Economic Momentum Yet to Lift Home Sales, According to First American Potential Home Sales Model

If existing homeowners remain hesitant to list their homes for sale, then increasing the pace of new home construction is necessary to alleviate the supply shortage that the housing market faces today, says Chief Economist Mark Fleming

August 21, 2018, 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 July 2018. 

July 2018 Potential Home Sales

  • Potential existing-home sales increased to a 6.08 million seasonally adjusted annualized rate (SAAR), a 0.3 percent month-over-month increase.

  • This represents a 62.8 percent increase from the market potential low point reached in February 2011.

  • The market potential for existing-home sales increased by 3.5 percent compared with a year ago, a gain of 208,900 (SAAR) sales.

  • Currently, potential existing-home sales is 1.21 million (SAAR), or 16.6 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 5.8 percent or an estimated 352,000 (SAAR) sales.
  • The market performance gap decreased by an estimated 75,000 (SAAR) sales between June 2018 and July 2018. 

Chief Economist Analysis: The Economy is Hot, The Housing Market is Hot, Home Sales… Are Not

“The U.S. economy remains on an impressive growth streak. Last month, the Commerce Department reported that the gross domestic product, the broadest measure of goods and services produced in the economy, grew at a 4.1 percent annualized rate in the second quarter, the strongest pace of growth since 2014,” said Mark Fleming, chief economist at First American. “The economy has added jobs every month for 94 consecutive months, producing the lowest unemployment rate since 2000.

“However, in spite of the macro-economic momentum, the housing market continued to underperform its potential in July. Actual existing-home sales are 5.8 percent below the market potential for existing-home sales, according to our Potential Home Sales model, which estimates the expected level of existing-home sales based on market fundamentals,” said Fleming. “The market for existing-home sales is underperforming its potential by an estimated 352,000 sales at a seasonally adjusted annualized rate (SAAR). Existing-home sales, which make up approximately 90 percent of U.S. home sales, continue to disappoint in 2018, despite what was likely the strongest period of economic growth since 2014.

“The housing market is moving at an exceptional rate these days. According to data from DataTree by First American, the median sale price of a home in the U.S. was approximately $230,000 in June – the highest since 2007,” said Fleming. “Additionally, the average home was sold in 54 days in June, a new record according to Despite the terrific economic backdrop and a hot housing market, home sales remain below their market potential. Why could this be?

“Our research shows that rising rates, especially when they are still historically low, don’t significantly discourage home buyers, but evidence is growing that indicates rising rates do influence the home sellers. Rising rates reduce the incentive for current homeowners to sell their homes. There are limited reasons to sell when, due to higher mortgage rates, it will cost you more each month just to borrow the same amount from the bank,” said Fleming. 

“Additionally, existing homeowners are hesitant to sell their homes as they are afraid that they will not be able to find a home to buy,” said Fleming. Home sales are being stifled by a shortage of homes on the market. The game of musical chairs that is the housing market today needs more chairs.” 

The Answer? Build, Build, Build

“Homebuilding, as a source of new supply, is crucial to solving the housing supply shortage. Homebuilders don’t have existing mortgages or the fear of not being able to find something to buy. Additional supply, particularly of new entry-level homes to meet the needs of the first-time buyers who remain interested in buying even as rates increase, is critical to satisfy the rising demand for housing,” said Fleming. “If existing homeowners remain hesitant to list their homes for sale, then increasing the pace of new home construction is necessary to alleviate the supply shortage that the housing market faces today.” 

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 September 19, 2018 with August 2018 data. 

About the Potential Home Sales Model

Potential home sales measures existing-homes sales, which include single-family homes, townhomes, condominiums and co-ops on a seasonally adjusted annualized rate based on the historical relationship between existing-home sales and U.S. population demographic data, income and labor market conditions in the U.S. economy, price trends in the U.S. housing market, and conditions in the financial market. When the actual level of existing-home sales are significantly above potential home sales, the pace of turnover is not supported by market fundamentals and there is an increased likelihood of a market correction. Conversely, seasonally adjusted, annualized rates of actual existing-home sales below the level of potential existing-home sales indicate market turnover is underperforming the rate fundamentally supported by the current conditions. Actual seasonally adjusted annualized existing-home sales may exceed or fall short of the potential rate of sales for a variety of reasons, including non-traditional market conditions, policy constraints and market participant behavior. Recent potential home sale estimates are subject to revision in order to reflect the most up-to-date information available on the economy, housing market and financial conditions. The Potential Home Sales model is published prior to the National Association of Realtors’ Existing-Home Sales report each month. 


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. © 2018 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; banking, trust and wealth management services; and other related products and services. With total revenue of $5.8 billion in 2017, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2018, First American was named to the Fortune 100 Best Companies to Work For® list for the third consecutive year. More information about the company can be found at