Market Potential Improves on the Back of Gains in Income, According to First American Chief Economist's Potential Home Sales Model

Recent improvements in employment and income levels are beneficial to housing demand, but increasing the pressure for an FOMC rate increase, says Chief Economist Mark Fleming

September 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 August 2016. The model provides a measure of what a healthy market level of home sales should be based on Chief Economist Mark Fleming’s analysis of current economic and demographic factors and the dynamics of the housing market environment. For August, the model showed that the market for existing-home sales is underperforming its potential by 5.6 percent or an estimated 323,000 seasonally adjusted, annualized rate (SAAR) of sales, an improvement relative to last month’s revised performance gap of -5.7 percent or 328,000 (SAAR) sales.

In August, the market potential for existing-home sales grew by 1.08 percent compared to July, an increase of 62,000 (SAAR) sales, and increased by 5.9 percent compared to a year ago. This month, potential existing-home sales increased to 5.78 million (SAAR). This represents a 91.9 percent increase from the market potential low point reached in December 2008*, however it is a decline of 371,000 (SAAR) or 6.4 percent from the pre-recession peak of market potential, which occurred in July 2005.

Chief Economist Analysis: Market Potential Improves on Income Growth

According to the National Association of Realtors (NAR), existing-home sales stumbled in July, falling to 5.39 million (SAAR) from 5.57 million (SAAR) sales in June. The 1.6 percent year-over year decrease is the first year-over-year decline since November 2015. Month-over-month, the drop was 3.2 percent, which is the first decline following three months of consecutive gains in the number of existing home sales.

“The West, which has recently been a laggard in sales when compared to other parts of the country, saw a 2.5 percent increase from June to July and was the only region to experience an increase in existing-home sales. The Northeast fell by 13.2 percent on a month-over-month basis, while the Midwest and South saw sales drop by 5.2 percent and 2.5 percent, respectively,” said Mark Fleming, chief economist at First American. “Low inventories still remain a significant issue, although the increase to a 4.7-month supply in July from a downwardly revised 4.5-month supply in June should offer some relief to frustrated potential homebuyers competing over the constrained supply. Low inventory levels continue to put upward pressure on home prices, which rose an estimated 6.1 percent year-over-year on a seasonally adjusted basis in July, according to the Case-Shiller House Price Index.

“Despite tight inventories and rising prices, consumers continue to be optimistic about the housing market. Nowhere is this more evident than in new-home sales volume, which according to the U.S. Census Bureau, grew by 12.4 percent between June and July and 31.3 percent from the year prior,” said Fleming. “Furthermore, the share of new home sales under $300,000 grew to 52 percent in July up from 48 percent in June, indicating that not only are homebuilders adding much needed supply to the market, but they are doing so at the lower end of the price distribution with an eye on entry-level buyers.

“Historic low mortgage rates have been extremely influential in boosting the housing market, softening the impact of rising prices and offering consumers increased leverage and buoyed home-buying power. However, recent improvements in employment data and income gains are starting to play a larger role influencing home-buying power, providing a firm foundation for increased housing demand,” said Fleming. “According to the Bureau of Labor Statistics employers added 151,000 jobs in August, which was slightly under expectations, holding the unemployment rate and participation rate unchanged at 4.9 percent and 62.8 percent, respectively. More importantly, average hourly earnings have continued moving upwards, changing 2.4 percent from a year prior to $25.73.

“Further confirming signs of a stronger consumer, the U.S. Census Bureau announced that real median household incomes increased by 5.2 percent between 2014 and 2015, the first annual increase in household incomes measured since 2007. The increases in household income were broad, with every demographic group seeing gains in income. However, the increases were greater for lower- and middle-income households,” said Fleming. “Real median household incomes for households in the 10th percentile of the income distribution saw their income rise by 7.9 percent in 2015 and households in the 20th percentile had their incomes grow by 6.3 percent, whereas households in the top 90th percentile experienced only a 2.9 percent gain.

“These recent gains in consumer financial health not only impact housing demand, but also play a role in the Federal Open Market Committee’s (FOMC) rate policy. With the September meeting just around the corner, some are now questioning if these positive economic indicators are enough for the Fed to raise rates,” said Fleming. “While the labor markets are improving and wages are rising, have the gains been strong enough to convince the FOMC that a rate hike is in order? Inflation, which is tracked by the FOMC using the core personal consumption expenditure (PCE), reached 1.6 percent in June, just under the target of 2 percent. Will this news cause the policy makers to change course, or does it demand more patience? Will global economic uncertainty, paradoxically a key driver in keeping U.S. mortgage rates low, cause the committee members to pause and table a rate hike decision yet again?”

Fleming added, “Rising rates will have a modest impact on housing demand, but they also signal a strengthening labor market and increased inflation pressure due to rising incomes – both unequivocally good for housing market health.”

*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 October 18, 2016 with September 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