First American Financial reveals changes in potential existing-home sales
Tight inventory continued to dampen housing market potential in November – a dynamic First American Financial expects to persist in 2022.
Potential existing-home sales slipped month over month to a 6.26 million seasonally adjusted annualized rate (SAAR), but were 7.2% higher than a year ago. The market for existing-home sales outperformed its potential by 9.4%, or an estimated 586,000 SAAR sales. According to First American, this represents an 87,000 increase in the market performance gap between October and November.
While market performance is projected to remain consistent in 2022, mortgage rates are widely anticipated to rise. But First American chief economist Mark Fleming said that existing-home sales don’t always slow down when mortgage rates rise. Rather, sales are more influenced by the reasons why rates are increasing.
“Looking back over almost 30 years, there have been six significant rising-mortgage rate eras,” Fleming said. “Rising mortgage rates led to declining existing-home sales in two of the six rising-rate eras.”
“The 2005-2006 rising-rate era preceding the 2008 housing crisis stands out because sales fell dramatically,” he stated. “Rising mortgage rates in that period were driven by the Federal Reserve’s efforts to tame above-target inflation. The Fed’s moves worked, as existing-home sales declined by more than 12% in approximately one year. Existing-home sales also decreased in the 1994 rising-rate era, as the Fed increased the federal funds rate to prevent strong economic growth from feeding inflation.”
Read next: Potential existing-home sales
Another example is when mortgage rates spiked in the summer of 2013, Fleming said, “when the Fed indicated it would taper its quantitative easing policy of buying Treasury bonds and mortgage-backed securities. But this ‘taper tantrum’ had no negative impact on existing-home sales. Most recently, in 2017, it took almost a year of rising rates, before the pace of existing-home sales declined below the pace of sales seen before rates started to rise.”
Fleming stressed that each rising-rate environment is different and influenced by various economic trends.
“The rising rates we see today are driven by a recovering economy. Rising mortgage rates don’t change the other key housing market fundamental – strong millennial home buyer demand, which will continue to underpin the 2022 housing market,” Fleming said.
