Millennial Demand Continues to Fuel Housing Market, According to First American Potential Home Sales Model

The strength of the housing market is not surprising given the ongoing wave of millennial demand propelled by historically low rates and greater geographic flexibility, says Chief Economist Mark Fleming

January 19, 2022, 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 December 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. 

December 2021 Potential Home Sales

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

  • Potential existing-home sales decreased to a 6.37 million seasonally adjusted annualized rate (SAAR), a 0.4 percent month-over-month decrease. 
  • This represents an 82.8 percent increase from the market potential low point reached in February 1993. 
  • The market potential for existing-home sales increased 5.0 percent compared with a year ago, a gain of 304,000 (SAAR) sales. 
  • Currently, potential existing-home sales is 419,000 (SAAR), or 6.2 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 10.4 percent or an estimated 662,000 (SAAR) sales.  
  • The market performance gap increased by an estimated 96,000 (SAAR) sales between November 2021 and December 2021. 

Chief Economist Analysis: Housing Market Potential Dips Month Over Month, But Up 5 Percent Year Over Year

“The final Potential Home Sales Model report of 2021 revealed that market potential ended the year on a strong note. While the winter months are traditionally real estate’s slow season, our measure of the market potential for existing-home sales showed the housing market again broke with traditional seasonal patterns by ending the year strong,” said Mark Fleming, chief economist at First American. “In December 2021, housing market potential increased 5.0 percent compared with one year ago, but declined modestly on a month-over-month basis to a 6.37 million seasonally adjusted annualized rate (SAAR) of existing-home sales.

The strength of the housing market is not surprising given the ongoing wave of millennial demand propelled by historically low rates and greater geographic flexibility due to work-from-home arrangements,” said Fleming. “Yet, home buyers face a historic and worsening housing supply shortage - you can’t buy what’s not for sale.”  

Millennials Super-Charge Housing Market Demand 

“Potential home sales measures what the healthy market level of home sales should be based on economic, demographic and housing market fundamentals. One of the most consistent drivers of housing market potential over the last year has been new household formation. Millennials are the largest generation in U.S. history, and the bulk of them are aging into their prime home-buying years,” said Fleming. “New household formation, which is the new demand for housing, contributed approximately 165,000 potential home sales compared with one year ago. Even as house-buying power declined by nearly $3,000 on a year-over-year basis due to higher mortgage rates, housing demand persisted because the decision to buy a home is not strictly a financial decision, but also a lifestyle decision. The challenge for new millennial households is the lack of supply, particularly at the starter home price range.”  

Housing Musical Chairs  

“Homeowners in areas where house prices are rising feel wealthier. American homeowners today enjoy record levels of equity, and as their equity grows, they are more likely to consider using that equity to purchase a larger or more attractive home – the wealth effect of rising equity,” said Fleming. “In the existing-home sales report from the National Association of Realtors (NAR) for November 2021, the increase in home sales was strongest at the upper end of the market, as sales of homes priced at more than $1 million spiked over 50 percent nationally, followed closely by homes in the $750,000 to $1 million range, which jumped 37 percent. Existing homeowners are playing ‘housing musical chairs’ by selling to each other. In December, the growing wealth effect of rising equity caused by house price appreciation increased housing market potential by 215,000 potential home sales relative to one year ago.”  

You Can’t Buy What’s Not for Sale 

“The dominant force holding back more housing market potential in December relative to one year ago was the lack of housing supply. Housing supply in today’s housing market remains so tight and demand so strong that in the November 2021 NAR existing home sales report 83 percent of all homes listed for sale were sold within the month, with days on market at 18 days, down from 21 days in November 2020,” said Fleming. “The ongoing supply shortage continues to put upward pressure on house price appreciation as buyers compete to buy what few homes are for sale. You can’t buy what’s not for sale, but you will compete for what is.  

“The shortage of homes for sale and the increase in house price appreciation is problematic for potential first-time home buyers, who tend to be younger and do not have the equity from the sale of an existing home to bring to the closing table. Existing homeowners can use the equity from the sale of their current home to purchase a bigger or better home, if they can find one they want,” said Fleming. “Rapid house price appreciation and its differing impact on existing and first-time home buyers will persist until the supply and demand imbalance improves. In the game of housing musical chairs, it’s clear the housing market needs more chairs.”  

Underlying data revisions contributed to an update to the Potential Home Sales Model from 2018-forward. 

Next Release

The next Potential Home Sales Model will be released on February 16, 2022 with January 2022 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. © 2022 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