Tightening Supply Squeezes Market Potential, According to First American Potential Home Sales Model

—The housing supply shortage hindering the market today is likely to remain in 2018, says Chief Economist Mark Fleming—

SANTA ANA, Calif.--(BUSINESS WIRE)-- 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 November 2017.

November 2017 Potential Home Sales

• Potential existing-home sales decreased to a 5.96 million seasonally adjusted, annualized rate (SAAR), a 2.0 percent month-over-month decrease.
• This represents a 98.3 percent increase from the market potential low point reached in December 2008.
• In November, the market potential for existing-home sales decreased by 1.5 percent compared with a year ago, a loss of 93,000 (SAAR) sales.
• Currently, potential existing-home sales is 404,000 (SAAR), or 6.8 percent, below the pre-recession peak of market potential, which occurred in July 2005.

Market Performance Gap

• The market for existing-home sales is underperforming its potential by 7.3 percent or an estimated 438,000 (SAAR) sales.
• Market potential decreased by an estimated 124,000 (SAAR) sales between October 2017 and November 2017.

Chief Economist Analysis: Housing Supply Shortage to Remain in 2018

“Strong first-time homebuyer demand continues with the help of low mortgage rates. But, tight supply continues to be the biggest constraint on housing market growth. Existing homeowners are increasingly prisoners in their own homes, preventing additional existing-home supply from entering the market. Homebuilders are also struggling to add more new home inventory, so both sources of housing supply face challenges,” said Mark Fleming, chief economist at First American. “The housing supply shortage hindering the market today is likely to remain in 2018.”

Additional Quotes from Chief Economist Mark Fleming

• “The housing market’s potential for existing-home sales decreased moderately between October 2017 and November 2017. The decrease was driven by a reduction in the expectation for future supply, even as mortgage rates, which remained below 4 percent for the sixth consecutive month, fuel demand.”
• “Both sources of future housing supply, new homebuilding and existing homes, are not meeting market demand. The pace of new homebuilding faces headwinds. At the same time, the fear of not being able to find a home to buy is preventing homeowners from putting their homes on the market, as more homeowners are increasingly prisoners in their own homes. The number of homes for sale has declined on a year-over-year basis for the past 39 consecutive months.”
• “The housing market has been underperforming its potential since May, although the market performance gap improved this month relative to the 12-month peak in the market performance gap measured in October.”
• “The supply of homes for sale nationally has fallen 7.5 percent from a year ago, and homes are selling 8.5 percent faster than a year ago, according to Realtor.com.”
• “The lack of inventory relative to demand is driving the fast pace of price appreciation. While rates have remained low and kept consumer house-buying power strong, the strength of house-buying power is not enough to offset rising prices, so affordability has suffered.”
• “According to the First American Real House Price Index, affordability is down 8.0 percent in September compared to a year ago and declining in all markets tracked by First American.”

What Insight Does the Potential Home Sales Model Reveal?

“When considering the right time to buy or sell a home, an important factor in the decision should be the market’s overall health, which is largely a function of supply and demand. Knowing how close the market is to a healthy level of activity can help consumers determine if it is a good time to buy or sell, and what might happen to the market in the future. That’s difficult to assess when looking at the number of homes sold at a particular point in time without understanding the health of the market at that time,” said Fleming. “Historical context is critically important. Our potential home sales model measures what home sales should be based on the economic, demographic, and housing market environments.”

Next Release

The next Potential Home Sales model will be released on January 23, 2018 with December 2017 data.

About the Potential Home Sales Model

Background information on the First American Potential Home Sales model is available here.

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. © 2017 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; and banking, trust and investment advisory services. With total revenue of $5.6 billion in 2016, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2016 and again in 2017, First American was named to the Fortune 100 Best Companies to Work For^® list. More information about the company can be found at www.firstam.com.

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Source: First American Financial Corporation