Market Hovering at Potential in Era of Many Housing "Positives," According to First American Chief Economist's Potential Home Sales Model

Historically low real house prices, increases in jobs, rising wages, low mortgage rates and greater credit availability are fueling consumer optimism about the housing market, says Chief Economist Mark Fleming

August 22, 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 July 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 July, the model showed that the market for existing-home sales is underperforming its potential by 1.3 percent or an estimated 92,000 seasonally adjusted, annualized rate (SAAR) of sales, an improvement over last month’s revised under-performance gap of 1.8 percent, or 104,000 (SAAR) sales.

In July, the market potential for existing-home sales grew by 0.15 percent compared to June, an increase of 8,000 (SAAR) sales, and increased by 5.4 percent compared to a year ago. This month, potential existing-home sales increased to 5.71 million (SAAR). This represents an 89.9 percent increase from the market potential low point reached in December 2008*, but is down 433,000 (SAAR) or 7.6 percent from the pre-recession peak of market potential, which occurred in July 2005.

Chief Economist Analysis: Low Interest Rates, Jobs Growth and Other Housing “Positives” Keeping Market at Potential

According to the National Association of Realtors (NAR), existing-home sales rose for the third consecutive month in June, with a reported level of 5.57 million (SAAR), up from a downwardly revised 5.51 million (SAAR) sales in May. The 1.1 percent month-over-month increase and the moderating year-over-year increase of 3.1 percent brought existing-home sales to the more normal level of sales that occurred in the early 2000s.

“The West, which continues to be hampered by tight supply and large price gains, was the only region to experience a year-over-year decline in sales of 0.8 percent. Meanwhile the Midwest, Northeast and South charged ahead with year-over-year increases in sales of 4.7 percent, 5.6 percent and 3.2 percent, respectively,” said Mark Fleming, chief economist at First American.

“Low inventories still remain an issue, dropping to a 4.6-month supply, down from the 4.7-month supply seen in April and May, and from the 4.9-month supply of June 2015. The constrained supply in this sellers’ market continues to frustrate potential homebuyers and adds further upward pressure to nominal home prices, which rose an estimated 5 percent year-over-year in May, according to the Case-Shiller House Price Index,” said Fleming. “While nominal price growth remains strong, prices adjusted for the impact of income and interest rate changes on consumer house-buying power remain historically very low.

“At the same time, consumers appear to be more optimistic about the housing market. The Fannie Mae Home Purchase Sentiment Index reached a new high in July, up 3.3 points from June to 86.5, with large gains in consumers’ expectations for lower rates and continued house price growth. The survey also showed a growing number of consumers leaning towards purchasing rather than renting if they were to relocate. There was also a notable and similarly positive shift in sentiment amongst younger households,” said Fleming.

“This is coming at a time when credit is slowly becoming more available across the board. The Mortgage Bankers Association (MBA) reported a loosening of credit in July, with their Mortgage Credit Availability Index increasing by 1.0 percent compared to June. While increases were seen in all four of their sub-indices, the Jumbo and Government (FHA/VA/USDA) segments showed particularly strong growth in credit availability with both growing by 1.3 percent month-over-month,” said Fleming. “The American Enterprise Institute reported similar loosening of lending requirements with their National Mortgage Risk Index, showing greater credit availability in June for first-time and repeat buyers alike.

“Mortgage rates have continued to move lower, absorbing the impact of rising prices and giving consumers increased leverage and buoyed house-buying power. The average rate for a 30-year, fixed-rate mortgage fell further in July, dropping to 3.44 percent from 3.57 percent in June. Except for a brief four-month period between October 2012 and January 2013, this marks the lowest mortgage rates have been since Freddie Mac began tracking mortgage rates in 1971,” said Fleming. “Global economic uncertainty and negative yields on government bonds overseas continue to drive demand for U.S. Treasuries, including the 10-year Treasury note, driving down yields and keeping mortgage rates low for U.S. consumers for the foreseeable future.

“The Bureau of Labor Statistics (BLS) put out another strong jobs report showing that employers added 255,000 new jobs to the economy in July, again significantly exceeding the expectation of 180,000 new jobs,” said Fleming. “Average hourly earnings continued to rise by 2.6 percent year-over-year, and the labor force participation rate increased to 62.8 percent.

“Historically low real house prices, increases in jobs, rising wages, low mortgage rates and greater credit availability are fueling consumer optimism about the housing market,” 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 September 19, 2016 with August 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