—The market potential for existing-home
sales in 2020 will largely depend on the strength of the rate
lock-in effect and whether house-buying power can increase
sufficiently to offset it, 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
October 2019.
October 2019 Potential Home Sales
- Potential existing-home sales decreased to a 5.17 million
seasonally adjusted annualized rate (SAAR), a 0.6 percent
month-over-month decrease.
- This represents a 54.0 percent increase from the market
potential low point reached in February 1993.
- The market potential for existing-home sales increased by 0.6
percent compared with a year ago, a gain of 33,050 (SAAR)
sales.
- Currently, potential existing-home sales is 1.56 million
(SAAR), or 23.1 percent below the pre-recession peak of market
potential, which occurred in March 2004.
Market Performance Gap
- The market for existing-home sales outperformed its potential
by 4.6 percent or an estimated 239,000 (SAAR) sales.
- The market performance gap increased by an estimated 92,680
(SAAR) sales between September 2019 and October 2019.
Chief Economist Analysis: Housing Market Exceeded Potential
in October
“In October 2019, the housing market exceeded its potential, as
actual existing-home sales exceeded market potential by 4.6
percent, or an estimated 239,000 seasonally adjusted annualized
sales. Housing market potential decreased relative to last month,
but increased 0.6 percent compared with October of last year,” said
Mark Fleming, chief economist at First American.
“Two forces drove the month-over-month decline in the potential
for existing-home sales – a month-over-month decline of 0.8 percent
in consumer house-buying power, the first decline since November
2018, and the continued impact of rising tenure length,” said
Fleming. “The decline in house-buying power dampened market
potential substantially. Examining how house-buying power
influences market potential can provide insight into the outlook
for the housing market.”
First Monthly Rate Increase Since November 2018 Holds Back
Housing Market Potential
“In 2019, consumer house-buying power, how much home one can
afford to buy given household income and the prevailing mortgage
rates, surged and provided a significant boost to housing market
potential,” said Fleming. “Since the start of 2019, income has
grown by 1.9 percent and mortgage rates have fallen by 0.77
percentage points, both dynamics sending house-buying power higher.
As a result, house-buying power jumped 12.0 percent between January
and October 2019.
“In October, mortgage rates increased by 0.08 percentage points,
the first monthly increase since November 2018. While household
income increased by 0.2 percent compared with one month ago, it was
not enough to offset the negative impact of the increase in
mortgage rates on house-buying power,” said Fleming. “The resulting
decline in house-buying power dropped the market potential for
existing-home sales by nearly 22,000 sales.
“Tenure length, the average length of time someone lives in
their home, increased in October by 6.0 percent compared with
January 2019, and 0.7 percent compared with last month. Increasing
tenure length reduced the market potential for existing-home sales
by 31,800,” said Fleming. “Tenure length and house-buying power are
two of the most influential forces on market potential, and they
combined to drag down the market potential for existing-home sales
by 0.6 percent compared with last month, despite positive
contributions from new home construction (1,300 potential home
sales), looser credit standards (7,500 potential home sales),
rising house prices (9,600 potential home sales), and increasing
household formation (6,500 potential home sales).”
Impact on 2020 Outlook
“One month of declining house-buying power is not a trend.
Mortgage rates are currently hovering at 3.7 percent, and
forecasters currently expect rates will remain somewhere between
3.7 percent to 3.9 percent in 2020 – still near historical lows,”
said Fleming. “Meanwhile, household income is expected to continue
to grow as wages rise. It’s possible that house-buying power in
2020 may dip lower than in the spring and summer of 2019, but will
likely remain near historical highs.
“As more buyers purchase homes with historically low rates and
existing owners refinance, there will be more homeowners with a
financial incentive to keep their current homes, and low mortgage
rates, and not sell. This is the rate lock-in effect, and it means
tenure length will likely continue to rise as well,” said Fleming.
“The market potential for existing-home sales in 2020 will largely
depend on the strength of the rate lock-in effect and whether
house-buying power can increase sufficiently to offset it.”
Next Release
The next Potential Home Sales Model will be released on December
18, 2019 with November 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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