Housing Market Faces Dilemma as Millennial Demand Continues to Grow, According to First American Chief Economist’s Potential Home Sales Model

As more and more Millennials marry and have children, among the strongest determinants for the desire to be a homeowner, demand for housing will remain robust, says Chief Economist Mark Fleming

June 20, 2017, 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 May 2017.

May 2017 Potential Home Sales

  • Potential existing-home sales increased to a 5.72 million seasonally adjusted, annualized rate (SAAR), a 1.8 percent month-over-month increase.
  • This represents a 90.3 percent increase from the market potential low point reached in December 2008.
  • In May, the market potential for existing-home sales fell by 1.1 percent compared with a year ago, a decline of 62,000 (SAAR) sales.
  • Currently, potential existing-home sales is 644,000 (SAAR), or 11.2 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 3.8 percent or an estimated 218,000 (SAAR) sales.
  • Market potential grew by 1.8 percent month over month, an estimated increase of 98,000 (SAAR) sales between April 2017 and May 2017.

Chief Economist Analysis: Lower Inventories + High Demand = Declining Affordability

“As more and more Millennials marry and have children, among the strongest determinants for the desire to be a homeowner, demand for housing will remain robust. However, the housing market faces a dilemma that is restricting the inventory of homes for sale,” said Mark Fleming, chief economist at First American. “As rates rise and the cost to finance a mortgage increases, existing homeowners are prisoners in their own homes. In addition, the fear of being unable to find a home to purchase hinders homeowners’ decision to sell.

“The low inventory of homes for sale is preventing the housing market from reaching its potential and pressuring prices higher. Increasing shortages of homes for sale is a growing problem for potential home buyers, especially potential first-time home buyers today, as it causes affordability to decline,” said Fleming.

Additional Quotes from Chief Economist Mark Fleming

  • “Strong demand is outpacing supply, as the lack of inventory continues to prevent the market from reaching full potential. According to the National Association of Realtors (NAR), the number of existing homes for sale has fallen for the past 23 months and is 9.0 percent lower than a year ago.”
  • “Current homeowners, faced with a prisoner’s dilemma, have been reluctant to put their homes on the market for fear of not finding a home to purchase at the right price.”
  • “In response to the tight supply, house prices rose 5.8 percent year-over-year in May, the fastest pace since July 2014. When combined with higher interest rates, the net effect is an 11.0 percent year-over-year decrease in affordability, according to the First American Real House Price Index.”
  • “However, with wage growth at 2.5 percent over the past 12 months, and unemployment at its lowest level since May 2001, economic conditions that favor Millennial household formation will continue to drive strong demand, despite decreasing affordability.”

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.”

Next Release                              

The next Potential Home Sales model will be released on July 23, 2017 with June 2017 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. © 2017 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 total revenue of $5.6 billion in 2016, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2016 and again in 2017, First American was named to the Fortune 100 Best Companies to Work For® list. More information about the company can be found at www.firstam.com.