in 2019, we’ve seen mortgage rates decline and wages rise – both trends work to boost house-buying power and fuel greater market potential for home sales, setting the stage for a stronger than expected spring home-buying season.”

The inventory problem is two-pronged: On one side there are homeowners who are “rate-locked” into their homes. They won’t re-enter the market because their next mortgage will likely be at a higher rate. On the other side is the lack of new construction. As long as builders are unable to meet demand for new housing, the problem of low inventory is more likely to persist.

“The majority of existing homeowners have mortgages with historically low rates, and there is limited incentive to sell if it will cost them more each month to borrow the same amount of money from the bank,” Fleming explains. “This rate-lock phenomenon has led to a nine percent yearly increase in tenure length, which reduced market potential by 99,000 sales in the last three months.”

However, the recent decline in mortgage rates will likely encourage some homeowners to re-enter the market.

“Additionally, millennials that were previously priced out of the market when rates were higher in 2018 are likely to jump back in,” Fleming says. “The increase in house-buying power directly contributed to a gain of nearly 131,000 potential home sales in the last three months, by far the strongest driver of market potential.”

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