First American recently released its proprietary Potential Home Sales Model for the month of March 2020. Key findings include:

March 2020 Potential Home Sales

• Potential existing-home sales decreased to a 4.94 million seasonally adjusted annualized rate (SAAR), a 9% month-over-month decrease.
• This represents a 47.1% increase from the market potential low point reached in February 1993.
• The market potential for existing-home sales decreased 7.5% compared to a year ago, a loss of nearly 400,000 (SAAR) sales.
• Currently, potential existing-home sales is 1.8 million (SAAR), or 26.6% below the pre-recession peak of market potential, which occurred in March 2004.

Market Performance Gap

• The market for existing-home sales outperformed its potential by 13.7% or an estimated 678,500 (SAAR) sales.
• The market performance gap increased by an estimated 565,800 (SAAR) sales between February 2020 and March 2020.

Chief Economist Analysis
“The coronavirus pandemic continues to take hold of the domestic and global economy. The housing market, although in a better position than it was at the onset of the last recession, will not be immune to the impact,” Fleming said. “Weekly unemployment claims have soared to record highs, which has already contributed to declining consumer confidence."

“The pandemic’s impacts have also influenced our Potential Home Sales Model. Market potential fell in March, as lenders tightened credit due to concern that many economically impacted households will not be able to make their mortgage payments,” Fleming said. “In March, the market potential for existing-home sales dropped to its lowest level since February 2016, according to our Potential Home Sales Model. Housing market potential decreased 9% in March relative to the previous month, and fell 7.5% year over year, a decline of nearly of 400,000 potential existing-home sales."

Credit Tightens, Market Potential Falls
“In March, tightening credit had by far the largest month-over-month negative impact on the market potential for home sales, followed distantly by rising tenure length. When lending standards tighten, fewer people can qualify for a mortgage to buy a home. When homeowners are less likely to qualify for a mortgage for a new home or qualify for a low mortgage rate, they are more likely to stay in their current home. Additionally, many potential first-time home buyers no longer qualify for a mortgage when credit tightens,” said Fleming. “So, tighter lending standards reduce demand and, in turn, housing market potential."

What to Expect Looking Ahead
“Tightening credit is already impacting the housing market and rising tenure length remains a headwind as well, but what can we expect of the other drivers of market potential for existing-home sales? In March, house-buying power continued to increase relative to one month ago, as mortgage rates remained low and household income data has yet to be impacted by the current environment,” said Fleming.

“While income growth may slow, we expect mortgage rates to remain low. Even with a continued boost in house-buying power, tighter lending standards will make it harder for some borrowers to leverage the market’s low mortgage rates. The contraction in credit availability reduces demand,” said Fleming. “However, housing supply remains at historically low levels, so house price growth is likely to slow, but it’s unlikely to go negative, as house prices are ‘downside sticky.’ The result? The immediate impact of the coronavirus pandemic on the housing market will be a reduction in spring sales activity and a moderation of price appreciation.”