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35 » VISIT US ONLINE @ DSNEWS.COM GAP BETWEEN POTENTIAL AND ACTUAL HOME SALES NARROWS While existing-home sales continued to underperform their potential in December 2017, the gap between actual sales and that potential has continued to narrow, according to a report by First American. e analysis was conducted by First American measuring existing-home sales, which include single-family homes, townhomes, condominiums, and co-ops, on a seasonally adjusted, annualized rate based on the historical relationship between existing-home sales and U.S. population demographic data, income and labor market conditions in the U.S. economy, price trends in the U.S. housing market, and conditions in the financial market. First American's proprietary Potential Home Sales model reports that potential existing-home sales decreased 0.2 percent month-over-month in December 2017, settling in at a 5.99 million seasonally adjusted annualized rate (SAAR). The market potential for existing-home sales is up 1.4 percent year-over-year, having gained 82,000 (SAAR) sales. According to First American, the December total of potential existing-home sales was 375,000 (SAAR), which puts it 6.3 percent below the pre-Recession peak that occurred in July 2005. e market for existing-home sales underperformed its potential in December, however, by 2.0 percent or an estimated 122,000 (SAAR) sales, per First American. First American also reported a market potential dip of an estimated 1,000 (SAAR) sales between November and December 2017. "Faster economic growth, a healthy stock market, low unemployment, and low mortgage rates are fueling substantial home-buying demand," said Mark Fleming, Chief Economist at First American. "e pace of actual existing-home sales has surged in recent months and significantly narrowed the gap between actual market performance and market potential. Nonetheless, the market is still underperforming its potential. Existing-home sales have been restrained by an increasingly concerning shortage of properties for sale, which puts upward pressure on house prices. e shortage of homes for sale will likely continue in 2018 and continue to push prices higher." First American predicts that homebuilding and sales listings will have difficulty keeping up with demand in 2018, especially from the growing demand among millennials eager to find a home. Tight inventory will also continue to cause problems, as Realtor.com reports the supply of homes has actually fallen year-over-year, down by 9.0 percent. Moreover, homes are selling 7.0 percent faster than a year ago. All of these factors contributed to an 8.6 percent decrease in affordability in November 2017, according to the First American Real House Price Index, which tracks incomes, mortgage rates, and an unadjusted house price index. WILL THE ECONOMY MAINTAIN ITS MOMENTUM? Low mortgage rates and accelerated economic growth has meant that the housing market has started the year with a bang. But will it maintain this momentum? According to Freddie Mac's January Outlook, a monthly report that looks at the housing market and economic growth, although the housing market has been improving every year for nearly a decade, it could see a slight moderation in activity through the next two years. "However, there are factors worth keeping an eye on in 2018, namely, is another recession on the horizon, how will housing markets respond to declining housing affordability and how will young adults move the housing market—more are living at home with their parents today than in 2000," said Len Kiefer, Deputy Chief Economist at Freddie Mac. e report indicated that home sales, which stood at 6.35 million last month, housing construction at 1.3 million starts, and house prices that saw a 5.7 percent increase are all expected to be modestly higher in 2018 relative to 2017. However, the report indicated that even though the economy will remain positive, it won't be able to keep pace with home prices, resulting in declining affordability, which in turn could lead to slow housing market activity. e report also indicated that with modest income growth, the high cost of living and high student debt. young adults are struggling to move out of their parents' homes and form their own households. Although a recession does not appear imminent, Freddie Mac said it would keep an eye on potential recession indicators, including the flattening (and potential inversion) of the U.S. Treasury yield curve and the unemployment rate (4.1 percent in December 2017). History has shown that an inverted yield curve and an unemployment rate below the natural rate usually leads to a recession in two to three years, the report said.

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