Persistent Lack of Inventory Drives Affordability Lower, 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 June 2017.

June 2017 Potential Home Sales

• Potential existing-home sales increased to a 5.59 million seasonally adjusted, annualized rate (SAAR), a 0.8 percent month-over-month increase.
• This represents an 85.8 percent increase from the market potential low point reached in December 2008.
• In June, the market potential for existing-home sales fell by 3.8 percent compared with a year ago, a decline of 220,000 (SAAR) sales.
• Currently, potential existing-home sales is 780,000 (SAAR), or 14.0 percent below the pre-recession peak of market potential, which occurred in July 2005.

Market Performance Gap

• The market for existing-home sales is outperforming its potential by 0.6 percent or an estimated 31,000 (SAAR) sales.
• Market potential grew by an estimated 45,000 (SAAR) sales between May 2017 and June 2017.

Chief Economist Analysis: Lack of Inventory Remains a Challenge and is Decreasing Affordability

“Demand for homes continued to remain strong this month, largely due to continued demand from more Millennials deciding they want to be homeowners. Yet, the supply of homes for sale continues to decrease,” said Mark Fleming, chief economist at First American. “Existing homeowners fear not being able to find something affordable to buy, and a lack of residential construction workers is increasing the cost of building and slowing the pace of new construction. The result is a supply and demand imbalance that produces upward pressure on house prices and decreasing affordability.”

Additional Quotes from Chief Economist Mark Fleming

• “The housing market’s potential for existing-home sales improved slightly in June, growing 0.8 percent over the course of the month as the 30-year, fixed-rate mortgage rate fell to a six-month low of 3.9 percent.”
• “Inventory shortages continue to challenge the market. According to the National Association of Realtors (NAR), the inventory of existing-homes for sale in May is 8.4 percent lower than a year ago. This is the 24th consecutive month of year-over-year declines.”
• “Existing homeowners fear not being able to find something affordable to buy. This dilemma is imprisoning homeowners and causing inventory shortages in practically every market across the country.”
• “The decline in residential construction employment is dragging down housing starts, a critical source of housing supply. It’s very hard to increase housing starts without increasing residential construction employment.”
• “According to the US Census Bureau, permits for newly constructed houses, a leading indicator for housing starts, fell 4.9 percent between April and May. As new construction supply stalls, the market potential for home sales will also stall.”
• “In response to the combination of tight supply and high demand, house prices are rising at a brisk pace. According to the First American Real House Price Index, fast house price growth combined with mortgage rates that are higher than a year ago has impacted affordability, which is down 11 percent in May compared to a year ago.”

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 August 23, 2017 with July 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 total revenue 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 and again in 2017, First American was named to the Fortune 100 Best Companies to Work For® list. More information about the company can be found at www.firstam.com.

View source version on businesswire.com: http://www.businesswire.com/news/home/20170720005421/en/