Market Overview

The Struggle is Real for First-Time Homebuyers, According to First American Potential Home Sales Model

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—Millennials are entering the housing market, but are confronted
with very few entry-level homes to buy, 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 July 2017.

July 2017 Potential Home Sales

  • Potential existing-home sales increased to a 5.82 million seasonally
    adjusted, annualized rate (SAAR), a 0.2 percent month-over-month
    increase.
  • This represents a 93.7 percent increase from the market potential low
    point reached in December 2008.
  • In July, the market potential for existing-home sales increased by 0.1
    percent compared with a year ago, a gain of 6,000 (SAAR) sales.
  • Currently, potential existing-home sales is 541,000 (SAAR), or 9.3
    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
    4.7 percent or an estimated 273,000 (SAAR) sales.
  • Market potential grew by an estimated 10,000 (SAAR) sales between June
    2017 and July 2017.

Chief Economist Analysis: Will the Lack of Inventory Stymie
Millennial First-Time Buyers?

"Lack of supply continues to be the main story of the 2017 housing
market. Just a few months ago, the difference between the actual level
of existing-home sales and the market's potential was negligible, but
supply issues have become a significant impediment and are preventing
the market from reaching its potential," said Mark Fleming, chief
economist at First American. "The number of existing homes listed for
sale has been declining for over two years and the number of new homes
added to the market has been insufficient to meet demand. Millennials
are entering the housing market, but are confronted with very few
entry-level homes to buy."

Additional Quotes from Chief Economist Mark Fleming

  • "The housing market's potential for existing-home sales improved
    slightly, growing 0.2 percent between June 2017 and July 2017, as the
    rate for a 30-year, fixed-rate mortgage remained little changed at 4.0
    percent."
  • "The lack of homes for sale in most markets has contributed to the
    recently growing underperformance gap between actual and potential
    existing-home sales. According to the National
    Association of Realtors (NAR)
    , the number of homes listed for sale
    has declined for 25 consecutive months, dropping 7.1 percent between
    June 2017 and July 2017."
  • "New residential construction, a critical source of new housing
    supply, is not keeping up with increasing demand. Last week, the U.S.
    Census Bureau
    reported that housing
    starts fell 5.1 percent in July compared to a year ago. The pace of
    housing starts needs to increase significantly to meet demand and
    alleviate inventory challenges."
  • "Since 2009, the number of new households has increased by 5.9
    million, while the net new number of housing units has only increased
    by 3.5 million, meaning there
    is a shortage of 2.4 million housing units in the United States
    ."
  • "The lack of inventory relative to demand is driving the fast pace of
    price appreciation. The increases in nominal house prices, combined
    with mortgage rates higher than a year ago, are having a material
    impact on affordability. According to the First
    American Real House Price Index
    , affordability
    is down 10.2 percent in June 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 September 19,
2017 with August 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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