Market Overview

Supply Shortage Still Sapping Market Potential, According to First American Potential Home Sales Model


—The housing market is not plagued by a decline in demand, but
rather a shortage of supply, says Chief Economist Mark Fleming—

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 June 2018.

June 2018 Potential Home Sales

  • Potential existing-home sales increased to a 6.12 million seasonally
    adjusted annualized rate (SAAR), a 1.1 percent month-over-month
  • This represents a 63.8 percent increase from the market potential low
    point reached in February 2011.
  • The market potential for existing-home sales increased by 3.3 percent
    compared with a year ago, a gain of 194,100 (SAAR) sales.
  • Currently, potential existing-home sales is 1.17 million (SAAR), or
    16.1 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
    4.2 percent or an estimated 256,000 (SAAR) sales.
  • The market performance gap decreased by an estimated 26,000 (SAAR)
    sales between May 2018 and June 2018.

Chief Economist Analysis: Rate Locked and Imprisoned

"In June, the housing market continued to underperform its potential.
Actual existing-home sales are 4.2 percent below the market potential
for home sales, according to our Potential Home Sales model, which
estimates the expected level of existing-home sales based on market
fundamentals," said Mark Fleming, chief economist at First American.
"The market for existing-home sales is underperforming its potential by
an estimated 256,000 sales at a seasonally adjusted annualized rate
(SAAR) and has underperformed its potential for 58 consecutive months.

"The lack of housing supply is the primary culprit for the persisting
gap. The inventory
of homes for sale in most markets remains historically tight
, yet
demand continues to rise as millennials further age into homeownership,
as explained in our Homeownership
Progress Index
," said Fleming. "The housing market is not plagued by
a decline in demand, but rather a shortage of supply. The result --
surging house prices.

"As house prices rise and homeowner equity reaches
its highest level on record
, it's reasonable to expect more
homeowners to list their homes for sale and leverage their equity for a
new home. So, why are existing homeowners not selling their homes?"
asked Fleming.

"Many existing homeowners today are ‘rate-locked.' The majority of
existing homeowners have mortgages with historically
low rates
and, now that rates are rising, they are hesitant to sell
their homes," said Fleming. "If they sell and purchase a new home, they
will have a higher mortgage rate. There is limited incentive to sell
when, due to higher mortgage rates, it will cost you more each month
just to borrow the same amount from the bank. As mortgage rates rise
further, more existing homeowners may become rate-locked into their
existing homes.

"Additionally, existing homeowners are facing a ‘prisoners
.' Many homeowners may want to sell their home and buy
another, but do not, for fear that they will not be able to find a home
to buy, which prevents more supply from reaching the market and further
exacerbates the lack of inventory," said Fleming. "Because many
homeowners are increasingly rate locked-in and fear not being able to
find something to buy, their home is becoming their prison."

Build It and They Will Come

"One solution is to build more new homes and increase the overall stock
of housing units, but the number of new homes constructed per household
is at its lowest level in 60
years of record-keeping
, according to the Federal Reserve Bank of
Kansas City. If existing homeowners won't supply their homes for sale
then increasing
the pace of new home construction
is necessary to alleviate the
supply shortage in the long run," said Fleming. "However, existing
homeowners will need to start selling their homes to provide any
immediate supply relief to the market."

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

Next Release

The next Potential Home Sales Model will be released on August 21, 2018
with July 2018 data.

About the Potential Home Sales Model

Potential home sales measures existing-homes sales, which include
single-family homes, townhomes, condominiums and co-ops on a seasonally
adjusted annualized rate based on the historical relationship between
existing-home sales and U.S. population demographic data, income and
labor market conditions in the U.S. economy, price trends in the U.S.
housing market, and conditions in the financial market. When the actual
level of existing-home sales are significantly above potential home
sales, the pace of turnover is not supported by market fundamentals and
there is an increased likelihood of a market correction. Conversely,
seasonally adjusted, annualized rates of actual existing-home sales
below the level of potential existing-home sales indicate market
turnover is underperforming the rate fundamentally supported by the
current conditions. Actual seasonally adjusted annualized existing-home
sales may exceed or fall short of the potential rate of sales for a
variety of reasons, including non-traditional market conditions, policy
constraints and market participant behavior. Recent potential home sale
estimates are subject to revision in order to reflect the most
up-to-date information available on the economy, housing market and
financial conditions. The Potential Home Sales model is published prior
to the National Association of Realtors' Existing-Home Sales report each


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 wealth management 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 2018, First
American was named to the Fortune 100 Best Companies to Work
For® list for the third consecutive year. More information
about the company can be found at


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