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The stock market’s volatility during December helped to improve the potential for existing-home sales, although housing’s performance remains well below its capacity, First American Financial said.
December’s potential for existing-home sales increased to a seasonally adjusted annualized rate of 6.15 million, up by 0.3% from November and 1.1% from a year ago, according to the First American Potential Home Sales Model.
The report was released on Jan. 21, the day before the December existing-home sales figures were announced.
But existing-home sales are underperforming their potential by 9.6%. “Month-over-month, the gap between actual existing-home sales and the market potential for home sales narrowed by 2.1%, but the housing market still has the potential to support more than 593,000 additional home sales at a seasonally adjusted annualized rate,” First American Chief Economist Mark Fleming said in a press release.
December’s stock market volatility contributed to the decline in interest rates, he continued, pointing out the 10-year Treasury yield is used to benchmark the 30-year mortgage.
“When the economy is doing well, investors prioritize investing in securities over bonds, driving higher longer-term Treasury yields, which also tends to increase mortgage rates,” Fleming said. “In December, the opposite happened. A steep sell-off in U.S. stocks caused by investors seeking safe haven from global and domestic economic uncertainty caused the 10-year Treasury yield to decline, and mortgage rates fell alongside it.”
“In fact, the average 30-year, fixed-rate mortgage in December fell 23 basis points compared with the previous month. The decline in mortgage rates is a welcome relief to prospective homebuyers who have mostly experienced a year of rising rates and house prices. The December drop in mortgage rates increased the market potential for existing home sales by 0.3%,” he said.
Declining interest rates are not expected to be the norm for 2019, he said. But there is an opportunity in the short term for rates to fall.
“Uncertainty regarding world economic events and global trade agreements may lead to a further sell-off in equity markets, adding more downward pressure on mortgage rates. If this occurs, we can expect the market potential for existing-home sales to rise further,” Fleming said.