Outlook for Market Potential Healthy for Rest of 2019, According to First American Potential Home Sales Model

Lower mortgage rates have a dual effect on the housing market: they incentivize homeowners to move as the rate “lock-in” effect fades and they boost demand by making homes more affordable, says Chief Economist Mark Fleming

October 18, 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 September 2019. 

September 2019 Potential Home Sales

  • Potential existing-home sales decreased to a 5.48 million seasonally adjusted annualized rate (SAAR), a 0.02 percent month-over-month decrease.

  • This represents a 63.2 percent increase from the market potential low point reached in February 1993.

  • The market potential for existing-home sales increased by 3.8 percent compared with a year ago, a gain of 198,800 (SAAR) sales.

  • Currently, potential existing-home sales is 1.25 million (SAAR), or 18.6 percent below the pre-recession peak of market potential, which occurred in March 2004. 

Market Performance Gap

  • The market for existing-home sales is marginally underperforming its potential by 0.04 percent or an estimated 2,340 (SAAR) sales.
  • The market performance gap decreased by an estimated 94,000 (SAAR) sales between August 2019 and September 2019. 

Chief Economist Analysis: Housing Market Hovers at Potential in September

“In September 2019, the housing market performed to its potential, as actual existing-home sales were a marginal 0.04 percent, or an estimated 2,340 seasonally adjusted annualized sales, below market potential. Housing market potential decreased relative to last month, but increased 3.8 percent compared with September of last year,” said Mark Fleming, chief economist at First American. “Indeed, in September of last year, rising mortgage rates dampened market potential and existing-home sales underperformed market potential by 7.2 percent, or an estimated 445,200 sales. The market dynamics and outlook has improved significantly in the last 12 months, begging the question: what’s changed?”

Then vs. Now

“In September 2018, the 30-year, fixed-rate mortgage was 4.63 percent and reached a high of 4.87 percent in November. Today, mortgage rates are more than one percentage point lower than one year ago, and 1.26 percentage points lower than the November 2018 zenith,” said Fleming. “In September of last year, rates were forecasted to continue to rise, as many experts believed the Federal Reserve would continue to increase the Federal Funds rate and put more upward pressure on mortgage rates. Rising rates reduce home-buying power and decrease market potential for existing-home sales.

“But, in December 2018, the unexpected happened – volatility in the bond market helped drive mortgage rates lower. This trend has continued through most of 2019 and mortgage rates are now near historically low levels,” said Fleming. “Lower mortgage rates have a dual effect on the housing market: they incentivize homeowners to move as the rate ‘lock-in’ effect fades, which slows or reduces the average tenure of homeowners, and they boost demand by making homes more affordable.”

Drag on Market Potential from Tenure Length Reduced Dramatically

“Changes in tenure length are largely the result of the strength of the rate ‘lock-in’ effect, and seniors aging in place. The year-over-year growth in tenure length has been slowing since March of this year and it is conceivable that it could stabilize or even decline, if mortgage rates continue to trend lower,” said Fleming. “In September 2019, the impact of increasing tenure length on market potential resulted in a loss of 137,230 potential home sales, but that is dramatically less than the 421,260 in September of last year.” 

Affordability Boosts Market Potential

“In 2019, housing affordability benefitted from lower mortgage rates and higher incomes driven by the strong labor market. In September 2019, house-buying power increased to $420,250, 15 percent higher than one year ago,” said Fleming. “The boost to house-buying power increased the market potential by 415,090 home sales, more than 10 times the annual gain in market potential boost of just 34,390 potential home sales in September 2018.” 

What’s the Outlook for the Rest of 2019?

“Housing is the most durable consumer good we’ll ever buy, and surging house-buying power fuels greater potential demand. You can’t buy what’s not for sale, but rising existing-home sales means more homes on the market, helping to meet the growing demand,” said Fleming. “While several factors may trigger a directional switch for market potential, the current environment of low mortgage rates and wage growth driven by a strong labor market, supports a healthy housing market for the remainder of 2019.” 

Next Release                             

The next Potential Home Sales Model will be released on November 20, 2019 with October 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 www.firstam.com.