First American Chief Economist's Existing-Home Sales Capacity Model Decreases 3.1 Percent in October

—Expectations of a rate increase dampens housing in October says Chief Economist Mark Fleming—

November 19, 2015, Santa Ana, Calif.

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 Existing-Home Sales Capacity (EHS-C) model for the month of October 2015, which provides a gauge on whether existing-home sales are under capacity or over capacity based on current market fundamentals. The EHS-C rate decreased by 3.1 percent compared to September and decreased by 7.3 percent compared to a year ago. The seasonally adjusted, annualized rate (SAAR) of existing-home sales capacity is up 73.6 percent from the low point of sales reached in February 2009*. The EHS-C decreased by 181,500 sales (SAAR) in October.
EHS-C is down 779,000 sales (SAAR) from the most recent peak in February 2014. The current underperformance gap is an estimated 209,000 (SAAR), which is significantly less than the sales capacity gap of 1.7 million existing-home sales in February 2014.

Chief Economist Analysis: Market Capacity Pre-Adjusting to expected Fed Rate Increase
“The housing market’s capacity for existing-home sales is declining with the expectation of a Fed rate increase pre-adjusting mortgage rates and causing a slowdown in house price appreciation. Market capacity remains modestly in excess of actual sales due to leverage-assisted housing asset inflation, which is home price appreciation fueled by low mortgage rates,” said Mark Fleming, chief economist, First American. “Rising mortgage interest rates and moderation in house price appreciation were the most important market fundamentals that reduced market capacity this month. Now that interest rates are pre-adjusting in response to signals from the Fed for a highly expected increase in December, demand is also declining.”
Fleming added, “This past September, I published an analysis of the impact of a possible rate increase on existing-home sales and house prices titled "Does a Fed Rate Increase Doom Housing?" Based on a 25 basis point increase in the 30-year fixed rate mortgage rate, house price appreciation on a year-over-year basis slows down by 1 percent more than expected without the rate increase. Existing-home sales slow by about 2.5 percent on annualized and seasonally adjusted basis, a decline of less than 150,000 sales a year. The housing market isn’t doomed by a Fed rate increase, but demand would fall modestly.”

Rising Mortgage Rates Can be Good for Housing Market
“An increase in rates on the part of the Fed, causing mortgage rates to rise, can actually be good for the housing market in the long run. Continued low mortgage rates are a contributing factor to the pace of price appreciation that we have seen in the housing market over the past three years,” said Fleming. “Leverage-assisted housing asset inflation is a significant contributing factor to the market capacity for existing-home sales exceeding actual existing-home sales. The longer rates remain low, the longer leverage-assisted housing asset inflation outpaces income growth and reduces affordability for the first-time homebuyer.”

Current Projection for October Existing-Home Sales and 2016 Look Ahead
Actual existing-home sales were estimated to be 5.55 million (SAAR) in September. Early forecasts for October actual existing-home sales predict a significant drop from the 5.55 million (SAAR) reported in September.
“Based on our EHS-C model, I estimate that actual existing-home sales in October will be 5.44 million (SAAR),” said Fleming. “Looking ahead to 2016, I expect existing-home sales to reach 5.5 million by the end of the year.  Housing demand is expected to be increasingly dominated by the first-time homebuyer as existing homeowners will have a reduced incentive to sell in a higher rate environment.”

*Previous EHS-C releases referred to November 2011 as the low point of sales. The model used to generate existing-home sales capacity 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 EHS-C Release
The next EHS-C model will be released on December 17, 2015 with November EHS-C data.

About Existing-Home Sales Capacity
Background information on the First American Existing-Home Sales Capacity (EHS-C) model is available here.

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. © 2015 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 $4.7 billion in 2014, 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