Housing Market Loses Steam: 2% Yearly Decline in Potential
In a recent illuminating post on the Housing Perspectives Blog, Mark Fleming, Chief Economist for First American Financial Corporation and the spearhead of First American’s Decision Sciences Team delved into the intricate dynamics of housing market potential and its connection to the much-discussed “lock-in effect.”
According to Fleming, an uptick of 1% was noted in the Potential Home Sales Model for July 2023. Despite this increase, the year-over-year data showed a 2% decline, making it the smallest drop since the figures recorded in February 2022. “The initial jitters caused by a sudden jump in mortgage rates appear to be dissipating,” Fleming observes. “Although we’ve seen a slight month-over-month improvement in market potential, the pressing issue of low inventory continues to stifle genuine growth in existing-home sales. In simple terms, consumers can’t purchase what isn’t available on the market.”
At the heart of this market potential conundrum are the homeowners themselves, who are major players on both the demand and supply sides of the real estate equation. Traditional sales and inventory figures indicate that existing homes have historically accounted for nearly 90% of the overall market. If these homeowners opt not to sell, buyers are left with significantly fewer options. Intriguingly, First American’s research revealed a staggering 90% of existing homeowners hold mortgage rates below the 6% mark. With current rates circling around 7.4%, many choose to stick with their current homes rather than face higher mortgage costs—this phenomenon is what’s commonly known as the “lock-in effect.”
Fleming elaborated on the powerful impact of the lock-in effect, stating, “The measure of this effect can be assessed by comparing the average rate across all outstanding mortgages to the current market rate. As this gap widens, more homeowners find themselves ensnared in this rate-lock trap. In fact, we’re seeing this more now than in any other period over the past three decades.”
Yet, Fleming also reminds us that life is anything but predictable. For many, the decision to sell and move isn’t solely based on financial calculations. A significant 42% of homeowners own their homes outright and are thus unaffected by the rate lock-in. Moreover, skyrocketing home prices during the pandemic have left many homeowners with substantial equity. For these equity-rich individuals, taking on a higher interest rate may not be a deal-breaker, especially if they’re relocating to a more affordable locale.
In conclusion, Fleming asserts that for the latter half of 2023, we may witness a relative surge in existing-home sales—particularly if mortgage rates undergo a decrease. However, he warns that meaningful sales growth will remain elusive until there’s an influx of existing homes on the market, despite these moderating influences.
