Potential for home sales stymied by owners' inertia: First American

People electing to remain in their primary residence for longer periods took more potential home sales out of the market than lower interest rates and higher income brought in, according to First American.

Potential existing-home sales in May increased 0.4% from April to 5.2 million at a seasonally adjusted annualized rate. But compared with a year ago, the market's potential declined by 1.5%, according to First American's index.

But even with the year-to-year reduction in the number of potential sales, the market outperformed its capability by a seasonally adjusted estimated 11,400 sales in May, compared with a deficit of 68,000 in April and 289,000 for the same month in 2018.

"Since last year, several forces have helped increase the market potential for existing-home sales," First American Chief Economist Mark Fleming said in a press release. "House-buying power, driven by falling mortgage rates and rising household income, contributed to a gain of 183,000 potential home sales compared with one year ago. Compared with May 2018, rising house prices also contributed positively, increasing the market potential for home sales by 41,000."

Looser credit standards added the potential for over 60,000 more sales during the past year, while new-home construction added 1,000 and household formation growth added 81,000.

"Despite all the positives, the market potential for home sales remains nearly 80,000 units below the level of a year ago," Fleming said.

"Collectively, the aforementioned market forces contributed to a positive gain of 366,000 potential home sales, but it was not enough to offset the loss of 446,000 potential sales due to the impact of rising tenure. The average tenure length, the amount of time a typical homeowner lives in their home, has increased dramatically in the last year."

Recent data Fleming cited indicated the average tenure a person lives in their home was 11.3 years in May, a 10% increase from the prior year.

Seniors electing to age in place are another factor that is pulling potential sales from the market. A recent Fannie Mae survey found that 1.6 more million units would have come on the market by 2018 if those born between 1931 and 1959 behaved like previous generations, Fleming said.

Those looking to become homeowners could be competing with investors for those properties especially at the low end of the market, a report from CoreLogic found.

Investor purchases made up 11.3% of 2018's home sales, the most since CoreLogic started tracking this data in 1999. In the low-price tier, investors made up 20.2% of the buyers. However, since 2011, between nearly 17% and 20% of purchases at the low end were made by investors.

The large increases in investor activity between 2012 and 2018 were strongly correlated with tightening housing market conditions, CoreLogic said.

"Does this mean investors snapped up supply that would have otherwise been bought by owner-occupiers? Maybe, but the evidence isn't conclusive because there's a possible chicken-or-egg relationship between the two," said CoreLogic Deputy Chief Economist Ralph McLaughlin in the report. "While it's certainly possible that an increase in investors into a market increases competition and lowers supply relative to aggregate demand, the opposite is also possible: markets with tightening supply could draw investors as they perceive markets with a dwindling supply to be safer bets than those with a more plentiful supply."