—Lower mortgage rates have a dual effect on
the housing market: they incentivize homeowners to move as the rate
“lock-in” effect fades and they boost demand by making homes more
affordable, 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
September 2019.
September 2019 Potential Home Sales
- Potential existing-home sales decreased to a 5.48 million
seasonally adjusted annualized rate (SAAR), a 0.02 percent
month-over-month decrease.
- This represents a 63.2 percent increase from the market
potential low point reached in February 1993.
- The market potential for existing-home sales increased by 3.8
percent compared with a year ago, a gain of 198,800 (SAAR)
sales.
- Currently, potential existing-home sales is 1.25 million
(SAAR), or 18.6 percent below the pre-recession peak of market
potential, which occurred in March 2004.
Market Performance Gap
- The market for existing-home sales is marginally
underperforming its potential by 0.04 percent or an estimated 2,340
(SAAR) sales.
- The market performance gap decreased by an estimated 94,000
(SAAR) sales between August 2019 and September 2019.
Chief Economist Analysis: Housing Market Hovers at Potential
in September
“In September 2019, the housing market performed to its
potential, as actual existing-home sales were a marginal 0.04
percent, or an estimated 2,340 seasonally adjusted annualized
sales, below market potential. Housing market potential decreased
relative to last month, but increased 3.8 percent compared with
September of last year,” said Mark Fleming, chief economist at
First American. “Indeed, in September of last year, rising mortgage
rates dampened market potential and existing-home sales
underperformed market potential by 7.2 percent, or an estimated
445,200 sales. The market dynamics and outlook has improved
significantly in the last 12 months, begging the question: what’s
changed?”
Then vs. Now
“In September 2018, the 30-year, fixed-rate mortgage was 4.63
percent and reached a high of 4.87 percent in November. Today,
mortgage rates are more than one percentage point lower than one
year ago, and 1.26 percentage points lower than the November 2018
zenith,” said Fleming. “In September of last year, rates were
forecasted to continue to rise, as many experts believed the
Federal Reserve would continue to increase the Federal Funds rate
and put more upward pressure on mortgage rates. Rising rates reduce
home-buying power and decrease market potential for existing-home
sales.
“But, in December 2018, the unexpected happened – volatility in
the bond market helped drive mortgage rates lower. This trend has
continued through most of 2019 and mortgage rates are now near
historically low levels,” said Fleming. “Lower mortgage rates have
a dual effect on the housing market: they incentivize homeowners to
move as the rate ‘lock-in’ effect fades, which slows or reduces the
average tenure of homeowners, and they boost demand by making homes
more affordable.”
Drag on Market Potential from Tenure Length Reduced
Dramatically
“Changes in tenure length are largely the result of the strength
of the rate ‘lock-in’ effect, and seniors aging in place. The
year-over-year growth in tenure length has been slowing since March
of this year and it is conceivable that it could stabilize or even
decline, if mortgage rates continue to trend lower,” said Fleming.
“In September 2019, the impact of increasing tenure length on
market potential resulted in a loss of 137,230 potential home
sales, but that is dramatically less than the 421,260 in September
of last year.”
Affordability Boosts Market Potential
“In 2019, housing affordability benefited from lower mortgage
rates and higher incomes driven by the strong labor market. In
September 2019, house-buying power increased to $420,250, 15
percent higher than one year ago,” said Fleming. “The boost to
house-buying power increased the market potential by 415,090 home
sales, more than 10 times the annual gain in market potential boost
of just 34,390 potential home sales in September 2018.”
What’s the Outlook for the Rest of 2019?
“Housing is the most durable consumer good we’ll ever buy, and
surging house-buying power fuels greater potential demand. You
can’t buy what’s not for sale, but rising existing-home sales means
more homes on the market, helping to meet the growing demand,” said
Fleming. “While several factors may trigger a directional switch
for market potential, the current environment of low mortgage rates
and wage growth driven by a strong labor market, supports a healthy
housing market for the remainder of 2019.”
Next Release
The next Potential Home Sales Model will be released on November
20, 2019 with October 2019 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, homeowner tenure, house-buying power 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 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. © 2019 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 $5.7 billion in 2018, the company offers its products
and services directly and through its agents throughout the United
States and abroad. In 2019, First American was named to the Fortune
100 Best Companies to Work For® list for the fourth consecutive
year. More information about the company can be found at
www.firstam.com.
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Media Contact: Marcus Ginnaty Corporate Communications
First American Financial Corporation (714) 250-3298
Investor Contact: Craig Barberio Investor Relations First
American Financial Corporation (714) 250-5214
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