Market at Potential in Era of Low Interest Rates and Job Growth, According to First American Chief Economist's Potential Home Sales Model

Low mortgage rates, greater employment and rising wages all indicate that the housing market is settling on solid ground, says Chief Economist Mark Fleming


July 20, 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 June 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 June, the model showed that the market for existing-home sales is underperforming its potential by only 0.3 percent or an estimated 17,000 seasonally adjusted, annualized rate (SAAR) of sales, an improvement over last month’s revised performance gap of -3.1 percent or 180,000 (SAAR) sales.

In June, the market potential for existing-home sales grew by 0.19 percent compared to May, an increase of 11,000 (SAAR) sales, and decreased by 5.2 percent compared with a year ago. This month, potential existing-home sales increased to 5.66 million (SAAR). This represents an 87.5 percent increase from the market potential low point reached in December 2008*, but is down 542,000 (SAAR) or 9.6 percent from the pre-recession peak of market potential, which occurred in July 2005.

Chief Economist Analysis: Market at Potential in Era of Low Interest Rates and Job Growth

According to the National Association of Realtors (NAR), existing-home sales rose for the second consecutive month in May, with a reported level of 5.53 million (SAAR), up from a downwardly revised 5.43 million (SAAR) sales in April. The 1.8 percent month-over-month increase and the slightly slower revised year-over-year increase of 4.5 percent brought existing-home sales to a pace not seen since February 2007.

“The gains were once again driven by broad growth across the country, including in the West where sales jumped 5.4 percent on a month-over-month basis. This increase follows a recent period in which buying activity in the West was hampered by large price gains and tight supply,” said Mark Fleming, chief economist at First American.

“Inventories held steady at an unchanged level between April and May, remaining at a 4.7-month supply, which is down from a 5.1-month supply a year ago. The constrained supply continues to both frustrate potential home buyers and add further upward pressure on home prices, which rose 5.9 percent year-over-year on a seasonally adjusted basis, according to the Case-Shiller House Price Index,” said Fleming.

“The silver lining for home buyers is that the low interest rate environment continues to absorb some of the impact of rising prices through the benefits of increased leverage and buoyed home-buying power. The average rate for a 30-year, fixed rate mortgage fell further in June, dropping to 3.57 percent from 3.6 percent in May. This marks the lowest mortgage rates have been since May 2013,” said Fleming. “There is little indication mortgage rates will change course and start to rise, even in the face of potential rate hikes from the Federal Reserve later this year. This is due in part to pressure on the 10-year Treasury note, as record levels of both foreign and domestic demand continue to drive down yields. Investors are seeking income as a response to negative yields on bonds in Europe and Asia, as well as safety from global economic uncertainty. This demand for treasuries is not expected to abate soon, which means mortgage rates will likely remain low – good news for the housing market. 

“Also good news for the housing market, the Bureau of Labor Statistics (BLS) reported that employers added 287,000 new jobs to the economy in June, significantly exceeding expectations of 187,000. Adding to that, the BLS also reported that average hourly earnings have risen by 2.6 percent year-over-year, alongside an increase in the labor force participation rate to 62.7 percent,” said Fleming. “While one month of data does not make a trend, when you consider today’s low mortgage rates, greater employment and rising wages, the housing market is settling on solid ground.”

*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 August 19, 2016 with July 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. 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 www.firstam.com.