—The keys to closing the performance gap lie
in where mortgage rates go from here and how existing homeowners
resolve the dilemma to sell or not to sell, 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 April 2019.
April 2019 Potential Home Sales
- Potential existing-home sales increased
marginally to a 5.17 million seasonally adjusted annualized rate
(SAAR), a 0.1 percent month-over-month increase.
- This represents a 54.1 percent increase
from the market potential low point reached in February 1993.
- The market potential for existing-home
sales declined by 1.3 percent compared with a year ago, a loss of
68,600 (SAAR) sales.
- Currently, potential existing-home
sales is 1.56 million (SAAR), or 23.2 percent below the
pre-recession peak of market potential, which occurred in March
2004.
Market Performance Gap
- The market for existing-home sales is
underperforming its potential by 1.3 percent or an estimated 68,000
(SAAR) sales.
- The market performance gap decreased by
an estimated 37,000 (SAAR) sales between March 2019 and April
2019.
Chief Economist Analysis: Why Did Housing Market Potential
Improve in April?
“The housing market continued to underperform its potential in
April 2019, but the performance gap shrank compared with March.
Actual existing-home sales remain 1.3 percent below the market’s
potential, but the performance gap narrowed from 2.0 percent last
month, according to our Potential Home Sales model,” said Mark
Fleming, chief economist at First American. “That means the housing
market has the potential to support 68,000 more home sales at a
seasonally adjusted annualized rate (SAAR).
“Lower mortgage rates in April loosened the 'rate lock-in
effect' that has created a financial disincentive that prevents
many existing homeowners from selling their homes. However, it was
not enough to reduce the average tenure length, the amount of time
a typical homeowner lives in their home, which has increased
dramatically in the last year,” said Fleming. “Since existing
homeowners supply the majority of the homes for sale and increasing
tenure length indicates homeowners remain hesitant to sell, the
housing market faces an ongoing supply shortage – you can’t buy
what’s not for sale.
“New home construction brought more homes to the market this
month, but the new supply was not enough to meet demand,” said
Fleming. “While supply remains tight, the market potential for home
sales increased month over month due to improved affordability
driven by lower mortgage rates and rising wages and favorable
demographics, as millennial first-time home buyer demand continues
to rise.”
Existing Homeowners Dilemma – To Sell or Not to Sell
“Before the housing market crash in 2007, the average length of
time someone lived in their home was approximately five years.
Tenure jumped to seven years during the aftermath of the crash
between 2008 and 2016,” said Fleming. “The most recent data shows
that the average length of time someone lives in their home reached
11 years in April 2019, a 9 percent increase compared with a year
ago. Increased tenure length reduced the market potential by 33,000
sales compared with last month.
“In 2018, rising mortgage rates, tight supply, low rates of
foreclosure, and tight credit all contributed to the ongoing surge
in homeowner tenure. The majority of existing homeowners have
mortgages with historically low rates, so there is limited
incentive to sell if it will cost them more each month to borrow
the same amount of money from the bank,” said Fleming. “The dilemma
facing existing homeowners today is how high must the cost of
losing that low rate mortgage be to choose not to sell.”
House-Buying Power Wins Tug-of-War
“While increasing tenure length reduced market potential in
April compared with the previous month, rising house-buying power
offset the impact of tenure length on market potential. In April,
mortgage rates reached their lowest point since January 2018 and
the strong labor market persisted,” said Fleming. “Average hourly
earnings continued their upward trend, growing at an annual rate of
3.4 percent, which resulted in a 2.6 percent year-over-year
increase in average household income. With more income and lower
mortgage rates, comes greater house-buying power. The increase in
house-buying power increased market potential by 50,000 sales,
compared with the previous month, by far the strongest driver of
market potential in our model.
“Consumers reacted to the increase in house-buying power, as
purchase applications in April reached their highest level in nine
years. If mortgage rates continue their downward trend, the
rate-lock in effect will diminish and more existing homeowners may
be enticed to sell, bringing more supply to the market. In addition
to stimulating supply by encouraging existing homeowners to sell
their homes, declining mortgage rates will further increase demand
by boosting house-buying power,” said Fleming. “In April, lower
mortgage rates helped close the performance gap between the
market’s potential and actual existing-home sales. The keys to
closing the performance gap lie in where mortgage rates go from
here and how existing homeowners resolve the dilemma to sell or not
to sell.
What Insight Does the Potential Home Sales Model
Reveal?
“When considering the right time to buy or sell a home, an
important factor in the decision should be the market’s overall
health, which is largely a function of supply and demand. Knowing
how close the market is to a healthy level of activity can help
consumers determine if it is a good time to buy or sell, and what
might happen to the market in the future. That’s difficult to
assess when looking at the number of homes sold at a particular
point in time without understanding the health of the market at
that time,” said Fleming. “Historical context is critically
important. Our Potential Home Sales Model measures what home
sales should be based on the economic, demographic and housing
market environments.”
Next Release
The next Potential Home Sales Model will be released on June 20,
2019 with May 2019 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. © 2019 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 $5.7 billion in 2018, the company offers its products
and services directly and through its agents throughout the United
States and abroad. In 2019, First American was named to
the Fortune 100 Best Companies to Work For® list for
the fourth consecutive year. More information about the company can
be found at www.firstam.com.
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Media Contact:Marcus GinnatyCorporate CommunicationsFirst
American Financial Corporation(714) 250-3298
Investor Contact:Craig BarberioInvestor RelationsFirst
American Financial Corporation(714) 250-5214
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