—Demand for existing homes is strong, but
one can’t buy what’s not for sale. Declining mortgage rates could
be the factor that moves the needle for those that still feel
rate-locked in, 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
July 2019.
July 2019 Potential Home Sales
- Potential existing-home sales decreased marginally to a 5.18
million seasonally adjusted annualized rate (SAAR), a 0.3 percent
month-over-month decrease.
- This represents a 54.4 percent increase from the market
potential low point reached in February 1993.
- The market potential for existing-home sales declined by 1.2
percent compared with a year ago, a loss of 63,000 (SAAR)
sales.
- Currently, potential existing-home sales is 1.54 million
(SAAR), or 22.9 percent below the pre-recession peak of market
potential, which occurred in March 2004.
Market Performance Gap
- The market for existing-home sales is marginally overperforming
its potential by 0.05 percent or an estimated 2,740 (SAAR)
sales.
- The market performance gap decreased by an estimated 54,600
(SAAR) sales between June 2019 and July 2019.
Chief Economist Analysis: Housing Market Reaches Potential in
July
“The housing market essentially reached its potential in July
2019, as actual existing-home sales were 0.05 percent above the
market’s potential,” said Mark Fleming, chief economist at First
American. “Existing-home sales in 2019 are running at a pace
similar to 2015, even though rates have fallen and household income
has increased this year. Housing market potential benefitted from a
10.6 percent year-over-year increase in consumer house-buying power
in July, as the 30-year, fixed-rate mortgage, an important
component of consumer house-buying power, fell to its lowest point
since November 2016.
“Despite the affordability boost, the market potential for
existing-home sales fell 0.3 percent this month compared with last
month and dropped 1.2 percent compared with one year ago,” said
Fleming. “How can the market potential fall when house-buying power
remains at near-record levels? The key point to remember about the
housing market is that the buyer and the seller are often one and
the same household.”
Forces Boosting the Potential for Existing-Home Sales
“Based on our dynamic simulation Potential Home Sales Model,
there are several forces shaping housing market potential today,”
said Fleming. “Rising new household formation, which is an
indicator of growing demand for housing, added approximately 95,000
more potential home sales compared with one year ago.
“Surging house-buying power also fuels greater potential demand.
House-buying power is how much home one can afford to buy given the
prevailing mortgage rate and household income,” said Fleming.
“Mortgage rates in July were 0.8 percentage points lower than they
were a year ago, which helps increase house-buying power. Household
income, the other component of consumer house-buying power,
increased 2.4 percent compared with one year ago, further
increasing house-buying power. The decline in the mortgage rate and
income growth drove combined to increase house-buying power by
$38,550 and increased market potential by 265,000 sales.
“Growth in house price appreciation, albeit slower in July
relative to last year, also added 33,000 more potential home sales
compared with one year ago. As new supply enters the market, the
risk of not being able to find something to buy lessens and
homeowners’ confidence in the decision to sell their existing homes
grows. New housing supply contributed 723 potential home sales
compared with one year ago,” said Fleming. “In aggregate,
increasing demand, rising affordability, greater equity, and new
supply increased the market potential for existing-home sales by
approximately 395,000 sales compared with one year ago.”
A Persistent Headwind: Rising Tenure Length
“While there were a flurry of forces boosting the market
potential for existing-home sales in July, the low supply of homes
for sale continues to hold market potential back,” said Fleming.
“Existing-home sales make up approximately 90 percent of all home
sales, which means existing homeowners must sell their homes in
order for homes to be available for sale. Rising tenure length,
therefore, means both fewer buyers and fewer homes on the market,
keeping existing-home sales below potential.
“Compared with one year ago, tenure length increased by 11
percent and contributed to a loss of nearly 425,000 potential home
sales, more than offsetting the nearly 395,000 potential
existing-home sales from the forces boosting market potential,”
said Fleming. “To a lesser extent, tightening credit also
contributed to a loss of 33,000 potential existing-home sales. The
result? An overall decline in potential existing-home sales
compared with one year ago, despite boosts in demand and
affordability.
“There are positive signs ahead, however. Increasing tenure
length is largely the result of the rate 'lock-in' effect, and
seniors aging in place. In the latest Freddie Mac weekly report of
mortgage rates, the 30-year, fixed mortgage rate was 3.6 percent,
approaching the lowest mortgage rate in history of 3.3 percent,
which occurred in 2012,” said Fleming. “Additionally, existing
homeowners are sitting on $5.7 trillion of tappable equity, money
which could be used to fund the purchase of a move-up home.
“If mortgage rates remain this low, more existing-home owners
may be enticed to move. It’s clear that demand for existing homes
is strong, but one can’t buy what’s not for sale,” said Fleming.
“Declining mortgage rates could be the factor that moves the needle
for those that still feel rate-locked in.”
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
September 18, 2019 with August 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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