Potential sellers find little incentive to sell as rates go higher
The housing market continued to underperform its potential in March, reflecting primarily the persistent lack of supply, according to the Potential Home Sales Model released by First American Financial.
March actual existing-home sales were 4.5% below the sales potential, First American found. The model revealed that potential existing-home sales were at a seasonally adjusted annualized rate of 6.04 million. The potential marks a 0.3% month-over-month increase and a 3.4% year-over-year gain.
However, the market for existing-home sales underperformed potential by an estimated 273,000 sales. The market performance gap increased by an estimated 22,700 sales between February and March.
First American Chief Economist attributed the performance gap primarily to the inventory shortage, saying supply in most markets continues to be historically tight. Additionally, Fleming identified the twin market dynamics of rate-locked homeowners as well as their prisoner’s dilemma behind the continuously low supply.
“There is limited incentive to sell when, due to higher mortgage rates, it will cost you more each month just to borrow the same amount from the bank,” Fleming said. “As mortgage rates rise further, more existing homeowners may become rate locked into their existing homes.”
Fleming also said that unlike in most markets, the seller and the buyer in the housing market are, in several cases, the same person.
“Potential sellers face a prisoner’s dilemma, a situation in which individuals don’t cooperate with each other, even though it seems in their best interest to do so. If sellers all choose to sell, they would all benefit as buyers because they would increase the inventory of homes available and alleviate the supply shortage,” Fleming said. “However, the risk of selling if others don’t in a market with a shortage of inventory prevents many existing homeowners from selling. The result is prices are further bid up by competition for the increasingly short supply.
