Market is Missing its Potential Due To Tight Supply, According to First American Chief Economist’s Potential Home Sales Model

Extremely limited supply is stopping the market from reaching its full potential, counteracting positive increases in market fundamentals, such as employment and wages, says Chief Economist Mark Fleming

October 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 September 2016.

September 2016 Potential Home Sales

  • Potential existing-home sales increased to a 5.8 million seasonally adjusted, annualized rate (SAAR).
  • This represents a 92.6 percent increase from the market potential low point reached in December 2008.
  • In September, the market potential for existing-home sales grew by 6.5 percent compared with a year ago, an increase of 352,000 (SAAR) sales.
  • Currently, potential existing-home sales is 351,000 (SAAR) or 6.0 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 375,000 (SAAR) of sales.
  • Last month’s revised performance gap was -6.3 percent or 365,000 (SAAR) sales.

Chief Economist Analysis: Low Inventories Restricting Sales and Driving Price Growth, But Buying Power Remains Strong

“Current  mortgage rates hovering near historic lows combined with increases in wages remain the key drivers to growth in the housing market, as they continue to soften the impact of rising prices and offer consumers increased leverage and buoyed home-buying power. While this is contributing to greater consumer confidence in the housing market and providing a firm foundation for increased housing demand, tight inventory, particularly in the lower-priced segments, is keeping 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 fell 0.9 percent between July and August to 5.33 million (SAAR). The decline in sales was concentrated in starter homes (homes under $100,000), which declined by 4.4 percent year-over-year, while all other home price ranges experienced increases.”
  • “Tight inventories continue to be a drag on the housing market which dropped to a 4.6-month supply in August. This put upward pressure on prices, which rose 5.7 percent over the past 12 months.”
  • “Incomes continue to trend upward with the Census Bureau reporting that average hourly earnings have increased 2.6 percent in the past year, coinciding with a boost in consumer confidence.”
  • “The unemployment rate ticked upward 0.1 percent between August and September to 5.0 percent, due to an increase in the number of people trying to re-enter the workforce after spending an extended period of time unemployed.”
  • “Mortgage rates ticked up slightly to 3.46 percent, a rise of 0.02 percent between August and September.”

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.”

*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 November 21, 2016 with October 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