Housing Market Potential Strengthens Modestly, According to First American Potential Home Sales Model

Strong demographic demand will continue to act as the wind in the housing market’s sails, says Chief Economist Mark Fleming


November 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 October 2021. The Potential Home Sales Model measures what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals. 

October 2021 Potential Home Sales

For the month of October, First American updated its proprietary Potential Home Sales Model to show that:

  • Potential existing-home sales increased to a 6.27 million seasonally adjusted annualized rate (SAAR), a 0.1 percent month-over-month increase.
  • This represents a 79.8 percent increase from the market potential low point reached in February 1993.
  • The market potential for existing-home sales increased 10.3 percent compared with a year ago, a gain of nearly 584,000 (SAAR) sales.
  • Currently, potential existing-home sales is 522,000 million (SAAR), or 7.7 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 8.4 percent or an estimated 525,000 (SAAR) sales.
  • The market performance gap increased by an estimated 52,000 (SAAR) sales between September 2021 and October 2021. 

Chief Economist Analysis: What 2021 Housing Market Dynamics Indicate for Next Year

“In September 2021, existing-home sales increased to a 6.29 million seasonally adjusted annualized rate (SAAR). Prior to the pandemic, the housing market had not reached this sales pace since 2006,” said Mark Fleming, chief economist at First American. “We may see another strong month in October, as housing market potential increased 10.3 percent compared with one year ago to 6.27 million (SAAR), according to our measure of the market potential for existing-home sales.

“As we approach the final weeks of the year, it’s important to reflect on how the housing market has performed,” said Fleming. “Analyzing the individual economic forces that have driven the continued growth of market potential for existing-home sales can provide insight into how the housing market may fare in 2022.”

Why Housing Market Potential Keeps Rising

  • Credit Standards Loosened: “When lending standards are tight, fewer people can qualify for a mortgage to buy a home, thus they are more likely to stay in their current home, limiting the supply of homes for sale. When the pandemic hit, lenders tightened their lending criteria to account for the greater likelihood of forbearance and delinquency,” said Fleming. “Since the peak of the pandemic in the spring of 2020, lending standards have bounced around but, ultimately, trended toward looser conditions. In October, credit loosened compared with one year ago as the economy continued to improve and lender confidence increased. Loosening credit conditions increased housing market potential by approximately 331,000 potential home sales compared with one year ago.”
  • Historic House Price Appreciation: “As homeowners gain equity in their homes, they may be more likely to consider using the equity to purchase a larger or more attractive home,” said Fleming. “The historic imbalance in housing supply relative to demand over the last year fueled faster house price appreciation, which increased housing market potential by nearly 223,000 potential home sales in October compared with one year ago.” 
  • Household Formation Growth Continued: “Household formation continued to grow over the last year, largely driven by millennials, accelerating demand for housing,” said Fleming. “The increase in household formation enhanced market potential by nearly 134,000 potential home sales in October compared with a year ago.” 
  • House-Buying Power Increased Modestly: “House-buying power, how much home one can afford to buy given household income and the prevailing mortgage rate, increased 0.6 percent compared with one year ago. The modest increase in house-buying power was due to the 3.6 percent year-over-year increase in household income,” said Fleming. “Rates pushed back against the increase, as the average 30-year, fixed mortgage rate in October 2021 was 0.23 percentage points higher than one year ago. The increase in house-buying power boosted market potential by 12,000 potential home sales.” 

The Only Economic Force that Reduced Housing Market Potential

  • Lack of Existing-Home Supply: “The average length of time someone lives in their home continues to set new records, rising to approximately 10.7 years in October, up from 10.4 years one year ago. The longer people live in their homes means fewer and fewer people list their homes for sale, compounding the housing supply shortage – you can’t buy what’s not for sale, and you won’t sell if you can’t find something better to buy,” said Fleming. “The increase in the average length of time someone lives in their home had the only negative impact on housing market potential compared with on year ago, reducing it by 116,000 potential home sales. The lack of supply is the primary constraint to the housing market.”

What Does This Mean for Market Potential in 2022?

“In 2022, the average length of time someone lives in their home appears poised to rise again, especially as mortgage rates increase, which will prolong the housing supply shortage and dampen housing market potential. The labor market recovery is expected to continue, putting upward pressure on wages, helping consumer house-buying power. Yet, the improving economy is also likely to put upward pressure on mortgage rates,” said Fleming. “The winner of the tug-of-war between rising rates and higher household income will determine the direction of house-buying power. But, even if rising rates outpace the impact of higher incomes, buying a home is more than a financial calculation. Millennials are widely expected to continue to form households, boosting demand for homes. Strong demographic demand will continue to act as the wind in the housing market’s sails.”

Next Release

The next Potential Home Sales Model will be released on December 21, 2021 with November 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. 

Disclaimer

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

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