Market Potential Continues Slide in January as Higher Rates Reduce Supply, According to First American Chief Economist’s Potential Home Sales Model

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 January 2017.

January 2017 Potential Home Sales

• Potential existing-home sales decreased to a 5.5 million seasonally adjusted, annualized rate (SAAR).
• This represents an 81.7 percent increase from the market potential low point reached in December 2008.
• In January, the market potential for existing-home sales fell by 1.9 percent compared with a year ago, a decline of 107,000 (SAAR) sales.
• Currently, potential existing-home sales is 328,000 (SAAR) or 13.8 percent below the pre-recession peak of market potential, which occurred in July 2005.

Market Performance Gap

• The market for existing-home sales is underperforming its potential by 0.2 percent or an estimated 9,500 (SAAR) of sales, which is the smallest performance gap in the last 18 months.
• Last month’s revised underperformance gap was 2.0 percent or 117,000 (SAAR) sales.

Chief Economist Analysis: Rising Mortgage Rates Lower Market Potential and Restrict Supply

“While higher mortgage rates did reduce the market’s potential, they also will have the positive effect of moderating house price appreciation,” said Mark Fleming, chief economist at First American. “More troubling is the lack of homes for sale, which is causing a ‘matching-trap’ where current homeowners are reluctant to sell because of concerns about the ability to find a home to buy and the likelihood that their new mortgage will have a higher rate than their existing mortgage.”

Additional Quotes from Chief Economist Mark Fleming

• “The housing market’s potential for existing-home sales fell 1.9 percent over the past twelve months, driven primarily by rising mortgage rates. The rising rates are influencing potential sellers to hold their properties off market and decreasing affordability, which modestly reduced first-time homebuyer demand.”
• “The low inventory of homes for sale, currently 3.6 months’ supply, continues to be a concern. Tight supply accompanied by rising prices is more indicative of a market reacting to a shift in the willingness of homeowners to list their homes for sale, and less indicative of a market reacting to a shortage of demand due to affordability issues. Restricted demand would result in lower quantity of homes for sale and lower, not higher, prices.”
• “The hesitation to sell is being caused by a 'matching-trap.' Current homeowners are reluctant to list their homes for sale because they are concerned they will not find a home to buy.”
• “Additionally, higher interest rates discourage the decision to sell because even a new mortgage for an equal amount becomes more expensive in terms of monthly debt-service payments as rates rise.”

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 we believe a healthy market level of 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 March 21, 2017 with February 2017 data.

About the Potential Home Sales Model

Background information on the First American Potential Home Sales model is available here.

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. © 2017 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; and banking, trust and investment advisory services. With revenues of $5.6 billion in 2016, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2016, First American was recognized by Fortune® magazine as one of the 100 best companies to work for in America. More information about the company can be found at www.firstam.com.

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