Market Close To Achieving Its Potential, According To First American Chief Economist's Potential Home Sales Model

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 2016, which provides a gauge on whether existing-home sales are under or over their long-run potential level based on current market fundamentals. For January, the model showed that the market potential for existing-home sales declined by 0.2 percent compared to December and decreased by 7.1 percent compared to a year ago.

According to the model, the seasonally adjusted, annualized rate (SAAR) of potential existing-home sales is up 76 percent from the low point reached in February 2009^*. The rate of potential home sales in the model decreased by 12,000 (SAAR) in January. The potential home sales rate is down 702,000 (SAAR) from the most recent peak in February 2014.

The model's current underperformance gap is an estimated 168,000 (SAAR), which is significantly less than the sales potential gap of 1.8 million existing-home sales in February 2014.

Chief Economist Analysis: Market Rebounds to Potential

The significant drop in existing-home sales to 4.76 million (SAAR) in November was largely reversed in December with a reported level of 5.46 million existing-home sales in December. 

"As we discussed in last month's release of our Potential Home Sales model, the October to November swoon was not unique to 2015. At the time, Pending Homes Sales indicated that there would be a strong rebound in December, as delayed closings due to the Know-Before-You-Owe rule eventually closed," said Mark Fleming, chief economist, First American. "Last month, we argued that the month-over-month volatility was not an indication of any fundamental changes in market conditions. The rebound in December existing-home sales is much more in line with our expectations for market sale activity.

"This month, potential home sales remained at the 5.7 million (SAAR) level, reducing the gap between our forecasted January actual existing-home sales level and potential existing-home sales in January to a meager 168,000 sales. The market is aligning with its potential," said Fleming.

"Mortgage rates actually declined in January due to the high degree of market volatility and the 'flight to safety' that drove down long-term treasury yields, the benchmark underpinning long-term mortgage rates. Originally suggesting that 2016 would be the year in which rates begin normalization, the Fed is now much more likely to slow down the pace of rate normalization due to deterioration in global economic conditions," added Fleming. "Is it possible that mortgage rates could break through to new historic lows or remain below 4 percent for another year? As usual, mortgage rate trends will heavily influence housing prices.

"House price appreciation cooled modestly late last year, but could strengthen again based on the leverage assistance that low rates provide to consumers' purchasing power. All else equal, lower rates mean borrowers can bid more for housing. In a market of limited supply, leverage-assisted demand drives prices higher," said Fleming. "Actual price appreciation is currently stronger than what is fundamentally supported by market conditions. This leverage-assisted housing inflation could persist if rates remain low. Even though modest increases in mortgage rates this year would not have a dramatic impact on home sales, the likelihood of modest mortgage rate increases seems less likely now.

"With the initial delay in closings triggered by Know-Before-You-Owe seemingly behind us, and global economic uncertainty driving down mortgage rates, 2016 remains a year to be bullish on housing. First-time homebuyers will be able to benefit from strong purchasing power in a low-rate environment. This year, the housing market may indeed achieve its potential," said Fleming.

*Previous Potential Home Sales releases referred to November 2011 as the low point of sales. The model used to generate existing-home sales potential has been enhanced to more accurately reflect the dynamic relationships between sales, prices, interest rates and the user-cost of housing, resulting in a model that more accurately reflects past conditions.

Next Release

The next Potential Home Sales model will be released on March 16, 2016 with February 2016 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. © 2016 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 revenues of $5.2 billion in 2015, the company offers its products and services directly and through its agents throughout the United States and abroad. More information about the company can be found at www.firstam.com.