Market Potential Caught in the Crosswinds of Surging Demand and Tightening Inventory, According to First American Chief Economist’s Potential Home Sales Model

The market faces a “prisoner’s dilemma.” If everyone sells, there will be plenty of supply, but the risk of selling when others don’t, the inability to find a home to purchase at the right price, is preventing homeowners from putting their homes on the market, says Chief Economist Mark Fleming.

May 23, 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 April 2017.

April 2017 Potential Home Sales

  • Potential existing-home sales decreased to a 5.69 million seasonally adjusted, annualized rate (SAAR), a 0.2 percent decline over last month’s revised data.
  • This represents an 89.3 percent increase from the market potential low point reached in December 2008.
  • In April, the market potential for existing-home sales fell by 0.1 percent compared with a year ago, a decline of 5,000 (SAAR) sales.
  • Currently, potential existing-home sales is 674,000 (SAAR), or 11.8 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 0.6 percent or an estimated 32,000 (SAAR) sales.
  • Market underperformance has improved 84.1 percent compared to this time last year. In April 2017, the housing market for existing-home sales was underperforming its potential by 200,000 (SAAR) sales. 

Chief Economist Analysis: The Housing Market Faces a “Prisoner’s Dilemma”

“Demand for existing-homes remains strong, as positive economic conditions and the demographic tail wind of Millennial demand continues to grow. Meanwhile, sellers are increasingly unwilling to list their homes for sale. The market faces a ‘prisoner’s dilemma.’ If everyone sells, there will be plenty of supply, but the risk of selling when others don’t, the inability to find a home to purchase at the right price, is preventing homeowners from putting their homes on the market,” said Mark Fleming, chief economist at First American. “The ‘prisoner’s dilemma’ in housing is restricting supply, causing increased house price appreciation and falling affordability.” 

Additional Quotes from Chief Economist Mark Fleming

  • “Conflicting market forces kept the potential for existing-home sales essentially unchanged in April, falling 0.1 percent compared to a year ago.”
  • “Strong consumer demand fueled gains in market potential for existing-home sales, but the gains were offset by the deterioration in affordability driven by widespread tight supply conditions.”
  • According to the most recent report from the National Association of Realtors (NAR), actual existing-home sales surged to the highest rate seen since 2007, 5.71 million sales, indicating that demand remains strong, even as affordability falls.”
  • “Healthy wage growth, which increased 2.5 percent over the past 12 months, and unemployment at its lowest level since May 2007, are both contributing to strong demand.”
  • According to the First American Real House Price Index, the fast pace of house price growth, combined with interest rates 40 basis points higher than a year ago, has had a material impact on affordability, which fell 11.0 percent compared with February 2016.”
  • “Analysis of data reveals that the average number of days on market for homes sold in April was 73 days, down five days compared to a year ago, and 35 days less than the buyer’s market of 2012. As the seller’s market continues to strengthen, affordability is expected to decline further. Yet, it’s unclear if the declining affordability will begin to curtail demand.”

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 June 20, 2017 with May 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