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Rising interest rates are holding back existing homeowners from listing their properties, driving the gap between existing and potential sales even as that disparity narrows, First American Financial said.
Existing-home sales in October underperformed what they would ideally be by 6.5% or an estimated seasonally adjusted annual rate of 391,600, according to the First American Potential Home Sales Model.
This is still an improvement from 7.1% in September and 7.7% for October 2017. It is the first annualized narrowing of the gap in the rate in over three years, said First American Chief Economist Mark Fleming in a press release. “It begs the question, what is driving the decline in the market potential for existing-home sales?”
The answer is that rising interest rates create a disincentive for existing homeowners who in other circumstances are candidates to move from listing their property for sale. But demand is growing with a strong economy and continued interest from first-time homebuyers. The potential for existing-home sales increased to 6.04 million on a seasonally adjusted annualized basis, an increase of 0.5% from September.
This is 61.7% higher than the market potential low point reached in February 2011. But it is 17.1% below the prerecession peak which occurred in July 2005.
“While the housing market benefits from increasing millennial demand for homeownership and a strong economy, rising mortgage rates reduce the propensity of sellers to sell and the buying power of potential buyers,” said Fleming. “Those who don’t sell, don’t buy either, and if you’re a first-time homebuyer, it’s hard to buy what’s not for sale.”