—Rising tenure length means both fewer
buyers and fewer homes on the market, and a reduction in the market
potential for existing-home sales, 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 2019.
August 2019 Potential Home Sales
- Potential existing-home sales increased to a 5.18 million
seasonally adjusted annualized rate (SAAR), a 0.2 percent
month-over-month increase.
- This represents a 54.2 percent increase from the market
potential low point reached in February 1993.
- The market potential for existing-home sales declined by 1.9
percent compared with a year ago, a loss of 102,760 (SAAR)
sales.
- Currently, potential existing-home sales is 1.55 million
(SAAR), or 23.1 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 0.8 percent or an estimated 41,519 (SAAR)
sales.
- The market performance gap increased by an estimated 23,000
(SAAR) sales between July 2019 and August 2019.
Chief Economist Analysis: Housing Market Exceeds Potential in
August
“The housing market exceeded its potential in August 2019, as
actual existing-home sales were 0.8 percent above the market’s
potential. Housing market potential increased relative to last
month, but declined 1.9 percent compared with August of last year,”
said Mark Fleming, chief economist at First American. “While down
compared with a year ago, existing-home sales have slightly
outperformed market potential since February 2019, begging the
question – how can existing-home sales exceed market
potential?”
What is Market Potential, Anyway?
“Let’s first explain what ‘potential’ means in the scope of
economics. Potential gross domestic product (GDP) is the level of
production the economy is capable of if its workforce is fully
employed and its capital stock is fully utilized,” said Fleming.
“In other words, the total capacity of a nation to produce goods
and services. The difference between actual GDP and potential GDP
is known as the output gap, which indicates how much the economy is
overperforming or underperforming its potential.
“The concept behind potential home sales is very similar. Our
Potential Home Sales Model measures what a healthy level of home
sales should be based on a variety of economic, demographic and
housing market metrics,” said Fleming. “The performance (output)
gap indicates how much actual existing-home sales are over or
underperforming market potential.”
Why are Existing-Home Sales Outperforming Market
Potential?
“In today’s real economy, real GDP is exceeding its potential,
the unemployment rate is outperforming its potential or ‘natural’
rate, and now existing-home sales are outperforming market
potential,” said Fleming. “In other words, given the historical
relationship between existing-home sales and population demographic
data, homeowner tenure, house-buying power, house price trends and
conditions in the financial market, the pace of existing-home sales
is exceeding what we believe is fundamentally supported by the
market. The main reason? Rising tenure length.
“While several forces are working to boost the market potential
for existing-home sales, the low supply of homes for sale continues
to hold market potential back. 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,” said Fleming. “Rising tenure length means both fewer
buyers and fewer homes on the market, and a reduction in the market
potential for existing-home sales. You can’t buy what’s not for
sale, and you won’t buy, if you don’t sell.”
Too Soon to Tell
“While actual existing-home sales have outperformed market
potential for the last six months, the performance gap has been
very small,” said Fleming. “When the actual level of existing-home
sales is significantly above the market potential for home sales,
the likelihood of a market correction increases.
“Today, the performance gap is not at the level that implies a
possible market correction. In fact, there are signs that the
market potential for existing-homes may begin to rise,” said
Fleming. “The year-over-year growth in tenure length has been
slowing since March of this year and it is conceivable that it
could stabilize or even decline. 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 3.5 percent, approaching the
lowest mortgage rate in history of 3.3 percent, which occurred in
2012. If mortgage rates remain this low or even fall further, more
existing-home owners may be enticed to move as the rate ‘lock-in’
effect fades,” said Fleming. “While actual existing-home sales are
marginally outperforming market potential this month, declining
mortgage rates could be the factor that bridges the gap.”
Next Release
The next Potential Home Sales Model will be released on October
21, 2019 with September 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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