Falling Mortgage Rates Spark Increase in Housing Market Potential, According to First American Data & Analytics’ Potential Home Sales Model

Recent mortgage applications data indicates a thaw in the housing market is upon us, says Chief Economist Mark Fleming


December 18, 2023, Santa Ana, Calif.

First American Data & Analytics, a leading national provider of property-centric information, risk management and valuation solutions and a division of First American Financial Corporation (NYSE: FAF), today released First American Data & Analytics’ proprietary Potential Home Sales Model for the month of November 2023. The Potential Home Sales Model measures what the healthy market level of home sales should be based on economic, demographic and housing market fundamentals. 

November 2023 Potential Home Sales

For the month of November, First American Data & Analytics updated its proprietary Potential Home Sales Model to show that:

  • Potential existing-home sales increased to a 5.30 million seasonally adjusted annualized rate (SAAR), a 1.3 percent month-over-month increase.
  • This represents a 52.1 percent increase from the market potential low point reached in February 1993.
  • The market potential for existing-home sales increased 1.5 percent compared with a year ago, a gain of 80,000 (SAAR) sales.
  • Currently, potential existing-home sales is 1,486,400 (SAAR), or 21.9 percent, below the peak of market potential, which occurred in April 2006. 

Chief Economist Analysis: Largest Monthly Growth in Housing Market Potential in a Year

“In the month of October, existing-home sales hit the lowest level since 2010 as a result of the higher mortgage rate environment. Rising mortgage rates reduce affordability, all else held equal, for buyers and strengthen the rate lock-in effect for potential sellers. However, mortgage rates declined in November, igniting cautious optimism in the industry,” said Mark Fleming, chief economist at First American. “In fact, our Potential Home Sales Model, which measures what a healthy market for home sales should be based on the economic, demographic and housing market environments, increased by 1.3 percent in November – that’s the highest monthly growth since December 2022. The question remains: will the recent decline in mortgage rates translate into growth in existing-home sales?” 

Lower Mortgage Rates Drive the Market Forward

The average 30-year, fixed mortgage rate declined to 7.4 percent in November from a recent peak of 7.6 percent in October. The nearly 0.2 percentage-point monthly decline in mortgage rates combined with a 0.3 percent increase in median household income fueled a 2 percent ($6,500) month-over-month increase in house-buying power,” said Fleming. “Mortgage rates have fallen further in December to approximately 7 percent. Holding median household income constant at its November level, a 0.4 percentage point decline in the average 30-year, fixed mortgage rate boosts house-buying power by approximately $13,000.

“One way to project whether lower mortgage rates will result in a boost in sales is by tracking mortgage applications. Most home buyers purchase a home with a mortgage, and filling out a purchase mortgage application is an early step in the home-buying process,” said Fleming. “An increase in purchase mortgage applications, therefore, precedes an uptick in home sales as these applications reflect growing demand in the market.

“According to purchase mortgage application data from the Mortgage Bankers Association (MBA), average mortgage applications in the month of November increased 5 percent compared with October. Additionally, data from the first two weeks of December indicates a nearly 8 percent increase from November,” said Fleming. “A simple analysis based on the historical relationship between mortgage applications and existing-home sales indicates that home sales should accelerate and approach 4 million seasonally adjusted annualized sales (SAAR) as 2023 comes to a close.” 

What’s Next?

“Existing-home sales of 4 million SAAR is still low from a historical perspective, but it represents a move in the right direction. Heading into 2024, existing-home sales may continue to drift higher if mortgage rates fall further or stabilize. However, it’s unlikely that existing-home sales will increase dramatically, as the bulk of existing homeowners will remain rate locked-in, even if rates drift closer to 6 percent,” said Fleming. “The road back to a market that is not too hot, not too cold, but just right will be a slow one, but recent mortgage applications data indicates a thaw in the housing market is upon us.” 

Next Release

The next First American Data & Analytics Potential Home Sales Model will be released on January 18, 2024 with December 2023 data. 

About the First American Data & Analytics 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. © 2023 by First American. Information from this page may be used with proper attribution. 

About First American Data & Analytics

First American Data & Analytics, a division of First American Financial Corporation, is a national provider of property-centric information, risk management and valuation solutions. First American maintains and curates the industry’s largest property and ownership dataset that includes more than 8 billion document images. Its major platforms and products include: DataTree®, FraudGuard®, RegsData®, First American TaxSource™ and ACI®. Find out more about how First American Data & Analytics powers the real estate, mortgage and title settlement services industries with advanced decisioning solutions at www.FirstAmDNA.com. 

About First American

First American Financial Corporation (NYSE: FAF) is a premier provider of title, settlement and risk solutions for real estate transactions. With its combination of financial strength and stability built over more than 130 years, innovative proprietary technologies, and unmatched data assets, the company is leading the digital transformation of its industry. First American also provides data products to the title industry and other third parties; valuation products and services; mortgage subservicing; home warranty products; banking, trust and wealth management services; and other related products and services. With total revenue of $7.6 billion in 2022, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2023, First American was named one of the 100 Best Companies to Work For by Great Place to Work® and Fortune Magazine for the eighth consecutive year and was named one of the 100 Best Workplaces for Innovators by Fast Company. More information about the company can be found at www.firstam.com

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