—Build it and the homebodies just might buy
it and provide welcome supply to the housing market, says Chief
Economist Mark Fleming—
First American Financial Corporation (NYSE: FAF),
a leading global provider of title insurance, settlement services
and risk solutions for real estate transactions, today released
First American’s proprietary Potential Home Sales Model for the
month of January 2020.
January 2020 Potential Home Sales
- Potential existing-home sales increased to a 5.36 million
seasonally adjusted annualized rate (SAAR), a 1.4 percent
month-over-month increase.
- This represents a 59.7 percent increase from the market
potential low point reached in February 1993.
- The market potential for existing-home sales increased by 4.7
percent compared with a year ago, a gain of 240,050 (SAAR)
sales.
- Currently, potential existing-home sales is 1.37 million
(SAAR), or 20.3 percent 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 1.0 percent or an estimated 53,900 (SAAR) sales.
- The market performance gap decreased by an estimated 14,400
(SAAR) sales between December 2019 and January 2020.
Chief Economist Analysis: Demand Soars, Supply Sinks
“The housing market started the year off strong, with the market
potential for existing-home sales reaching its highest level since
January 2018, according to our Potential Home Sales Model,” said
Mark Fleming, chief economist at First American. “Housing market
potential increased 1.4 percent in January 2020 relative to the
previous month, and grew 4.7 percent year over year, an increase of
240,050 potential existing-home sales and the highest rate of
yearly growth since December 2017. Actual existing-home sales
exceeded housing market potential by 1.0 percent, or an estimated
53,900 seasonally adjusted annualized sales.
“The growth in market potential for existing-home sales was
primarily fueled by positive market demand dynamics. In 2020, 4.8
million millennials will turn 30 – the peak age for home-buying.
They’re fortunate to be entering the housing market at a time of
historically low mortgage rates and a strong economy. However,
there are challenges,” said Fleming. “Millennials face a very
limited supply of existing homes available for sale, especially
homes in the entry-level price range. In January, the positive
impact from market demand outweighed the negative impact of limited
supply, boosting housing market potential relative to one year
ago.”
Lower Rates and Wage Growth Boost Affordability
“The primary reason for increased housing market potential
compared with one year ago was increased house-buying power, how
much home one can afford to buy given household income and the
prevailing mortgage rate. In January, after three months of
slightly increasing mortgage rates, the 30-year, fixed-rate
mortgage declined to 3.6 percent, 0.8 percentage points lower than
one year ago,” said Fleming. “At the same time, the healthy labor
market continued to boost wage growth, contributing to a 2.6
percent increase in household income. Low mortgage rates and income
growth triggered a 13.5 percent increase in house-buying power
compared with a year ago. This increase in house-buying power had
the greatest impact on housing market potential in January,
boosting market potential by 343,250 potential home sales.”
New Household Growth Boosts Demand for Homes
“According to recent estimates, 1.65 million new households were
formed between December 2018 and December 2019. As more new
households are formed, demand for housing rises,” said Fleming.
“The increase in household formation enhanced market potential by
103,380 potential home sales in January compared with last
year.”
End of Year Housing Supply Relief
“While the construction of new homes, specifically much needed
single-family homes, remains below what is needed to satisfy
demand, homebuilding took a sharp turn higher at the end of 2019,”
said Fleming. “As new housing supply enters the market, the risk of
not being able to find something to buy lessens, so homeowners may
become more confident in the decision to sell their existing home.
Compared with last year, the addition of new supply increased
housing market potential by a modest 248 potential home sales.”
Homebodies Holding Back Market Potential
“The lack of existing homes available for sale is the most
significant hindrance to housing market potential. Interestingly,
the same dynamic that’s making homes more affordable is preventing
more supply from entering the market. Persistently low mortgage
rates can discourage existing homeowners from selling,” said
Fleming. “The majority of homeowners already have a low mortgage
rate because there has been ample opportunity to refinance to lower
rates over the last decade. So, for a homeowner with a low mortgage
rate, the only house-buying power advantage comes from household
income growth. Many homeowners decide to ‘stay put,’ as observed by
rising average tenure length, and the inventory of homes for sale
dwindles further.
“The aging of the U.S. population has also contributed to rising
tenure length as many aging silent generation, baby boomer and
Generation X homeowners decide to remain in their existing homes,”
said Fleming. “More than half of all existing homes are owned by
baby boomers and the silent generation, and they are choosing not
to sell and consequently not buy either.
“While the year-over-year growth of tenure length slowed in
January 2020, it is still 8.0 percent higher than one year ago,”
said Fleming. “The increase in tenure length had the only negative
impact on housing market potential this month, reducing it by
376,110 potential home sales compared with one year ago.”
Should We Expect More Good News for Housing in 2020?
“Housing demand is expected to grow in 2020, as millennials
continue to form new households and mortgage rates remain below 4
percent. Additionally, wage growth driven by a strong labor market
will continue to support house-buying power growth,” said Fleming.
“While it’s unlikely that tenure length will decline significantly
in a low and unchanging mortgage rate environment, additional new
housing supply can incentivize existing homeowners to move. Build
it and the homebodies just might buy it and provide welcome supply
to the housing market.”
Next Release
The next Potential Home Sales Model will be released on March
19, 2020 with February 2020 data.
About the Potential Home Sales Model
Potential home sales measures existing-homes 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, homeowner tenure, house-buying power in the U.S.
economy, price trends in the U.S. housing market, and conditions in
the financial market. When the actual level of existing-home sales
are significantly above potential home sales, the pace of turnover
is not supported by market fundamentals and there is an increased
likelihood of a market correction. Conversely, seasonally adjusted,
annualized rates of actual existing-home sales below the level of
potential existing-home sales indicate market turnover is
underperforming the rate fundamentally supported by the current
conditions. Actual seasonally adjusted annualized existing-home
sales may exceed or fall short of the potential rate of sales for a
variety of reasons, including non-traditional market conditions,
policy constraints and market participant behavior. Recent
potential home sale estimates are subject to revision to reflect
the most up-to-date information available on the economy, housing
market and financial conditions. The Potential Home Sales model is
published prior to the National Association of Realtors’
Existing-Home Sales report each month.
Disclaimer
Opinions, estimates, forecasts and other views contained in this
page are those of First American’s Chief Economist, do not
necessarily represent the views of First American or its
management, should not be construed as indicating First American’s
business prospects or expected results, and are subject to change
without notice. Although the First American Economics team attempts
to provide reliable, useful information, it does not guarantee that
the information is accurate, current or suitable for any particular
purpose. © 2020 by First American. Information from this page may
be used with proper attribution.
About First American
First American Financial Corporation (NYSE: FAF) is a
leading provider of title insurance, settlement services and risk
solutions for real estate transactions that traces its heritage
back to 1889. First American also provides title plant management
services; title and other real property records and images;
valuation products and services; home warranty products; property
and casualty insurance; banking, trust and wealth management
services; and other related products and services. With total
revenue of $6.2 billion in 2019, the company offers its products
and services directly and through its agents throughout the United
States and abroad. In 2020, First American was named to the Fortune
100 Best Companies to Work For® list for the fifth consecutive
year. More information about the company can be found at
www.firstam.com.
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Media Contact: Marcus Ginnaty Corporate Communications
First American Financial Corporation (714) 250-3298
Investor Contact: Craig Barberio Investor Relations First
American Financial Corporation (714) 250-5214
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