Lack of Affordable Inventory Keeps Market Below Potential, According to First American Chief Economist’s Potential Home Sales Model

Increases in employment and post-crisis, record-breaking wage growth, alongside historically low mortgage rates, continue to buoy the housing market. However, the increasing shortage of affordable inventory for first-time homebuyers is preventing market activity from reaching its true potential, says Chief Economist Mark Fleming.

November 21, 2016, 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 Potential Home Sales model for the month of October 2016.

October 2016 Potential Home Sales

  • Potential existing-home sales increased to a 5.9 million seasonally adjusted, annualized rate (SAAR).
  • This represents a 97.4 percent increase from the market potential low point reached in December 2008.
  • In October, the market potential for existing-home sales grew by 6.7 percent compared with a year ago, an increase of 376,000 (SAAR) sales.
  • Currently, potential existing-home sales is 206,000 (SAAR) or 3.5 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 6.5 percent or an estimated 384,000 (SAAR) of sales.
  • Last month’s revised performance gap was -10.2 percent or 614,000 (SAAR) sales.

Chief Economist Analysis: Wage Growth, Higher Employment and Low Rates Keep Buying Power Strong as Low Inventories Restrict Sales

“With mortgage rates still near-historic lows in September, wages growing at a brisker pace, and greater employment, the market potential for existing-home sales grew dramatically. However, despite the increased consumer house-buying power fueled by lower rates and higher incomes, existing home sales remain below market potential, in part due to tight inventory. The supply of affordable entry-level homes is not keeping up with increasing first-time homebuyer demand. The increasing shortage of affordable inventory for first-time homebuyers is preventing market activity from reaching its true potential,” said Mark Fleming, chief economist at First American.

Additional Quotes from Chief Economist Mark Fleming

  • “According to the National Association of Realtors, existing-home sales grew 3.2 percent between August and September to 5.47 million (SAAR). The growth in sales was broad-based, with gains seen across all four Census Regions.”
  • “Sales of starter homes (homes under $100,000) continued to decline, dropping 10.2 percent year-over-year, while sales of homes in all other price ranges increased year-over-year.”
  • “Tight inventories continue to be a drag on the housing market, which dropped to a 4.5-month supply in September, down from 4.6 in August. The inventory shortage continues to put upward pressure on prices, which rose 5.3 percent over the past 12 months.”
  • “Incomes continue to trend upward, with the Census Bureau reporting that average hourly earnings have increased 2.8 percent in the past year to a post-crisis high point.”
  • “The unemployment rate remained steady between September and October at 4.9 percent, with a growing number of people trying to re-enter the workforce after spending an extended period of time unemployed.”
  • “Mortgage rates ticked up slightly to 3.47 percent, a rise of 0.01 percent between September and October. While mortgage rates have been creeping up as of late, they still remain at near historic lows. The low rates combined with increases in wages remain the key drivers to growth in the housing market, continuing to soften the impact of rising prices, offering consumers increased leverage and buoyed home-buying power.”

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 we believe a healthy market level of 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 December 19, 2016 with November 2016 data.

About the Potential Home Sales Model

Background information on the First American Potential Home Sales 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. © 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. In 2016, First American was recognized by Fortune® magazine as one of the 100 best companies to work for in America. More information about the company can be found at