Although mortgage rates are expected to continue to rise this year, last month’s stock market volatility stopped the increases. That’s because when the economy is doing well, investors prefer stocks over bonds, but economic weakness brings an appetite for the safety bonds offer investors.

“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,” said Mark Fleming, chief economist at First American. “In fact, the average 30-year, fixed-rate mortgage in December fell 23 basis points compared with the previous month. The December drop in mortgage rates increased the market potential for existing-home sales by 0.3 percent."

December 2018 Potential Home Sales

Potential existing-home sales increased marginally to a 6.15 million seasonally adjusted annualized rate (SAAR), a 0.3 percent month-over-month increase, according to the Potential Home Sales Model for December 2018 from First American Financial Corp. This represents a 64.7 percent increase from the market potential low point reached in February 2011.

In addition, the market potential for existing-home sales increased by 1.1 percent compared with a year ago, a gain of 69,000 (SAAR) sales. Currently, potential existing-home sales is 1.1 million (SAAR), or 15.6 percent below the pre-recession peak of market potential, which occurred in July 2005.

The Market Performance Gap

• The market for existing-home sales is underperforming its potential by 9.6 percent or an estimated 593,000 (SAAR) sales.
• The market performance gap decreased by an estimated 129,000 (SAAR) sales between November 2018 and December 2018.

"While we don’t expect falling mortgage rates to be the norm in 2019, the recent drop has benefited potential home buyers. In the face of falling mortgage rates, mortgage applications for the week ending January 4 jumped more than 20 percent from the previous week, even during the slower than usual holiday period,” said Fleming. “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.”