Stage is Set for Stronger Spring Home-Buying Season, According to First American Potential Home Sales Model

Business Wire 21-Mar-2019 7:00 AM

—We've seen mortgage rates decline and wages rise – both trends work to boost house-buying power and fuel greater market potential for home sales, setting the stage for a stronger than expected spring home-buying season, 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 February 2019.

February 2019 Potential Home Sales

• Potential existing-home sales increased marginally to a 5.17 million seasonally adjusted annualized rate (SAAR), a 1.5 percent month-over-month increase.
• This represents a 54.0 percent increase from the market potential low point reached in February 1993.
• The market potential for existing-home sales declined by 2.9 percent compared with a year ago, a loss of 153,000 (SAAR) sales.
• Currently, potential existing-home sales is 1.6 million (SAAR), or 23.2 percent below the pre-recession peak of market potential, which occurred in March 2004.

Market Performance Gap

• The market for existing-home sales is underperforming its potential by 2.5 percent or an estimated 127,000 (SAAR) sales.
• The market performance gap increased by an estimated 200,000 (SAAR) sales between January 2019 and February 2019.

Chief Economist Analysis: Housing Market Poised for Strong Spring

"In February 2019, the housing market continued to underperform its potential, but showed signs of promise leading into the spring home-buying season. Actual existing-home sales are 2.5 percent below the market's potential, according to our Potential Home Sales model," said Mark Fleming, chief economist at First American. "That means the market has the potential to support 127,000 more home sales at a seasonally adjusted annualized rate (SAAR).

"Supply shortages have been the primary culprit for this performance gap – you can't buy what's not for sale," said Fleming. "However, so far in 2019, we've seen mortgage rates decline and wages rise – both trends work to boost house-buying power and fuel greater market potential for home sales, setting the stage for a stronger than expected spring home-buying season."

House-Buying Power Fuels Market Potential

"The last three months have been kind to potential home buyers. While mortgage rates increased throughout most of 2018, they began to trend downward in December and have continued to fall since then," said Fleming. "All the while, average household income has trended up, boosting house-buying power.

"The decline in mortgage rates over the last three months may have encouraged some homeowners, who were "rate locked-in" by rising mortgage rates, to re-enter the market. Additionally, millennials that were previously priced out of the market when rates were higher in 2018 are likely to jump back in," said Fleming. "The increase in house-buying power directly contributed to a gain of nearly 131,000 potential home sales in the last three months, by far the strongest driver of market potential."

What's Still Holding Back Market Potential?

"Even with the house-buying power boost, the market for existing-home sales is underperforming its potential due to the persisting supply shortage," said Fleming. "The supply squeeze is two-fold: the existing homeowner's dilemma and the lack of new construction.

"The majority of existing homeowners have mortgages with historically low rates, and there is limited incentive to sell if it will cost them more each month to borrow the same amount of money from the bank. This rate-lock phenomenon has led to a 9 percent yearly increase in tenure length, which reduced market potential by 99,000 sales in the last three months," said Fleming.

"One way to reduce supply squeeze is to build more new homes, but construction headwinds have prevented homebuilders from keeping up with housing demand," said Fleming. "Lack of new home supply directly contributed to a decline of nearly 8,000 potential home sales in the last three months."

A Head Start to Spring Home-Buying Season

"Rising house-buying power and limited supply are locked in a tug-of-war as the two strongest forces influencing housing market potential in advance of the spring home-buying season," said Fleming. "The increase in house-buying power, in conjunction with favorable market conditions, led to an increase of nearly 161,000 potential home sales over the last three months. The rise in house-buying power overpowered the effects of limited supply.

"Continuing low mortgage rates and a strong labor market will fuel demand as the spring home-buying season ramps up. In addition, the recent increase in housing starts means home builders are pushing through new construction projects, which should help alleviate the supply shortage in the future," said Fleming. "The net effect? We expect the spring home-buying season to be stronger than anticipated just a few months 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 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 April 19, 2019 with March 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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