Market Overview

The Impact of Rising Rates on Housing Market Potential, According to First American Potential Home Sales Model

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—"There are a variety of reasons why people buy homes that are
completely independent of mortgage rates. A gradual rise in mortgage
rates won't change that," 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 January 2018.

Chief Economist Analysis: Housing Market Performance Gap Narrows, but
Remains Below Potential

"In January, the market potential for existing-home sales increased to a
6.1 million seasonally adjusted annualized rate (SAAR), a 0.4 percent
month-over-month increase, and a gain of 210,000 (SAAR) sales from
January 2017," said Mark Fleming, chief economist at First American.
"The gap between actual market performance (existing-home sales) and
market potential (potential home sales) has significantly narrowed as
actual existing-home sales have surged in recent months. Nonetheless,
the housing market is still underperforming its potential.

"According to our Potential Home Sales model, the increase in market
potential this month is fueled by faster economic growth, low
unemployment and continued low mortgage rates. The Federal Reserve (Fed)
did not hike rates this month, however, the CME
Group FedWatch
views future rate hikes as nearly certain," said
Fleming. "In fact, just the expectation of future Fed rate hikes has
actually pushed interest rates higher. The 30-year, fixed-rate mortgage
rate increased to 4.32 percent last week, up 40 basis points from the
beginning of the year. This is the fourth consecutive week of rising
rates."

Impact of Rising Rates on Housing Market Potential

"The consensus
among economists is that 30-year, fixed-rate mortgages will approach 5
percent by the end of the year. Rising mortgage rates typically reduce
the affordability of housing, as it means the cost of borrowing
increases," said Fleming. "So, the question is: how much will rising
interest rates impact the amount of home sales?

"Our Potential Home Sales model forecasts what the market potential for
home sales should be given current economic, demographic, and housing
market environments. Potential home sales, while currently at a level of
6.1 million SAAR, are expected to reach an estimated 6.29 million SAAR
by the end of 2019, despite a rising rate environment," said Fleming.
"However, while the yearly growth rate in potential sales is currently
at 3.6 percent, it is expected to slow to just below 1 percent by the
end of 2019.

"Historically, a 30-year, fixed-rate mortgage of 5 percent is still a
very low rate. In fact, the mortgage rate has been greater than 5
percent in 38 of the last 46 years, so it is unlikely that large numbers
of home buyers will be dissuaded by a modest increase in mortgage
rates," said Fleming. "There are a variety of reasons why people buy
homes that are completely independent of mortgage rates. A gradual rise
in mortgage rates won't change that."

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 March 20, 2018
with February 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 $5.8 billion in
2017, the company offers its products and services directly and through
its agents throughout the United States and abroad. In 2016, 2017 and
again in 2018, 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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