Factors Effecting Existing Home Sales
The market potential for existing-home sales in June was estimated to be 5.47 million at a seasonally adjusted annualized rate (SAAR), down 2.5 percent compared to last month, and 13.1 percent lower than one year ago, which is near the same level as in early 2019.
Fundamentals Reducing Housing Market Potential-
- Declining House-Buying Power: House-buying power is how much home one can afford to buy given household income and the prevailing 30-year, fixed mortgage rate. Mortgage rates in June were 2.5 percentage points higher than they were a year ago. Holding household income constant at its June 2021 level, the increase in mortgage rates reduced house-buying power by $123,500. A 4.4 percent annual increase in household income helped to mitigate some of the impact of rising rates on affordability. Once accounting for the rise in household income, house-buying power fell by $108,000 since June 2021. The overall decline in house-buying power reduced housing market potential by 522,000 potential home sales.
- Tighter Credit Standards: When lending standards are tight, it becomes more difficult to qualify for a mortgage to buy a home. Likewise, when standards are loose, it’s easier to get a mortgage and buy a home. When home buyers are less likely to receive mortgages for a new home, they are also less likely to purchase a home. Credit standards tightened in recent months due to increasing economic uncertainty and monetary policy tightening. Compared with a year ago, credit tightening reduced housing market potential by 458,000 potential home sales.
- Increasing Tenure: According to the most recent data from June 2022, tenure length has increased from 10.4 years to 10.6 years compared with a year ago. The main reason? Low mortgage rates discourage existing homeowners from selling because there is no increased house-buying power other than that which comes from household income growth. Homeowners staying put reduced market potential by 80,000 potential home sales compared with one year ago.
Fundamentals Boosting Housing Market Potential-
- Rising House Prices: As a homeowner gains equity in their home, they are more likely to consider using the equity to purchase a larger or more attractive home. However, if equity is low, homeowners are likely to remain ‘equity locked-in’ to their home. Compared with one year ago, house price appreciation increased housing market potential by nearly 193,000 potential home sales. This may be particularly important in an environment where house price growth is beginning to moderate, as sellers may be tempted to jump into the market to capture the higher sale price, yet these potential sellers must also contend with a rising interest rate environment.
- Rising Household Formation: The more households formed, the higher the demand for homes. The growth in household formation contributed to 43,000 potential home sales in June compared with one year ago.
- More New-Home Supply: The lack of supply and the fear of not being able to find something to buy keeps many existing homeowners from selling. As homebuilders bring more new homes to the market, the risk of not being able to find something to buy lessens and homeowners’ confidence in the decision to sell their existing home grows. Compared with last year, more new-home supply is entering the market, increasing housing market potential by 1,400 potential home sales.
Data and information sourced from First American.
I see many of these factors pushing renters to remain renters. Interest rates going up is impacting the ability of renters to migrate into buying houses.
The 'increasing tenure' bullet point will undoubtedly impact future sales and refinances. 7-10+ years down the road people who bought a house within the last 2 years at all time low rates will not be inclined to either sell or refi unless they have to. That is, assuming rates aren't once again setting new all time lows at that point.
@Taylor L. I agree and will be interesting to see what the future holds relevant to rates. I am a little cautious in an area such as Boston with these factors pushing renters to remain renters. While I certainly agree, my concern is the high prices already experienced in the Greater Boston area for renters and questioning how much further rents will/can go before tenants start looking for lower cost areas of living. We do have many positives with great schools/universities, diverse economy, world class hospitals, and massive life science investment flowing in to the city to (hopefully) keep high income earners.
I would hope most multi investors are using conservative underwriting in their rent increase assumptions moving forward, but the good news is if you already have qualified high-quality tenants then they should be staying put and renting for a while.
Quote from @Michael Vazza:
@Taylor L. I agree and will be interesting to see what the future holds relevant to rates. I am a little cautious in an area such as Boston with these factors pushing renters to remain renters. While I certainly agree, my concern is the high prices already experienced in the Greater Boston area for renters and questioning how much further rents will/can go before tenants start looking for lower cost areas of living. We do have many positives with great schools/universities, diverse economy, world class hospitals, and massive life science investment flowing in to the city to (hopefully) keep high income earners.
I would hope most multi investors are using conservative underwriting in their rent increase assumptions moving forward, but the good news is if you already have qualified high-quality tenants then they should be staying put and renting for a while.
Very true re: the exodus from higher cost markets. We have seen a number of folks move here to Richmond from Northern Virginia, NYC, and some from Boston. However, I suspect most higher earners who were able to relocate via remote work probably have already done so.
I also agree that we should not be banking on the recent rent increase rates continuing. House purchase affordability is upward pressure, but the current recession and non-housing inflation put downward pressure on rents. We'll see where the balance falls.