Market Overview

Economic Momentum Yet to Lift Home Sales, According to First American Potential Home Sales Model

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—If existing homeowners remain hesitant to list their homes for
sale, then increasing the pace of new home construction is necessary to
alleviate the supply shortage that the housing market faces today, 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 2018.

July 2018 Potential Home Sales

  • Potential existing-home sales increased to a 6.08 million seasonally
    adjusted annualized rate (SAAR), a 0.3 percent month-over-month
    increase.
  • This represents a 62.8 percent increase from the market potential low
    point reached in February 2011.
  • The market potential for existing-home sales increased by 3.5 percent
    compared with a year ago, a gain of 208,900 (SAAR) sales.
  • Currently, potential existing-home sales is 1.21 million (SAAR), or
    16.6 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
    5.8 percent or an estimated 352,000 (SAAR) sales.
  • The market performance gap decreased by an estimated 75,000 (SAAR)
    sales between June 2018 and July 2018.

Chief Economist Analysis: The Economy is Hot, The Housing Market is
Hot, Home Sales… Are Not

"The U.S. economy remains on an impressive growth streak. Last month,
the Commerce Department reported
that the gross domestic product, the broadest measure of goods and
services produced in the economy, grew at a 4.1 percent annualized rate
in the second quarter, the strongest pace of growth since 2014," said
Mark Fleming, chief economist at First American. "The economy has added
jobs every month for 94 consecutive months, producing the lowest
unemployment rate since 2000.

"However, in spite of the macro-economic momentum, the housing market
continued to underperform its potential in July. Actual existing-home
sales are 5.8 percent below the market potential for existing-home
sales, according to our Potential Home Sales model, which estimates the
expected level of existing-home sales based on market fundamentals,"
said Fleming. "The market for existing-home sales is underperforming its
potential by an estimated 352,000 sales at a seasonally adjusted
annualized rate (SAAR). Existing-home sales, which make up approximately
90 percent of U.S. home sales, continue to disappoint in 2018, despite
what was likely the strongest period
of economic growth
since 2014.

"The housing market is moving at an exceptional rate these days.
According to data from DataTree
by First American
, the median sale price of a home in the U.S. was
approximately $230,000 in June – the highest since 2007," said Fleming.
"Additionally, the average home was sold in 54 days in June, a new
record according to Realtor.com.
Despite the terrific economic backdrop and a hot housing market, home
sales remain below their market potential. Why could this be?

"Our research
shows that rising rates, especially when they are still historically
low, don't significantly discourage home buyers, but evidence is growing
that indicates rising rates do influence the home sellers. Rising rates
reduce the incentive for current homeowners to sell their homes. There
are limited reasons to sell when, due to higher mortgage rates, it will
cost you more each month just to borrow the same amount from the bank,"
said Fleming.

"Additionally, existing homeowners are hesitant to sell their homes as
they are afraid that they will not be able to find a home to buy," said
Fleming. Home sales are being stifled by a shortage of homes on the
market. The game of musical chairs that is the housing market today
needs more chairs."

The Answer? Build, Build, Build

"Homebuilding, as a source of new supply, is crucial to solving the
housing supply shortage. Homebuilders don't have existing mortgages or
the fear of not being able to find something to buy. Additional supply,
particularly of new entry-level homes to meet the needs of the
first-time buyers who remain interested in buying even as rates
increase, is critical to satisfy the rising demand for housing," said
Fleming. "If existing homeowners remain hesitant to list their homes for
sale, then increasing the pace
of new home construction
is necessary to alleviate the supply
shortage that the housing market faces today."

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 September 19,
2018 with August 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
month.

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; banking, trust and
wealth management services; and other related products and 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 www.firstam.com.

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