Home sales

Home sales are approaching a ‘not so new normal’

The potential market for existing home sales saw an annual decline of 14.4% in July.

That’s the word from First American Financial Corp., a Santa Ana, Calif.-based title, settlement and risk solutions company for real estate transactions.

“According to our Potential home sale modelmarket potential for existing home sales in July was estimated at 5.45 million at a seasonally adjusted annualized rate, down 0.2% from a month ago and 14.4% lower than a year ago,” said Mark Fleming, the company’s chief economist. .

Fleming attributes some of the blame to higher mortgage rates. The 30-year fixed mortgage rate fluctuates around 5.5% today, says Bankrate, compared to last year when the rate was less than 3%according to the Federal Reserve Bank of St. Louis.

“Clearly the housing market has slowed from its pandemic-era frenzy as buyers adjust to the new reality of higher mortgage rates,” he said. “Excluding the spring of 2020, when the housing market briefly stalled, June home sales fell to their lowest level since February 2019.”

“The decline is not a crash,” Fleming added, “but rather an adjustment to a not-so-new normal. Potential buyers face greater economic uncertainty and mortgage rate volatility, but there remains a strong desire for home ownership, especially among millennials.

And while median household income has increased, he says it’s not enough to offset affordability issues.

“Compared to a year ago, median household income increased by around 4.7% in July, but this was not enough to offset the loss in affordability due to the increase of 2.5 percentage points of the 30-year fixed mortgage rate. The result was a 23% decline in home buying power, which was a major driver of cooling demand,” Fleming said.

“The annual decline in home buying power has reduced market potential by almost 520,000 sales compared to a year ago,” he continued. in July, as rates fell and household income continued to rise. A drop, or even a stabilization, in mortgage rates could encourage some potential buyers to pull out. »

Fleming said the presence of millennials – measured as the greatest generation in the United States to about 73 million strong and Between 26 to 41-year-olds — is felt in home sales.

“Despite the year-over-year decline in affordability, household formation – a key, long-term driver of housing market potential – remained positive,” he said. The decision to buy a home is both a financial and lifestyle decision and many millennials age into marriage and family formation, which are strongly correlated with the decision to become a homeowner.”

“Many of these households also face increase in rents“, he added, “which can speed up the decision to buy a house. Rent pressure and lifestyle choices may help explain why the home ownership rate for households under 35 grew the most of all other age cohorts, rising 0.8 percentage points in the second quarter of 2022 compared to the fourth quarter of 2021, despite rising mortgage rates. »

He also said there were fewer home sellers because they didn’t want to give up their low interest rates for higher rates when buying a new home.

“Because home sellers are also potential buyers, homeowners choosing not to sell have reduced the potential housing market by 84,000 sales from a year ago,” he said. .

“However, today’s owners have record levels of equityand as their capital grows, they are more likely to consider using that capital to purchase another home that better suits their needs,” Fleming said. “Rising home prices contributed to an increase of 154,000 potential home sales compared to a year ago.

He added that the slowdown in sales is a symptom of a housing market emerging from a two-year pandemic-influenced frenzy and settling in at a pace “more in line with historical norms.”

“From the perspective of home buyers and sellers,” he said, “there are financial concerns that may hold them back from the market, but there are still plenty of reasons to jump in. Millennials continues to age in its prime home-buying years, which will keep long-term demand stable.