Housing Market Potential Reaches Highest Level Since 2007, According to First American Potential Home Sales Model
September 21 2020 - 7:00AM
Business Wire
—Demographic demand and Fed policy keeping
rates low has helped housing recover rapidly from the initial
stages of the pandemic and remain immune to the ongoing economic
impacts of the coronavirus for now, 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
August 2020.
August 2020 Potential Home Sales
- Potential existing-home sales increased to a 5.92 million
seasonally adjusted annualized rate (SAAR), a 5.6 percent
month-over-month increase.
- This represents a 70.8 percent increase from the market
potential low point reached in February 1993.
- The market potential for existing-home sales increased 9.7
percent compared with a year ago, a gain of nearly 525,580 (SAAR)
sales.
- Currently, potential existing-home sales is 875,000 million
(SAAR), or 12.9 percent below the pre-recession peak of market
potential, which occurred in April 2006.
Market Performance Gap
- The market for existing-home sales underperformed its potential
by 4.8 percent or an estimated 282,430 (SAAR) sales.
- The market performance gap increased by an estimated 271,060
(SAAR) sales between July 2020 and August 2020.
Chief Economist Analysis: Strong Fundamentals Propel Housing
Market Potential
“Since hitting a low point during the initial stages of the
pandemic, the only major industry to display immunity to the
economic impacts of the coronavirus is the housing market. Housing
has experienced a strong V-shaped recovery and is now exceeding
pre-pandemic levels,” said Mark Fleming, chief economist at First
American. “This is largely because the economic distress from the
pandemic has created a services-driven recession, disproportionally
hurting younger, lower wage renters that are less likely to be
homeowners or home buyers.
“The bifurcated economic landscape has allowed prospective home
buyers who are still employed to channel increased savings towards
buying a home, and to take advantage of record low mortgage rates.
Weekly purchase applications have surpassed their levels from one
year ago for 17 straight weeks, due to a delayed spring season and
the heightened demand from low rates,” said Fleming. “In August,
these tailwinds propelled housing market potential to its highest
level since 2007, driven by a 5.6 percent month-over-month jump in
the market potential for existing-home sales, according to our
Potential Home Sales Model.”
Forces Boosting Housing Market Potential to 13-Year
High:
- Credit Loosening: “According to the NFCI credit index, a
composite measure of credit conditions, credit tightened
dramatically in mid-April to its most conservative level since 2009
due to the increased economic uncertainty driven by impacts from
the pandemic. Since then, credit availability has loosened, even
reaching pre-pandemic levels in August,” said Fleming. “This credit
composite takes into consideration many different credit
indicators, giving a comprehensive picture of credit conditions in
the U.S. When lending standards are tight, fewer people can qualify
for a mortgage to buy a home. Likewise, when standards are loose,
more people can qualify for a mortgage and buy a home. Credit
loosening in August compared with last month increased housing
market potential by 266,640 potential home sales.”
- House-Buying Power Increases 1.3%: “House-buying power,
how much home one can afford to buy given household income and the
prevailing mortgage rate, increased 1.3 percent month over month,”
said Fleming. “The house-buying power increase was driven by the
combined impact of lower mortgage rates, which were 0.08 percentage
points lower in August than the previous month, and a moderate
increase in month-over-month household income. The increase in
house-buying power boosted market potential by approximately 28,180
potential home sales.”
- House Price Appreciation Continues: “Homeowners in areas
where house prices are rising feel wealthier than those where house
prices are flat or declining. As homeowners gain equity in their
homes, they are more likely to consider using that equity to
purchase a larger or more attractive home – the wealth effect of
rising equity,” said Fleming. “In today’s housing market, fast
rising demand against the limited supply of homes for sale has
resulted in continued house price appreciation. Compared with last
month, the growing wealth effect of rising equity caused by house
price appreciation increased housing market potential by nearly
17,270 potential home sales.”
- Household Formation Growth Continued: “Household
formation continued to grow in August, as millennials continued to
form new households, increasing demand for housing,” said Fleming.
“Rising household formation increased market potential by 24,255
potential home sales in August compared with last month.”
Forces Reducing Housing Market Potential:
- Tenure Length Continues to Rise: “Tenure length, the
average length of time someone lives in their home, increased 0.5
percent in August relative to last month. The increase in tenure
length had a negative impact on housing market potential, reducing
it by 20,070 potential home sales compared with last month,” said
Fleming. “While low mortgage rates can spur homebuying demand by
reducing the monthly cost of a mortgage and increasing house-buying
power, many existing owners who have refinanced into lower
mortgages are less incented to move. Since roughly two-thirds of
all home buyers are existing homeowners, homeowners staying put
reduces the available inventory of homes for sale for home
buyers.”
Is the Pace of Growth Sustainable?
“Our Potential Home Sales Model measures what we believe a
healthy level of home sales should be based on the economic,
demographic and housing market conditions. The market potential for
home sales increased to a 13-year high this month due to strong
underlying fundamentals, especially the return to pre-pandemic
credit conditions,” said Fleming. “Demographic demand and Fed
policy keeping rates low has helped housing recover rapidly from
the initial stages of the pandemic and remain immune to the ongoing
economic impacts of the coronavirus for now, but as with the virus
itself, we are not sure if immunity lasts forever.”
Next Release
The next Potential Home Sales Model will be released on October
21, 2020 with September 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
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American Financial Corporation (714) 250-5214
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