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15 Journal HOUSING MARKET: WHAT TO EXPECT IN THE REMAINDER OF 2022 In a recent First American blog post, Mark Fleming, First American's Chief Economist and leader of the Data Sciences team extrapolated what buyers and investors should expect through year-end in terms of Housing Market Potential. Overall, housing market potential sagged to its lowest point since May 2020 in Septem- ber—when the pandemic brought the country to a near standstill—falling 3.6% from August 2022 to an estimated 5.38 million units at a seasonally adjusted annualized rate. On a year-over-year basis, the market potential for existing-home sales is now down 16.7%. "Market dynamics and the broader economic outlook have changed dramatically in the last 12 months, and that has strong- ly influenced the fundamentals that drive buyer and seller behavior and the potential for existing-home sales compared with a year ago," Fleming said. "e higher the mortgage rate, the more sellers will go on strike and the more potential buyers will feel the impact of reduced house-buying power, but price appreciation will further slow and potential buyers can use adjustable-rate mortgages to regain some of that lost house-buying power." en vs. Now September 2021 marked the highest market potential level recorded since 2007 mainly because the average 30-year fixed mortgage rate was 2.9%. Since then, the market has endured constantly rising interest rates which are now toeing the 7% mark. ese higher rates have a dual effect on the housing market. Firstly, rising rates reduce home-buying power, all things being equal, which in turn dampens home-buying de- mand and decreases the market potential for existing-home sales. Compared to September 2021, house-buying power is now down 29%, equivalent to a loss of 695,000 home sales. Ninety-three percent of outstanding mort- gages now have a rate under 6% as of the second quarter of 2022. "As mortgage rates approach 7% and the gap between most homeowners' current mortgage rate and the prevailing market rate grows, the financial disincentive for homeown- ers to sell their homes and buy a new home at the higher prevailing mortgage rate increas- es," Fleming wrote. "e rate lock-in effect prevents more new supply from reaching the market and reduces the number of home sales. Homeowners staying put reduced housing market potential by 84,000 sales in September compared with one year ago." When lending standards are tight, fewer people can qualify for a mortgage to buy a home. Tighter credit conditions resulted in 424,000 fewer potential home sales com- pared to one year ago. So, What's Next? While in hindsight, it is clear that the ultra-low mortgage rates lenders were of- fering during the pandemic "super-charged" housing market potential, what is in store for potential home sales now that rates are slated to keep rising? "As long as inflation remains high, there will be upward pressure on mortgage rates as the Federal Reserve continues to aggressively tighten monetary policy," Fleming said. "e higher the mortgage rate, the more sellers will go on strike and the more potential buyers will feel the impact of reduced house-buying power, but price appreciation will further slow and potential buyers can use adjustable-rate mortgages to regain some of that lost house-buying power." "While not the frenzy of 2021, the largest living generation, the millennials, will con- tinue to age into their prime home-buying years, creating a demographic tailwind for the housing market," Fleming concluded. Black and Latino residents are in their prime homebuying years. In 2021, Black and Latino people's median ages were 35.3 and 30.5, respectively, compared with 43.9 for whites. Despite the pandemic's negative effects on employment, swift government actions, such as forbearance and unemployment benefits, helped Black and Latino households sustain homeownership and helped many enter homeownership and benefit from historically low interest rates. Data show forbearance take- up was higher among these households. But quickly changing market conditions could impede this positive trajectory. Despite signs of a slowdown, home prices remain high and mortgage interest rates have more than doubled from last year, making homeownership less affordable, especially for Black and Latino households who, on average, have lower incomes because of structural barriers. Rising rent is also making it more difficult to save for future down payments. Research shows that homeownership transfers from parents to children. ose with wealthy homeowner parents—who are disproportionately white—are most likely to receive financial support and help navigating the complicated homebuying process. A well-targeted down payment assistance program, special purpose credit program, outreach, and counseling are among solutions that can reduce the racial homeownership and wealth gaps. Additionally, the state-level differences suggest policymakers should consider different priorities in different places to reduce the racial homeownership gap. For example, in the Midwest and Mountain West, affordability is not as much of a concern, but decreasing outward mobility and making such places welcoming and attractive to diverse populations will be key. In Texas, Florida, and Georgia, states with large Black or Latino populations, improving housing affordability can go a long way. e racial and ethnic homeownership gap narrowed for Black and Latino households relative to white households during the pandemic, but targeted and tailored policy supports are needed to ensure these gains don't backslide. Continued from page 13