Market Overview

First American Chief Economist's Existing-Home Sales Capacity Model Decreases 0.1 Percent in September


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 Existing-Home Sales Capacity (EHS-C) model for the month of September 2015, which provides a gauge on whether existing-home sales are under capacity or over capacity based on current market fundamentals. The EHS-C rate decreased by 0.1 percent compared to August and decreased by 3.6 percent compared to a year ago. The seasonally adjusted, annualized rate (SAAR) of existing-home sales capacity is up 77.1 percent from the low point of sales reached in February 2009*. The EHS-C increased by a modest 3,800 sales (SAAR) in September.

"Continued modest income gains and moderation in house price appreciation were factors that drove the market capacity for existing-home sales slightly lower, when compared to August. The user cost for housing, which is a measure of the cost of ownership that includes the interest cost of a mortgage, home maintenance, taxes, tax benefits, and appreciation, remains negative, meaning that owning a home ‘pays' the homeowner," said Mark Fleming, chief economist, First American. "This negative user cost, combined with slowly growing incomes, should counter the expected eventual rise in interest rates and deceleration in house prices. Our expectation is that the market capacity for existing-home sales will rise slowly in 2016."

Actual existing-home sales spiked in July, but in August dropped back to a pace below 5.4 million (SAAR) and rebounded in September to a rate of 5.55 million (SAAR). The current underperformance gap is an estimated 215,000 (SAAR), which is significantly less than the sales capacity gap of 1.7 million existing-home sales in February 2014. EHS-C is down 640,000 sales (SAAR) from the most recent peak in February 2014.

Forecasts for September actual existing-home sales predict an increase to 5.56 million (SAAR), remarkably close to actual existing-home sales for September. This would be an increase of 4.7 percent over August's disappointing preliminary estimate for actual existing-home sales.

"Recent volatility in the actual level of existing-home sales is being attributed to a breakdown in the adjustments made to account for seasonality in home sales data," said Fleming. "Considering the likely recent outlier on the high side in July and the potential outlier on the low side in August, actual existing-home sales should reasonably be in the 5.4 to 5.5 million (SAAR) range."

HELOCS "Poised to Surge"

A recent survey of prospective homebuyers conducted on behalf of Trulia indicated that mortgage rates would have to rise above 6 percent before significantly discouraging homebuyers from buying a home. Last month, First American's Chief Economist published an analysis of the impact of a possible rate increase on existing-home sales and house prices entitled "Does a Fed Rate Increase Doom Housing?"

"Our research corroborates the Trulia survey findings that housing demand in a low-rate environment is relatively insensitive to mortgage rates but, as rates rise further, the impact will be stronger," said Fleming. "In fact, there is reason to believe that as rates increase, home equity loans are ‘Poised to Surge.'"

Leverage-Assisted Housing Asset Inflation

Last month, the Federal Reserve decided not to raise the benchmark federal funds rate and recent economic data has decreased the likelihood that a rate increase will happen this year.

"Continued low mortgage rates, which remain below 4 percent, are certainly a contributing factor to the pace of price appreciation that we see in the housing market, which is significantly exceeding inflation and income growth, said Fleming. "Leverage-assisted housing asset inflation, or home-price appreciation fueled by low mortgage rates, is a significant contributing factor to the reason why the market capacity for existing-home sales is exceeding actual existing-home sales."

Fleming added, "The housing market's capacity for existing-home sales is moderating as home-price appreciation slows, but remains in excess of actual sales due to leverage-assisted housing asset inflation. Looking forward, we expect greater equity reinvestment demand caused by rising rates. Yet, the financial benefits of owning a home and favorable demographic trends bode well for trends in market capacity for existing-home sales in the long run, and point to modest capacity growth expectations for the coming year."

*Previous EHS-C releases referred to November 2011 as the low point of sales. The model used to generate existing-home sales capacity has been enhanced to more accurately reflect the dynamic relationships between sales, prices, interest rates and the user-cost of housing, resulting in a model that more accurately reflects past conditions.

Next EHS-C Release

The next EHS-C model will be released on November 19, 2015 with October EHS-C data.

About Existing-Home Sales Capacity

First American's proprietary Existing-Home Sales Capacity (EHS-C) model provides a gauge on whether existing-home sales are under capacity or over capacity based on current market circumstances. The EHS-C rate provides a measure on whether existing-home sales, which include single-family homes, townhomes, condominiums and coops, are outperforming or underperforming based on current market fundamentals. The seasonally adjusted annualized EHS-C estimates the historical relationship between existing-home sales and the U.S. population demographic data, income and labor market conditions in the U.S. economy, price trends in the U.S. housing market, and conditions in the financial market. For example, seasonally adjusted, annualized rates of existing-home sales above the level of the EHS-C indicate market turnover is outperforming the rate fundamentally supported by the current conditions. Conversely, seasonally adjusted, annualized rates of existing-home sales below the level of the EHS-C 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 capacity rate of sales for a variety of reasons, including non-traditional market conditions, policy constraints and market participant behavior. Recent EHS-C estimates are subject to revision in order to reflect the most up-to-date information available on the economy, housing market and financial conditions. The EHS-C will be published prior to National Association of Realtors Existing-Home Sales report each month.


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. © 2015 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 $4.7 billion in 2014, the company offers its products and services directly and through its agents throughout the United States and abroad. More information about the company can be found at

First American Financial Corporation
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Marcus Ginnaty
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(714) 250-3298
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