—Market conditions are ripe for increasing
home sales with one glaring exception. The supply of homes for sale
remains tight, keeping existing home sales below potential, 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
June 2019.
June 2019 Potential Home Sales
- Potential existing-home sales increased marginally to a 5.25
million seasonally adjusted annualized rate (SAAR), a 1.1 percent
month-over-month increase.
- This represents a 56.3 percent increase from the market
potential low point reached in February 1993.
- The market potential for existing-home sales declined by 0.2
percent compared with a year ago, a loss of 11,170 (SAAR)
sales.
- Currently, potential existing-home sales is 1.48 million
(SAAR), or 22.0 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 1.5 percent or an estimated 80,150 (SAAR) sales.
- The market performance gap increased by an estimated 18,840
(SAAR) sales between May 2019 and June 2019.
Chief Economist Analysis: Housing Market Underperforms
Despite Lower Rates
“The housing market underperformed its potential in June 2019,
as actual existing-home sales were 1.5 percent below the market’s
potential,” said Mark Fleming, chief economist at First American.
“The market potential for existing-home sales increased 1.1 percent
compared with May, according to our Potential Home Sales model.
“In June, housing market potential benefited from a 10.7 percent
year-over-year increase in consumer house buying power as 30-year,
fixed mortgage rates, an important component of consumer
house-buying power, fell to their lowest point since November 2016,
and declined 0.8 percentage points compared with one year ago,”
said Fleming. “Household income, the other component of consumer
house-buying power, continued to rise as well, increasing 2.5
percent compared with one year ago.”
What’s the Fed Got to Do with It?
“With the Federal Reserve Open Market Committee (FOMC) meeting
less than two weeks away, many are wondering about the fate of the
Federal Funds Rate, and its impact on the housing market. The CME
group estimates the probability of a 25-basis point reduction at 72
percent, virtually a sure thing,” said Fleming. “Yet, changes to
the short-term rate matter little to the housing market because
mortgage rates, particularly the 30-year, fixed-rate mortgage, are
benchmarked to the 10-year Treasury bond. In fact, since the end of
the recession, the 30-year, fixed-rate mortgage has on average
remained 1.7 percentage points above the 10-year Treasury bond
yield.
“In December 2018, the 10-year Treasury bond yield began to
decline because of global economic uncertainty and concern about
the impact of trade negotiations, and mortgage rates have
followed,” said Fleming. “If the 10-year Treasury bond yield
remains as low as it is today, or even continues to decline, it
begs the question – what does this mean for housing?”
It’s All About House-Buying Power
“This month, the surge in house-buying power, driven largely by
lower mortgage rates, contributed a gain of 98,800 potential home
sales compared with last month and an even more dramatic 272,000
potential home sales compared with last year,” said Fleming.
“Indeed, mortgage rates are approaching the historically low level
of 3.44 percent last seen in July 2016. If mortgage rates reach
3.44 percent, house-buying power would increase by $18,000, and
potential home sales would increase by 124,300 sales, holding all
else equal. Stronger house-buying power benefits the housing market
in two ways: it boosts affordability for home buyers and it may
encourage some homeowners, who are less 'rate locked-in,' to
re-enter the market.”
The Main Force Impeding Market Potential
“While increasing house-buying power improved housing
affordability and boosted the incentive to sell, the low supply of
homes for sale continues to hold the market back,” said Fleming.
“Tenure length increased by 0.7 percent compared with one month
ago, contributing to a loss of nearly 33,000 potential home sales.
The homeowner’s prisoners dilemma, rate 'lock-in' (albeit less so
now) and seniors aging in place have all contributed to rising
tenure length.
“The housing market is unique because existing homeowners
influence both the demand and supply side of the market. In 2018,
just over 6 million homes were sold in the U.S. Only 667,000 of
those were new home sales, the remaining 5.34 million were
existing-home sales,” said Fleming. “This means historically high
tenure length results in both fewer buyers and fewer homes on the
market, keeping existing-home sales below potential.”
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 August
20, 2019 with July 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 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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