Market Overview

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

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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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