Purchase power rises, but fails to move homebuyers: First American

The potential for home resales rose 1.1% month-to-month as mortgage rates fell, but buyers only became more entrenched as their purchase power increased, according to First American.

First American's June Potential Home Sales Model determined there could be 5.25 million potential transactions on a seasonally adjusted annualized rate.

"In June, housing market potential benefited from a 10.7% year-over-year increase in consumer house buying power as 30-year fixed mortgage rates, an important component of consumer house buying power, fell to their lowest point since November 2016, and declined 0.8 percentage points compared with one year ago," Mark Fleming, chief economist at First American Financial Corp., said in a press release. "Household income, the other component of consumer house buying power, continued to rise as well, increasing 2.5% compared with one year ago."

But the market nevertheless underperformed during the month by 1.5%, or an estimated 80,150 seasonally adjusted units.

This is a change from May, when the market outperformed its potential by 11,400 on a seasonally adjusted basis. But the gap is much narrower than it was for June 2018, when the market underperformed by 256,000 seasonally adjusted sales. With the exception of May, the market generally has underperformed relative to its potential in recent months.

That's likely to continue, despite the possibility of further Federal Open Market Committee rate cuts.

While the FOMC is likely to cut short-term interest rates at its upcoming meeting, its impact on housing will likely be limited. Fed cuts can affect the 10-year Treasury bond yield that serves as a benchmark for 30-year fixed-rate mortgages, but since the end of the recession, the 30-year FRM has on average has remained 1.7 percentage points higher than the 10-year Treasury yield, Fleming noted.

The housing market could, nevertheless, get a slight boost, he added.

"Indeed, mortgage rates are approaching the historically low level of 3.44% last seen in July 2016," Fleming pointed out. "If mortgage rates reach 3.44%, house buying power would increase by $18,000, and potential home sales would increase by 124,300 sales, holding all else equal. Stronger house buying power benefits the housing market in two ways: it boosts affordability for homebuyers and it may encourage some homeowners, who are less 'rate locked-in,' to re-enter the market."

But some inertia could continue to prevent buyers from reacting to a future increase in rate incentive.

Tenure in a home, which affects the supply portion of the home sales equation, increased by 0.7% over May, contributing to a loss of 33,000 potential home sales in June, Fleming noted.