Market Overview

Tightening Supply Squeezes Market Potential, According to First American Potential Home Sales Model

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—The housing supply shortage hindering the market today is likely
to remain in 2018, 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 November 2017.

November 2017 Potential Home Sales

  • Potential existing-home sales decreased to a 5.96 million seasonally
    adjusted, annualized rate (SAAR), a 2.0 percent month-over-month
    decrease.
  • This represents a 98.3 percent increase from the market potential low
    point reached in December 2008.
  • In November, the market potential for existing-home sales decreased by
    1.5 percent compared with a year ago, a loss of 93,000 (SAAR) sales.
  • Currently, potential existing-home sales is 404,000 (SAAR), or 6.8
    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
    7.3 percent or an estimated 438,000 (SAAR) sales.
  • Market potential decreased by an estimated 124,000 (SAAR) sales
    between October 2017 and November 2017.

Chief Economist Analysis: Housing Supply Shortage to Remain in 2018

"Strong first-time homebuyer demand continues with the help of low
mortgage rates. But, tight supply continues to be the biggest constraint
on housing market growth. Existing homeowners are increasingly prisoners
in their own homes, preventing additional existing-home supply from
entering the market. Homebuilders are also struggling to add more new
home inventory, so both sources of housing supply face challenges," said
Mark Fleming, chief economist at First American. "The housing supply
shortage hindering the market today is likely to remain in 2018."

Additional Quotes from Chief Economist Mark Fleming

  • "The housing market's potential for existing-home sales decreased
    moderately between October 2017 and November 2017. The decrease was
    driven by a reduction in the expectation for future supply, even as
    mortgage rates, which remained below 4 percent for the sixth
    consecutive month, fuel demand."
  • "Both sources of future housing supply, new homebuilding and existing
    homes, are not meeting market demand. The pace of new homebuilding
    faces headwinds. At the same time, the fear of not being able to find
    a home to buy is preventing homeowners from putting their homes on the
    market, as more homeowners
    are increasingly prisoners in their own homes
    . The number of homes
    for sale has declined on a year-over-year basis for the past 39
    consecutive months."
  • "The housing market has been underperforming its potential since May,
    although the market performance gap improved this month relative to
    the 12-month peak in the market performance gap measured in October."
  • "The supply of homes for sale nationally has fallen 7.5 percent from a
    year ago, and homes are selling 8.5 percent faster than a year ago,
    according to Realtor.com."
  • "The lack of inventory relative to demand is driving the fast pace of
    price appreciation. While rates have remained low and kept consumer
    house-buying power strong, the strength of house-buying power is not
    enough to offset rising prices, so affordability has suffered."
  • "According to the First
    American Real House Price Index
    , affordability is down 8.0 percent
    in September compared to a year ago and declining in all markets
    tracked by First American."

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 January 23, 2018
with December 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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