Impact of Rising Rates, Tenure Length on 2020 Outlook, According to First American Potential Home Sales Model

The market potential for existing-home sales in 2020 will largely depend on the strength of the rate lock-in effect and whether house-buying power can increase sufficiently to offset it, says Chief Economist Mark Fleming

November 20, 2019, 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 2019. 

October 2019 Potential Home Sales

  • Potential existing-home sales decreased to a 5.17 million seasonally adjusted annualized rate (SAAR), a 0.6 percent month-over-month decrease.

  • This represents a 54.0 percent increase from the market potential low point reached in February 1993.

  • The market potential for existing-home sales increased by 0.6 percent compared with a year ago, a gain of 33,050 (SAAR) sales.

  • Currently, potential existing-home sales is 1.56 million (SAAR), or 23.1 percent below the pre-recession peak of market potential, which occurred in March 2004. 

Market Performance Gap

  • The market for existing-home sales outperformed its potential by 4.6 percent or an estimated 239,000 (SAAR) sales.
  • The market performance gap increased by an estimated 92,680 (SAAR) sales between September 2019 and October 2019. 

Chief Economist Analysis: Housing Market Exceeded Potential in October

“In October 2019, the housing market exceeded its potential, as actual existing-home sales exceeded market potential by 4.6 percent, or an estimated 239,000 seasonally adjusted annualized sales. Housing market potential decreased relative to last month, but increased 0.6 percent compared with October of last year,” said Mark Fleming, chief economist at First American.

“Two forces drove the month-over-month decline in the potential for existing-home sales – a month-over-month decline of 0.8 percent in consumer house-buying power, the first decline since November 2018, and the continued impact of rising tenure length,” said Fleming. “The decline in house-buying power dampened market potential substantially. Examining how house-buying power influences market potential can provide insight into the outlook for the housing market.”

First Monthly Rate Increase Since November 2018 Holds Back Housing Market Potential

“In 2019, consumer house-buying power, how much home one can afford to buy given household income and the prevailing mortgage rates, surged and provided a significant boost to housing market potential,” said Fleming. “Since the start of 2019, income has grown by 1.9 percent and mortgage rates have fallen by 0.77 percentage points, both dynamics sending house-buying power higher. As a result, house-buying power jumped 12.0 percent between January and October 2019.

“In October, mortgage rates increased by 0.08 percentage points, the first monthly increase since November 2018. While household income increased by 0.2 percent compared with one month ago, it was not enough to offset the negative impact of the increase in mortgage rates on house-buying power,” said Fleming. “The resulting decline in house-buying power dropped the market potential for existing-home sales by nearly 22,000 sales.

“Tenure length, the average length of time someone lives in their home, increased in October by 6.0 percent compared with January 2019, and 0.7 percent compared with last month. Increasing tenure length reduced the market potential for existing-home sales by 31,800,” said Fleming. “Tenure length and house-buying power are two of the most influential forces on market potential, and they combined to drag down the market potential for existing-home sales by 0.6 percent compared with last month, despite positive contributions from new home construction (1,300 potential home sales), looser credit standards (7,500 potential home sales), rising house prices (9,600 potential home sales), and increasing household formation (6,500 potential home sales).” 

Impact on 2020 Outlook

“One month of declining house-buying power is not a trend. Mortgage rates are currently hovering at 3.7 percent, and forecasters currently expect rates will remain somewhere between 3.7 percent to 3.9 percent in 2020 – still near historical lows,” said Fleming. “Meanwhile, household income is expected to continue to grow as wages rise. It’s possible that house-buying power in 2020 may dip lower than in the spring and summer of 2019, but will likely remain near historical highs.

“As more buyers purchase homes with historically low rates and existing owners refinance, there will be more homeowners with a financial incentive to keep their current homes, and low mortgage rates, and not sell. This is the rate lock-in effect, and it means tenure length will likely continue to rise as well,” said Fleming. “The market potential for existing-home sales in 2020 will largely depend on the strength of the rate lock-in effect and whether house-buying power can increase sufficiently to offset it.”   

Next Release                             

The next Potential Home Sales Model will be released on December 18, 2019 with November 2019 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, homeowner tenure, house-buying power 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 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. © 2019 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 $5.7 billion in 2018, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2019, First American was named to the Fortune 100 Best Companies to Work For® list for the fourth consecutive year. More information about the company can be found at