—The pandemic has already influenced some
long-term trends, like increasing tenure and limited supply, and
may soon also influence other key housing market dynamics, such as
household income growth and formation, 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 2020.
June 2020 Potential Home Sales
- Potential existing-home sales increased to a 4.88 million
seasonally adjusted annualized rate (SAAR), a 9.2 percent
month-over-month increase.
- This represents a 39.4 percent increase from the market
potential low point reached in February 1993.
- The market potential for existing-home sales decreased 2.3
percent compared with a year ago, a loss of nearly 114,000 (SAAR)
sales.
- Currently, potential existing-home sales is 2.11 million
(SAAR), or 30.2 percent below the pre-recession peak of market
potential, which occurred in February 2005.
Market Performance Gap
- The market for existing-home sales outperformed its potential
by 3.8 percent or an estimated 186,850 (SAAR) sales.
- The market performance gap decreased by an estimated 442,960
(SAAR) sales between May 2020 and June 2020.
Chief Economist Analysis: Housing Market Potential Recovers
Strongly in June, Down 2.3 Percent Year Over Year
“The domestic and global economy continue to feel the pain
inflicted by the coronavirus pandemic. Yet the housing industry, at
least for now, is bucking the trend,” said Mark Fleming, chief
economist at First American. “Weekly purchase applications have
surpassed their levels from one year ago for eight straight weeks,
as potential buyers respond to record low mortgage rates. The
market potential for existing-home sales reflects the accelerated
activity, according to our Potential Home Sales Model.
“After hitting a 2020 low point in April, the market potential
for existing-home sales increased in May and again in June,
reaching a 4.88 million seasonally adjusted annualized rate (SAAR),
9.2 percent better than the May and only 2.3 percent lower than one
year ago,” said Fleming. “While the rebound in the potential for
existing-home sales is good news, the recent surge in COVID-19
cases has caused many parts of the country to reverse or pause
plans to reopen, posing additional risks to the economy and the
housing market. Examining the dynamics that influence housing
market potential provide insight into health of the housing
market.”
Breaking Down Housing Market Potential
“Tenure length, the average length of time someone lives in
their home, has been steadily increasing for years and is one of
three dynamics reducing housing market potential in June. Amid the
pandemic, tenure has continued to rise and had the biggest impact
on housing market potential (354,200 SAAR potential home sales) in
June,” said Fleming. “Economic uncertainty has caused lenders to
tighten credit standards, limiting the number of home buyers that
can qualify for a mortgage and contributing to a year-over-year
loss of 267,000 potential home sales. In June, the lack of new home
construction further contributed to the limited supply of homes for
sale and resulted in a small loss of 2,450 potential home sales
relative to one year ago.
“Helping offset these negative impacts to market potential are
three dynamics. Record low mortgage rates have helped fuel an
increase in house-buying power, contributing nearly 305,000
potential home sales. Increasing household formation and rising
house prices also contributed positively, with 164,400 and 40,360
respective potential home sale gains,” said Fleming. “As mortgage
rates continue to set new record lows and help fuel demand against
a severely limited supply of homes, we anticipate house prices will
continue to rise. Household formation, while a net positive for
housing market potential in June, may suffer from pandemic-related
impacts in the months ahead.”
More Households, More Sales
“Household formation growth boosts demand for homes, and
household formation has largely been on the rise over the last
decade due to millennials continuing to form households. According
to a 2019 study, household formation has rebounded to more than one
million per year from the 2009 low point of 534,000 reached during
the Great Recession,” said Fleming. “Household formation has helped
boost the potential for existing-home sales this year, but research
on household formation during recessions suggests there may be
cause for concern.
“A study from the Federal Reserve Bank of Cleveland shows that
during the Great Recession, the rate at which Americans formed
households fell sharply. The study showed that younger people are
less willing and able to form their own households during
recessions as employment prospects are reduced,” said Fleming.
“Another study showed that the likelihood that a young adult will
form an independent household falls by up to 4 percentage points
during times of recession. We may be seeing this playout now during
the pandemic as a very recent study showed that more than 1.1
million people between the ages of 23 and 30 moved back in with
their parents between February and May 2020.
“Given this recession’s likely similar impact on household
formation, we simulated the possible impact on the market potential
home sales for June, keeping all other fundamental drivers of the
potential for existing-home sales the same,” said Fleming. “If the
number of households falls one percent relative to one year ago,
the potential for existing-home sales would fall from its current
level of 4.88 million SAAR sales to 4.71 million SAAR, a change of
nearly 166,000 SAAR potential home sales. The pandemic and related
economic impacts may turn household formation from a tailwind to a
headwind for home sales later this year.”
The Good, The Bad, and the Likely
“The housing market has proven resilient in the face of the
pandemic thus far. Bolstered by record low mortgage rates and
demand stemming from millennials aging into their household
formation years, the potential for existing-home sales has
rebounded, nearing its pre-pandemic level. Yet, risks remain.
House-buying power is a function of both mortgage rates and income,
and the longer the labor market decline continues, the higher the
risk that household incomes could fall,” said Fleming. “Similarly,
the rate of household formation may slow if the labor market
slowdown continues or worsens. The pandemic has already influenced
some long-term trends, like increasing tenure and limited supply,
and may soon also influence other key housing market dynamics, such
as household income growth and formation.”
Note: This month’s report includes a revision to the full
history of the credit index, which may result in revised PHS
values.
Next Release
The next Potential Home Sales Model will be released on August
20, 2020 with July 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
Investor Contact: Craig Barberio Investor Relations First
American Financial Corporation (714) 250-5214
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