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46 | M REPORT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST DATA Is the Housing Market Finding a Not-so-New Normal? According to First American Chief Economist Mark Fleming, rising rates may cool house price appreciation and bring a new norm to the market. F irst American Financial Corporation has released their latest iteration of the proprietary Poten- tial Home Sales Model (PHSM) for April 2022 and found that potential existing-home sales decreased to a 5.74 million seasonally adjusted annualized rate (SAAR), a 3.0% month-over- month decrease. The reported market potential for existing-home sales decreased 8.1% compared with a year ago, a loss of 503,350 sales. This reduction represents a 64.6% increase from the market potential low point that occurred in February 1993. MARKET POTENTIAL FOR EXISTING-HOME SALES DECLINES 3.0% FROM MARCH "The market potential for exist- ing-home sales in April declined 3% compared with last month, falling to 5.74 million at a season- ally adjusted annualized rate. Housing market potential is down 8.1%, compared with the roaring housing market in April 2021, but today's housing market is still very 2019, which was the housing market's strongest year in a decade at the time," said Mark Fleming, First American's Chief Economist. "In fact, the market potential for existing-home sales remains 4.2% higher than April 2019." "Mortgage rates increased sig- nificantly in April," Fleming con- tinued. "The jump in mortgage rates came as the Federal Reserve signaled it would soon tighten monetary policy to intensify its fight against inflation." However, April also saw mortgage rates rise significantly in preparation for the next Federal Reserve meeting, which occurred on May 4, who is expected to continue increasing the base inter- est rate until inflation is under control. THE DUAL IMPACT OF RISING MORTGAGE RATES "Rising mortgage rates impact housing market potential in two ways—reducing affordability and increasing the number of home- owners that are rate locked-in," Fleming said. "While these forces may reduce existing-home sales, they will also bring much-needed balance to the housing market." HIGHER RATES REDUCE AFFORDABILITY With higher rates, affordabil- ity concerns begin to emerge; a problem which is already pushing people out of the market. "In April 2022, the average 30-year, fixed mortgage rate was 4.98%, which is almost two percentage points higher than one year ago. Holding household income constant at its April 2021 level, the increase in the average mortgage rate since last April reduced house-buying power by nearly $96,000," Fleming said. "However, household income increased by 5% year over year, which helped ease the loss in house-buying to $77,000. The year-over-year decline in house- buying power reduced housing market potential by nearly 380,000 potential home sales. "Even though that is a sig- nificant decline in the potential number of home sales, it is relative to an unusually high level of potential sales in April 2021, which were fueled by pandemic- driven demand and historically low mortgage rates," Fleming said. "Comparing today's potential home sales levels to April 2019, before the pandemic, provides some helpful perspective. In fact, the market potential for existing- home sales is approximately 230,000 above the pre-pandemic benchmark of April 2019." A RETURN TO NOT-SO-NEW NORMAL "The frenzy of the pandemic-era housing market appears to be the historical exception, not the rule. Recency bias may have many be- lieving that mortgage rates below 4% is normal, but it is anything but normal from a historical perspec- tive," Fleming said. "In fact, the historical average for the 30-year, fixed mortgage rate is nearly 8%. "The rate lock-in effect will constrain supply below demand, making real house price declines unlikely. The good news for potential home buyers is that rising mortgage rates may help to cool the rapid pace of house price appreciation as some potential buyers will pull back from the market," Fleming said. "As higher mortgage rates slow the housing market from its 150-mile-per-hour pace to something more in the line with its historical speed limit, sellers' market conditions should ease, and home buyers will ben- efit from a not-so-new normal." The PHSM measures what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals.