First American chief economist considers which will be the dominant force
The new year is set for a showdown between increased demand from millennials and strong house-buying power; and rising tenure and limited supply.
But which of the conflicting forces will be dominant in 2020?
That’s what First American chief economist Mark Fleming has been considering, as he released the firm’s latest Potential Home Sales Model for November.
House-buying power – how much a buyer can afford to spend based on prevailing mortgage rates and household income – increased 18.7% in the year to November 2019.
“The dramatic increase in house-buying power had the greatest impact on housing market potential in 2019, boosting market potential by 450,200 potential home sales,” said Fleming. “The house-buying power surge was driven by the combined impact of lower mortgage rates, which were 0.93% lower in November than they were a year ago, and a 2.6% increase in annual household income.”
However, homeowner tenure has been increasing and hit a new record in 2019 of 11 years. That reduced housing market potential sales by 383,100, more than the combined potential created by increased household formation and price appreciation (which may prompt equity-rich owners to move up).
“In 2020, the continuation of rising tenure length appears likely, which will prolong the housing supply shortage and dampen housing market potential,” said Fleming.
Tighter credit standards
Tighter credit standards and lack of new supply further weakened the market’s potential.
“In 2019, the dramatic increase in house-buying power and strong household formation fueled housing demand, increasing the market potential for existing-home sales. The boost from house-buying power and household formation was strong enough to overcome the negative impact from the increase in tenure length and tight supply,” said Fleming. “In 2020, the continuation of rising tenure length appears likely, which will prolong the housing supply shortage and dampen housing market potential. The question for housing market potential in 2020 is will increased demand from the millennials and strong house-buying power be enough to offset the ongoing drag from rising tenure length and limited supply?
