Market Overview

Housing Market Nears Potential, but Supply Shortage Continues, According to First American Potential Home Sales Model

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—Sales have surged in recent months and significantly narrowed the
gap between actual market performance and market potential, 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 December 2017.

December 2017 Potential Home Sales

  • Potential existing-home sales decreased to a 5.99 million seasonally
    adjusted annualized rate (SAAR), a 0.2 percent month-over-month
    decrease.
  • This represents a 99.2 percent increase from the market potential low
    point reached in December 2008.
  • The market potential for existing-home sales increased by 1.4 percent
    compared with a year ago, a gain of 82,000 (SAAR) sales.
  • Currently, potential existing-home sales is 375,000 (SAAR), or 6.3
    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
    2.0 percent or an estimated 122,000 (SAAR) sales.
  • Market potential decreased by an estimated 1,000 (SAAR) sales between
    November 2017 and December 2017.

Chief Economist Analysis: Supply Shortage Still Sapping Market
Potential

"Faster economic growth, a healthy stock market, low unemployment and
low mortgage rates are fueling substantial home-buying demand. The pace
of actual existing-home sales has surged in recent months and
significantly narrowed the gap between actual market performance and
market potential. Nonetheless, the market is still underperforming its
potential. Existing-home sales have been restrained by an increasingly
concerning shortage of properties for sale, which puts upward pressure
on house prices," said Mark Fleming, chief economist at First American.
"The shortage of homes for sale will likely continue in 2018 and
continue to push prices higher."

Additional Quotes from Chief Economist Mark Fleming

  • "The housing market's potential for existing-home sales remained
    essentially unchanged between November 2017 and December 2017. The two
    main reasons for the lack of movement in market potential are the
    expectation for future supply also remained flat compared with
    November, as indicated by the rate of authorized building permits in
    the Census Bureau's latest report, and mortgage rates remained below 4
    percent for the seventh consecutive month. In other words, the housing
    supply shortage is unlikely to change, while home-buying demand, aided
    by low interest rates, remains strong."
  • "As millennial demand continues to strengthen in 2018, new
    homebuilding and sales listings for existing homes will struggle to
    keep up. 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 supply of homes for sale nationally has fallen 9.0 percent from a
    year ago, and homes are selling 7.0 percent faster than a year ago,
    according to Realtor.com."
  • "The median number of days on market in December reached 83 days, and
    properties sold in six fewer days than this time last year – even as
    prices continued to climb year over year, according to Realtor.com."
  • "As a result, according to the First
    American Real House Price Index
    , affordability is down 8.6 percent
    in November, compared with 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 February 20,
2018 with January 2018 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. © 2018 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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