May's home sales beat potential despite coronavirus: First American

Existing-home sales during May outperformed their potential by 11.5%, as the market comeback continued, fueled by low mortgage rates that increased affordability, First American said.

There was the potential for 4.92 million transactions on a seasonally adjusted annualized rate basis in May, which itself was an increase of 6.2% over April. The increase occurred even as stay-at-home orders impacted much of the U.S. economy.

First American estimated that actual existing-home sales during May outperformed that potential by an estimated 565,580 SAAR sales.

Still, on a year-over-year basis, market potential was down 7%, a loss of 368,120 SAAR sales.

The increase in potential did not lead to an increase in actual sales; a report from Remax found home sales declined 3.9% in May compared with April and 33.7% from May 2019.

"The two biggest drivers of the increase in May are slightly loosening credit standards, which allow more potential home buyers to qualify for financing, and the increase in house-buying power due to historically low mortgage rates," said First American Chief Economist Mark Fleming in a press release.

(First American's economists use the Chicago Federal Reserve's National Financial Conditions Credit Subindex to judge credit conditions. That number was higher on a year-over-year basis than the Mortgage Banker Association's Mortgage Credit Availability Index, which was lower compared with April and with May 2019.)

"The increase in house-buying power is also a major reason why market potential is not even lower compared with one year ago," Fleming said. "During economic downturns, the housing market benefits in one specific way — monetary policy is usually eased to boost the economy, often leading to falling mortgage rates, which increases consumer house-buying power and makes homes more affordable.

"Relative to one year ago, the potential for existing-home sales declined by 368,120 SAAR, but it could've been worse were it not for the house-buying power boost from low mortgage rates," he continued.

Credit conditions last month, even when looked at compared with May 2019, took 565,340 potential home sales out of the market on a year-over-year basis, Fleming said.

Low inventory has affected the market for several years, and in May, existing homeowners who in normal circumstances might list their home, reduced potential by another 362,440 sales by not doing so.

And because there were fewer new homes for sale — giving existing owners a place to move to — potential was cut by another 1,916 sales.

"Given these headwinds, the market potential for existing-home sales could have declined by nearly 930,000 sales. Yet, the 30-year, fixed-rate mortgage fell to its lowest level in nearly 50 years in May, boosting house-buying power by 15.3% relative to one year ago," said Fleming. "The increase in house-buying power resulted in a 354,000 increase in potential home sales, helping offset some of the impact from the credit and housing supply headwinds."

Millennial household formations during the pandemic boosted demand by 152,000 sales. And the continued growth in house price appreciation, which is the result of rising demand and a limited supply of homes for sale, added 56,000 potential sales to First American's calculations.

Mortgage rates will continue to play a major role in housing affordability and potential sales for the rest of this year, Fleming said.

“Our Potential Home Sales Model indicates that even if mortgage rates climbed to 3.5%, all else held equal, the market potential for existing-home sales would decrease modestly from 4.92 million SAAR to 4.84 million SAAR," said Fleming. "Record low mortgage rates are proving to be a powerful motivator and benefit for home buyers in an otherwise challenging time."