Housing Market Potential Rebounds Despite Pandemic Impacts So Far, According to First American Potential Home Sales Model
Bolstered by record low mortgage rates and demand stemming from millennials aging into homeownership the potential for existing-home sales will likely continue to rise. Yet, you can’t buy what’s not for sale, says Chief Economist Mark Fleming
August 20, 2020, 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 2020.
July 2020 Potential Home Sales
- Potential existing-home sales increased to a 5.59 million seasonally adjusted annualized rate (SAAR), a 1.9 percent month-over-month increase.
- This represents a 61.3 percent increase from the market potential low point reached in February 1993.
- The market potential for existing-home sales increased 4.0 percent compared with a year ago, a gain of nearly 215,800 (SAAR) sales.
- Currently, potential existing-home sales is 1.21 million (SAAR), or 17.7 percent below the pre-recession peak of market potential, which occurred in April 2006.
Market Performance Gap
- The market for existing-home sales underperformed its potential by 1.0 percent or an estimated 56,600 (SAAR) sales.
- The market performance gap increased by an estimated 16,000 (SAAR) sales between June 2020 and July 2020.
Chief Economist Analysis: Housing Market Potential Up 4 Percent Year Over Year
“With a July unemployment rate of 10.2 percent and roughly 30 million Americans claiming unemployment benefits, it’s clear that the domestic economy continues to feel the pain inflicted by the coronavirus pandemic. Yet the housing industry, at least for now, continues its impressive V-shaped rebound,” said Mark Fleming, chief economist at First American. “Weekly purchase applications have surpassed their levels from one year ago for 12 straight weeks as potential buyers respond to record low mortgage rates. The market potential for existing-home sales reflects the accelerated activity, according to our Potential Home Sales Model.
“After hitting a 2020 low point in April, the market potential for existing-home sales steadily increased, reaching 5.6 million sales at a seasonally adjusted annualized rate (SAAR) in July, up 1.9 percent from June and 4.0 percent from one year ago,” said Fleming. “Record low mortgage rates and millennials continuing to age into their prime home-buying years has boosted demand, but a lack of housing supply remains a challenge. Examining the dynamics fueling the rebound in housing market potential provides insight into the overall health of the housing market and the sustainability of the rebound.”
Forces Boosting Housing Market Potential:
- Household Formation Growth Continued: “Household formation continued to grow in July, as millennials continued to form new households, increasing demand for housing,” said Fleming. “Rising household formation increased market potential by 289,160 potential home sales in July compared with last year.”
- House-Buying Power Increases 15%: “House-buying power, how much home one can afford to buy given household income and the prevailing mortgage rate, increased 15 percent since July 2019. The house-buying power surge was driven by the combined impact of lower mortgage rates, which were 0.75 percentage points lower in July than they were a year ago, and a continued increase in annual household income,” said Fleming. “The increase in house-buying power boosted market potential by approximately 282,000 potential home sales.”
- House Price Appreciation Continues: “As homeowners gain equity in their homes, they are more likely to consider using that equity to purchase a larger or more attractive home – the wealth effect. In today’s housing market, fast rising demand against the limited supply of homes for sale has resulted in continued house price appreciation,” said Fleming. “Compared with one year ago, the growing wealth effect caused by house price appreciation increased housing market potential by nearly 105,000 potential home sales.”
Forces Reducing Housing Market Potential:
- Credit Tightening: “Due to the increased economic uncertainty driven by impacts from the pandemic, lenders have tightened credit standards. When lending standards are tight, fewer people can qualify for a mortgage to buy a home,” said Fleming. “Likewise, when standards are loose, more people can qualify for a mortgage and buy a home. In July, credit tightened compared with last year, which reduced housing market potential by nearly 295,000 potential home sales.”
- Tenure Length Continues to Rise: “Tenure length, the average length of time someone lives in their home, increased 4.2 percent in July relative to one year ago. The increase in tenure length had a negative impact on housing market potential, reducing it by 163,000 potential home sales compared with one year ago,” said Fleming. “Overall, tenure length has been increasing since the aftermath of the housing market crash, meaning fewer and fewer people are listing their homes for sale, keeping housing supply tight and restraining potential sales.”
- More New Home Supply Needed: “The lack of inventory for sale and the fear of not being able to find something to buy keeps many existing homeowners from selling their homes, further preventing inventory for sale from reaching the market. Home builders don’t have this fear and are a critical source of inventory for sale when existing homeowners are not,” said Fleming. “Home builders have accelerated construction since hitting a low point in April, but more building is needed to bridge the gap between supply and demand. Compared with last year, the lack of new home supply reduced housing market potential by 2,100 potential home sales.”
Will Housing Market Potential Continue to Rise?
“Bolstered by record low mortgage rates and demand stemming from millennials aging into their household formation years, the potential for existing-home sales will likely continue to rise. Yet, you can’t buy what’s not for sale. The limited supply of existing homes for sale will continue to be an issue, and it will take builders years at a faster pace to build enough new supply to make up for the imbalance between supply and demand,” said Fleming. “Even though credit standards have loosened in recent months, they are anticipated to remain tight by historical standards, as long as economic uncertainty persists. The economy will follow the path of the virus, but the housing market has largely bucked that trend, and we remain cautiously optimistic for what’s to come.”
Note: This month’s report includes an update to the model, which may result in revised PHS values. Additionally, input data has been especially volatile in recent months, which may result in strong revisions.
The next Potential Home Sales Model will be released on September 21, 2020 with August 2020 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. © 2020 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 $6.2 billion in 2019, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2020, First American was named to the Fortune 100 Best Companies to Work For® list for the fifth consecutive year. More information about the company can be found at www.firstam.com.