Market Activity Impeded From Potential, According to First American Chief Economist's Potential Home Sales Model

Although the market has moved closer to its potential, low inventories of homes for sale and tighter credit availability continue to constrain market activity, even with improving labor, wage and mortgage rate conditions, says Chief Economist Mark Fleming

May 18, 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 April 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 April, the model showed that the market for existing-home sales is underperforming its potential by 4.1 percent or an estimated 232,000 seasonally adjusted, annualized rate (SAAR) of sales, an improvement over the last month’s revised performance gap of -7.6 percent or 418,000 (SAAR) sales.

The market potential for existing-home sales grew by 2.2 percent compared to March, an increase of 122,000 (SAAR) sales, and grew by 1.5 percent compared to a year ago. This month, the seasonally adjusted, annualized rate of potential existing-home sales is 5.63 million. This represents an 86.5 percent increase from the market potential low point reached in December 2008*, but is down 751,000 (SAAR), or 11.8 percent, from the pre-recession peak of market potential, which occurred in July 2005.

Chief Economist Analysis: Sellers are Increasingly Bullish on the Housing Market, but Buyers are More Bearish

Existing-home sales rebounded in March, with a reported level of 5.33 million (SAAR), after dropping sharply in February to 5.07 million (SAAR), according to the National Association of Realtors (NAR).

“The 5.1 percent month-over-month increase and 1.5 percent annual increase were driven mainly by gains in the Northeast and Midwest. The increases further illustrate how volatile the housing market has been over the past few quarters, as a variety of competing economic forces has pulled the market in different directions,” said Mark Fleming, chief economist at First American. “Although the market has moved closer to its potential, low inventories of homes for sale and tighter credit availability continue to constrain market activity, even with improving labor, wage and mortgage rate conditions.

“The number of available homes for sale remains at depressed levels, although there was some slight relief in March as the housing inventory increased to a 4.5 month supply of homes for sale, up from a 4.4 month supply in February. Fannie Mae’s April Home Purchase Sentiment Index suggests that increasing inventories will continue into the heart of the spring buying season with an encouraging 3.5 point increase between March and April driven solely by a large increase in seller sentiment,” said Fleming. “The net percentage of those who said now was a good time to sell jumped from -1 percent to an all-time survey high of 15 percent. This is in contrast to the net percentage of those who believe that now is a good time to buy, which fell to an all-time survey low of 30 percent, dropping 3 percentage points from March to April and 5 percentage points from April 2015.

“Tightening credit availability is potentially contributing to the decrease in homebuyer sentiment. The Mortgage Bankers Association (MBA) reported a monthly drop in its Mortgage Credit Availability Index (MCAI) in April of 0.9 percent, indicating tightening lending standards among mortgage originators. The index has decreased 4.7 percent since October 2015, with the greatest concentration of reduced credit availability seen in the Jumbo and Conventional mortgage markets,” said Fleming. “The timing of the decrease suggests that lenders began implementing tighter lending standards in response to the implementation of the Know-Before-You-Owe rule, particularly for loan products that the private secondary market is rejecting more frequently for Know-Before-You-Owe compliance issues. Counteracting this trend is a loosening of lending standards targeted at first-time homebuyers, such as the increasingly popular GSE low-down-payment program.

“While low inventories, tight credit conditions and rising prices are keeping the market from achieving its potential, the market is benefitting from positive job growth, increasing wages and persistently low mortgage rates. The unemployment rate has been holding steady at 5.0 percent and inflation-adjusted average hourly wages have seen positive month-over-month growth for the past four consecutive months, growing 0.8 percent between December 2015 and March 2016, and 1.5 percent between March 2015 and March 2016,” said Fleming. “Mortgage rates continue to trend lower, with the average rate on a conventional 30-year, fixed mortgage hitting 3.61 percent in April, a spring housewarming present for homebuyers with the ability to further leverage their income into continued strong and even increasing home-buying power. Given that it is looking less and less likely that a Fed Rate hike will come in June, homebuyers should benefit from low rates and increased home-buying power throughout the spring home-buying season.”

*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 June 16, 2016 with May 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