Low Supply Keeps Market Below Potential, According to First American Potential Home Sales Model

The housing market has been underperforming its potential since May and this month’s market performance gap is the largest since November 2016, says Chief Economist Mark Fleming

November 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 October 2017.

October 2017 Potential Home Sales

  • Potential existing-home sales increased to a 5.89 million seasonally adjusted, annualized rate (SAAR), a 0.4 percent month-over-month increase.
  • This represents a 95.7 percent increase from the market potential low point reached in December 2008.
  • In October, the market potential for existing-home sales decreased by 4.3 percent compared with a year ago, a loss of 262,000 (SAAR) sales.
  • Currently, potential existing-home sales is 481,000 (SAAR), or 8.2 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 7.7 percent or an estimated 455,000 (SAAR) sales.
  • Market potential increased by an estimated 26,000 (SAAR) sales between September 2017 and October 2017.

Chief Economist Analysis: Tight Inventory Continues to Put Pressure on Affordability

“Tight supply and strong first-time home buyer demand continue to be the dominant factors driving the current state of the housing market. Existing homeowners remain reluctant to list their homes for sale for fear of not being able to find a home to buy, keeping supply levels low. At the same time, a healthy number of potential home buyers continue to enter the market, so house prices are increasing and affordability is declining,” said Mark Fleming, chief economist at First American. “Historically low rates offer some relief in the form of strong borrowing power, however rates are expected to rise in the months to come, so if you are renting and thinking of buying, now is the time.”

Additional Quotes from Chief Economist Mark Fleming

  • “The housing market’s potential for existing-home sales increased moderately between September 2017 and October 2017, as mortgage rates remained below 4 percent for the fifth consecutive month and the economy continued to improve.”
  • “The housing market has been underperforming its potential since May and this month’s market performance gap is the largest since November 2016.”
  • “Tight supply continues to weigh on the market, depressing actual existing-home sales, while the market’s potential gains strength. The number of homes for sale has declined on a year-over-year basis for 38 consecutive months.”
  • “Active inventory has fallen 7.6 percent, and homes are selling 7.6 percent faster than a year ago, according to Realtor.com.”
  • “The lack of inventory relative to demand is driving the fast pace of price appreciation. While low rates have kept consumer house-buying power strong, it has not offset rising prices, so affordability has suffered.”
  • “According to the First American Real House Price Index, affordability is down 9.6 percent in August compared with a year ago.”

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 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 December 19, 2017 with November 2017 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. © 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.