Market Activity Continues To Track Potential, According To First American Chief Economist's Potential Home Sales Model

-Actual existing-home sales are expected to show a decline in February compared to January, while still showing positive year-over-year growth, says Chief Economist Mark Fleming-

March 17, 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 February 2016. The model provides a gauge on whether existing-home sales are under or over their long-run potential level based on current market fundamentals. For February, the model showed that the market potential for existing-home sales grew by 1.0 percent compared with January and increased by 3.6 percent compared with a year ago.

According to the model, the seasonally adjusted, annualized rate (SAAR) of potential existing-home sales is up 88.1 percent from the low point reached in December 2008*. The rate of potential home sales in the model increased by 55,000 (SAAR) in February. The potential home sales rate is down 703,000 (SAAR) from the pre-recession peak, which occurred in July 2005.

The model’s current underperformance gap is an estimated 388,000 (SAAR), which is significantly less than the sales potential gap of 850,000 existing-home sales in July 2005.

Chief Economist Analysis: Market Potential Remains Strong, Dip in Sales Expected in February

Actual existing-home sales held steady in January, with a reported level of 5.47 million (SAAR), up slightly from 5.45 million sales in December.

"The market stability in January was a welcome sign indicating continued strength and resilience after the substantial drop in sales in November caused by closing delays due to the implementation of the Know-Before-You-Owe-Rule, also referred to as the TILA-RESPA Integrated Disclosure rule," said Mark Fleming, chief economist at First American. "We continue to see no indications of any fundamental changes in market conditions and January was no exception, showing an existing home sales market in line with expectations for sales activity.

"This month, our model continued to show potential home sales at the 5.7 million (SAAR) level, increasing the underperformance gap between our forecasted February actual existing-home sales level and potential existing-home sales in February to 388,000 sales," said Fleming.

"As implied by the 2.5 percent decrease in January in the NAR Pending Home Sales Index, actual existing-home sales are expected to show a decline in February compared to January, while still showing positive year-over-year growth compared to February 2015. This is due in large part to tight inventories, which is keeping the market from aligning with its potential," added Fleming. "However, this is expected to be a temporary condition and should reverse course as inventories increase with the start of the spring home-buying season.

"Mortgage rates continued to decline in the first half of February 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," said Fleming. "While rates started to increase during the second half of the month, they still remained below 4 percent, continuing to provide consumers with strengthened purchasing power.

"While house price appreciation continues to cool modestly, the historically low rates mean borrowers can bid more for housing. In this current market, the limited supply combined with leverage-assisted demand is driving 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.

"Last month, we mentioned that the likelihood of modest mortgage rate increases seems less likely now due to the global economic uncertainty and depressed energy markets. However, conditions have recently stabilized, if not improved slightly," said Fleming. "Even though the Federal Reserve did not raise the benchmark Federal Funds Rate this week, they did indicate that it is likely we shall see an increase in the Federal Funds Rate later this year.

"Regardless of the rate hike path, we expect mortgage rates to increase modestly as investor demand for the 10-year Treasury bill, which truly drives mortgage rates, fades with a more certain global economic outlook. This has the potential to impact many aspects of the housing market, from affordability to inventories, and is something that will be watched with peaked interest over the course of 2016," said Fleming.

*Previous Potential Home Sales releases referred to February 2009 as the low point of sales. The model used to generate existing-home sales potential has been updated with more recent data 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 April 14, 2016 with February 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. More information about the company can be found at