How rising rates affect potential home sales – NMP

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First American’s proprietary Home Sales Potential Model measures what the healthy level of the home sales market should be based on economic, demographic and housing market fundamentals.

For the month of November, the main takeaways were as follows: Potential sales of existing homes declined to 6.26 million annualized rate (SAAR), which is a 79.5% increase from low potential market share of February 1993. However, the market potential for existing home sales increased 7.2% year-on-year, a gain of 422,000 sales (SAAR). Currently, potential sales of existing homes are 533,000 (SAAR), 7.9% below the peak of pre-recession market potential, which occurred in April 2006.

“The demand for housing was strong before the pandemic,” said Mark Fleming chief economist at First American, “then housing demand accelerated amid the pandemic as buyers wanted more space, benefited from greater geographic flexibility in where they could live and benefited from an increase in home purchasing power driven by record mortgage rates. While many of these factors will remain constant in 2022, mortgage rates are expected to remain constant in 2022. increase, so what impact will this have on home sales? ”

Fleming explains that sales of existing homes don’t always slow down when mortgage rates rise and are often more influenced by why mortgage rates rise. “Looking back almost 30 years, there have been six periods of significant rise in mortgage rates,” Fleming said. “Rising mortgage rates have resulted in lower sales of existing homes in two of the six periods of rate hikes. “

Fleming refers to the period of rate hikes from 2005 to 2006 leading up to the 2008 housing crisis, when sales fell dramatically. At the time, rates were dictated by the Federal Reserve’s efforts to control above target inflation. The Fed’s move worked as sales of existing homes fell more than 12% in one year. Additionally, Fleming refers to the days of the 1994 rate hike when the Fed raised the federal funds rate to prevent strong economic growth from fueling inflation.

Overall, Fleming demonstrates through these examples that existing home sales are resilient in a rising rate environment. “For example,” he says, “mortgage rates skyrocketed in the summer of 2013 when the Fed signaled it would cut its quantitative easing policy of buying Treasury bonds and bank-backed securities. mortgage claims. But this tantrum had no negative impact on existing home sales.

“More recently, in 2017, it took almost a year of rate hikes, before the pace of existing home sales fell below the pace of sales seen before rates started to rise,” said Fleming. “Context matters and each period of rate hikes is different. The housing market’s response to rising rates depends on why the rates are rising.

Overall, the pattern of potential home sales indicates household formation, higher home purchasing power and looser credit terms, which will boost the housing market potential over the year. last. However, limited inventories will continue to dampen the potential of the housing market, a dynamic that is expected to persist until 2022, Fleming predicts.

While rising mortgage rates will reduce affordability in 2022, Fleming reminds us that every rising rate environment is different and influenced by various economic trends. The rate hike we are seeing today is due to a recovering economy. “Rising mortgage rates do not change the other fundamental element of the housing market – strong demand from millennial homebuyers,” Fleming added, “which will continue to support the housing market in 2022.”


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