Market Overview

Market Potential Caught in the Crosswinds of Surging Demand and Tightening Inventory, 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 April 2017.

April 2017 Potential Home Sales

  • Potential existing-home sales decreased to a 5.69 million seasonally
    adjusted, annualized rate (SAAR), a 0.2 percent decline over last
    month's revised data.
  • This represents an 89.3 percent increase from the market potential low
    point reached in December 2008.
  • In April, the market potential for existing-home sales fell by 0.1
    percent compared with a year ago, a decline of 5,000 (SAAR) sales.
  • Currently, potential existing-home sales is 674,000 (SAAR), or 11.8
    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
    0.6 percent or an estimated 32,000 (SAAR) sales.
  • Market underperformance has improved 84.1 percent compared to this
    time last year. In April 2017, the housing market for existing-home
    sales was underperforming its potential by 200,000 (SAAR) sales.

Chief Economist Analysis: The Housing Market Faces a "Prisoner's
Dilemma"

"Demand for existing-homes remains strong, as positive economic
conditions and the demographic tail wind of Millennial demand continues
to grow. Meanwhile, sellers are increasingly unwilling to list their
homes for sale. The market faces a ‘prisoner's dilemma.' If everyone
sells, there will be plenty of supply, but the risk of selling when
others don't, the inability to find a home to purchase at the right
price, is preventing homeowners from putting their homes on the market,"
said Mark Fleming, chief economist at First American. "The ‘prisoner's
dilemma' in housing is restricting supply, causing increased house price
appreciation and falling affordability."

Additional Quotes from Chief Economist Mark Fleming

  • "Conflicting market forces kept the potential for existing-home sales
    essentially unchanged in April, falling 0.1 percent compared to a year
    ago."
  • "Strong consumer demand fueled gains in market potential for
    existing-home sales, but the gains were offset by the deterioration in
    affordability driven by widespread tight supply conditions."
  • "According
    to the most recent report
    from the National Association of
    Realtors (NAR), actual existing-home sales surged to the highest rate
    seen since 2007, 5.71 million sales, indicating that demand remains
    strong, even as affordability falls."
  • "Healthy wage growth, which increased 2.5 percent over the past 12
    months, and unemployment at its lowest level since May 2007, are both
    contributing to strong demand."
  • "According
    to the First American Real House Price Index
    , the fast pace of
    house price growth, combined with interest rates 40 basis points
    higher than a year ago, has had a material impact on affordability,
    which fell 11.0 percent compared with February 2016."
  • "Analysis of Realtor.com
    data
    reveals that the average number of days on market for homes
    sold in April was 73 days, down five days compared to a year ago, and
    35 days less than the buyer's market of 2012. As the seller's market
    continues to strengthen, affordability is expected to decline further.
    Yet, it's unclear if the declining affordability will begin to curtail
    demand."

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 June 20, 2017
with May 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.

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