Housing Market Outlook Pits ‘Homebodies’ Against Pandemic-Fueled Demand, According to First American Potential Home Sales Model
House-buying power drives the market potential for existing-home sales, but market potential is limited by what you can buy, says Chief Economist Mark Fleming
June 22, 2021, 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 May 2021.
May 2021 Potential Home Sales
- Potential existing-home sales increased to a 6.34 million seasonally adjusted annualized rate (SAAR), a 0.8 percent month-over-month increase.
- This represents an 81.8 percent increase from the market potential low point reached in February 1993.
- The market potential for existing-home sales increased 22.7 percent compared with a year ago, a gain of 1,173,038 (SAAR) sales. The year-over-year comparison is very large this month because economic activity in May of 2020, including the housing market, was significantly curtailed due to the pandemic. Housing rebounded sharply in the summer.
- Currently, potential existing-home sales is 453,138 (SAAR), or 6.7 percent below the pre-recession peak of market potential, which occurred in April 2006.
Market Performance Gap
- The market for existing-home sales outperformed its potential by 4.3 percent or an estimated 272,588 (SAAR) sales.
- The market performance gap increased by an estimated 31,341 (SAAR) sales between April 2021 and May 2021.
Chief Economist Analysis: Housing Market Potential Strengthens in May Despite Supply Headwinds
“Housing market potential strengthened again last month, according to our Potential Home Sales Model, despite significant supply headwinds. In May, housing market potential increased 0.8 percent compared with April, and is now nearly 23 percent higher than the pandemic-driven decline last May,” said Mark Fleming, chief economist at First American. “Relative to two years ago, housing market potential is nearly 18 percent higher.
“A dip in mortgage rates and slight uptick in household income fueled an increase in house-buying power that was large enough to offset the largest monthly increase in tenure length since August 2020. Despite the pandemic-driven demand for more space and shift away from urban areas, the average tenure length – the amount of time a typical homeowner lives in their home – continues to set new records,” said Fleming. “You can’t buy what’s not for sale, even if your buying power says you can afford it.”
Pandemic-Accelerated Demand Trends Collide with Homebodies – To the Winner Goes Housing Market Potential
“House-buying power, which is a function of mortgage rates and household income, increased by approximately $7,100 in May, contributing to a gain of nearly 31,000 potential home sales compared with last month. Both mortgage rates and household income swung in favor of increased house-buying power in May, offsetting the historic lack of supply,” said Fleming. “The primary cause of the lack of supply? Homebodies, existing homeowners choosing to remain in place and not list their homes for sale, a trend that has hampered housing market potential for several years and continues to worsen.”
Homebodies, the Immovable Object
“Average tenure length jumped nearly 4 percent from one year ago, and 0.4 percent compared with last month. The monthly gain was the largest since August 2020. The monthly increase in average tenure length contributed to a loss of over 17,000 potential home sales,” said Fleming. “Since existing homeowners supply the majority of the homes for sale, and increasing tenure length indicates homeowners are not selling, the housing market faces an ongoing supply shortage.
“Before the housing market crash in 2007, the average length of time someone lived in their home was approximately five years. Average tenure length grew to approximately eight years during the aftermath of the housing market crisis between 2008 and 2016,” said Fleming. “The most recent data shows that the average length of time someone lives in their home reached 10.6 years in May 2021, an historic high.
“Two trends are locking homebodies in place and driving the increase in tenure length. First, for homeowners with rock-bottom rates, modestly higher rates in an historically low inventory environment may disincentivize some from selling their homes, thus preventing more supply from reaching the market. Second, seniors are choosing to age in place,” said Fleming. “Analysis of the 2020 ASEC data reveals that the homeownership rate actually increased for baby boomers in 2020. While a 2019 study from Freddie Mac shows that if seniors and adults born between 1931-1959 behaved like earlier generations, they would have released nearly 1.6 million additional housing units to the market by 2018. As seniors continue to choose to age in place, there will be fewer existing homes available for sale.”
What Does it all Mean for Housing Market Potential?
“It all comes down to the fundamentals. House-buying power drives the market potential for existing-home sales, but market potential is limited by what you can buy. The demand for homes is strong as millennials continue to age into homeownership, mortgage rates remain low, and the economy begins to improve,” said Fleming. “Yet, we need more existing homes for sale to satisfy this growing demand. You can’t buy what’s not for sale – and the homebodies don’t seem ready to relieve the supply pressure, keeping a lid on market potential growth.”
The next Potential Home Sales Model will be released on July 21, 2021 with June 2021 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. © 2021 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; banking, trust and wealth management services; and other related products and services. With total revenue of $7.1 billion in 2020, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2021, First American was named to the Fortune 100 Best Companies to Work For® list for the sixth consecutive year. More information about the company can be found at www.firstam.com.