Existing-home sales met potential, but faced inventory constraints

July's existing-home sales lived up to their potential, but that potential remains limited because homeowner tenure continues to increase, removing inventory and buyers from the equation, according to First American.

"While there were a flurry of forces boosting the market potential for existing-home sales in July, the low supply of homes for sale continues to hold market potential back," said First American Chief Economist Mark Fleming in a press release. "Existing-home sales make up approximately 90% of all home sales, which means existing homeowners must sell their homes in order for homes to be available for sale. Rising tenure length, therefore, means both fewer buyers and fewer homes on the market, keeping existing-home sales below potential."

There were an estimated 2,740 sales on a seasonally adjusted annualized rate during July, which was 0.05% above the market's potential. The market performance gap decreased by 54,600 compared with June.

"Compared with one year ago, tenure length increased by 11% and contributed to a loss of nearly 425,000 potential home sales, more than offsetting the nearly 395,000 potential existing-home sales from the forces boosting market potential," said Fleming.

Those forces included higher household income, which led to a 10.6% year-over-year increase in buying power, he said. Higher demand, increased equity and new supply also helped boost potential sales.

"To a lesser extent, tightening credit also contributed to a loss of 33,000 potential existing-home sales. The result? An overall decline in potential existing-home sales compared with one year ago, despite boosts in demand and affordability," Fleming said.

Potential existing-home sales fell 0.3% from June to 5.18 million on a seasonally adjusted basis. Compared with one year ago, there was a loss of 63,000 seasonally adjusted sales, or 1.2%.

Homeowners are sitting on $5.7 million of equity they can tap, which could be used to help purchase a new home.

"If mortgage rates remain this low, more existing-home owners may be enticed to move. It's clear that demand for existing homes is strong, but one can't buy what's not for sale," said Fleming. "Declining mortgage rates could be the factor that moves the needle for those that still feel rate-locked in."