The market potential for existing-home sales increased 5 percent compared with a year ago, a gain of 304,000 (SAAR) sales, according to the December model. The market for existing-home sales outperformed its potential by 10.4 percent, or an estimated 662,000 (SAAR) sales.
“The final potential home sales model report of 2021 revealed that market potential ended the year on a strong note. While the winter months are traditionally real estate’s slow season, our measure of the market potential for existing-home sales showed the housing market again broke with traditional seasonal patterns by ending the year strong,” First American Chief Economist Mark Fleming said in a release.
“The strength of the housing market is not surprising given the ongoing wave of millennial demand propelled by historically low rates and greater geographic flexibility due to work-from-home arrangements,” Fleming said. “Yet, homebuyers face a historic and worsening housing supply shortage; you can’t buy what’s not for sale.”
One of the most consistent housing market potential indicators has been new household formation, he said.
“Millennials are the largest generation in U.S. history, and the bulk of them are aging into their prime homebuying years,” Fleming said. “New household formation, which is the new demand for housing, contributed approximately 165,000 potential home sales compared with one year ago. Even as house-buying power declined by nearly $3,000 on a year-over-year basis due to higher mortgage rates, housing demand persisted because the decision to buy a home is not strictly a financial decision, but also a lifestyle decision.”
The challenge for millennial housebuyers is the lack of inventory, particularly for starter homes, he said.
“The dominant force holding back more housing market potential in December relative to one year ago was the lack of housing supply,” Fleming said. “Housing supply in today’s housing market remains so tight and demand so strong that in the November 2021 NAR existing home sales report, 83 percent of all homes listed for sale were sold within the month, with days on market at 18 days, down from 21 days in November 2020.”
The ongoing housing supply shortage puts pressure on house appreciation as buyers compete for the few homes that are available.
“The shortage of homes for sale and the increase in house price appreciation is problematic for potential first-time homebuyers, who tend to be younger and do not have the equity from the sale of an existing home to bring to the closing table,” Fleming said. “Rapid house price appreciation and its differing impact on existing and first-time homebuyers will persist until the supply and demand imbalance improves. In the game of housing musical chairs, it’s clear the housing market needs more chairs.”