Report: Know Before You Owe Not Affecting Housing Market Potential

January 19, 2016

While there have been reports of a significant drop in existing home sales from October to November due to regulatory requirements, a new report from First American Financial Corp. shows that the market potential remains stable.

According to First American’s December Potential Home Sales model, which provides a gauge on whether existing-home sales are under or over their long-run potential level based on current market fundamentals, the market potential for existing-home sales increased by 0.5 percent compared to November and decreased by 5.1 percent compared to a year ago.

According to the model, the seasonally adjusted, annualized rate (SAAR) of potential existing-home sales is up 78.1 percent from the low point reached in February 2009. The rate of potential home sales in the model increased by 26,000 (SAAR) in December.

Last month, the National Association of Realtors (NAR) reported a significant drop in existing-home sales from 5.32 million (SAAR) in October to 4.76 million (SAAR) in November, a decline of 10.5 percent month over month. Mark Fleming, First American’s chief economist, said this is not the first time the market has experienced a significant decline in existing-home sales between October and November.

“In fact, this is the third year in a row this has occurred. What’s unique about the decline this time is the increased magnitude of the month-over-month drop,” Fleming said. “In addition to the winter home sales woes we have seen in the past two years, the additional decline is being attributed to delayed closings caused by the implementation of the Know Before You Owe rule. Pending Home Sales, which measures contract signings and is a leading indicator of actual sales in the subsequent month, strongly indicates that existing-home sales will rebound in December as the delayed closing of signed contracts in November come to fruition in December.”

Fleming added that as the industry adjusts to the new mortgage disclosures, there’s room for “significantly more sales activity than is currently observed” given fundamental market conditions.

In addition, despite the increase in the Federal Fund Rate last month by the Federal Reserve, long-term mortgage rates started the year below 4 percent. Fleming said rates are expected to remain below 5 percent through the end of this year, even as the Fed is likely to further increase their short-term Federal Fund rate.  The modest forecasted mortgage rate increase over the course of the year will not significantly reduce the purchasing power of borrowers financing their home purchases.

“In addition, the slow expected increases in mortgage rates, steady modest growth in incomes, increasing household formation, and slowing price appreciation all indicate that market potential in 2016 is likely to remain in the 5.5 to 6 million (SAAR) existing-home sales range,” Fleming added. “In fact, price growth in particular is expected to slow from a rate of 6 percent year-over-year at the end of 2015 to a rate of approximately 3.5 percent year-over-year at the end of 2016. The decline in the pace of appreciation is a positive for first-time homebuyers, as it further reduces the gap between housing asset growth and income growth – a gap that cannot be indefinitely sustained as rates increase.

“Regulatory shock aside, the existing-home market should benefit in 2016 from an environment marked by continued low rates, strong purchasing power, slowing price appreciation and continued economic improvement. The winter home sales woes of late last year are not an indication of any structural change in market potential, but a temporary shock that will be quickly forgotten,” Fleming continued.

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