Thaw in Rates May Bring Early Start to Spring Home-Buying Season, According to First American Potential Home Sales Model

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 January 2019.

January 2019 Potential Home Sales

• Potential existing-home sales increased marginally to a 5.48 million
  seasonally adjusted annualized rate (SAAR), a 0.4 percent
  month-over-month increase.
• This represents a 63.4 percent increase from the market potential low
  point reached in February 1993.
• The market potential for existing-home sales increased by 0.8 percent
  compared with a year ago, a gain of 41,500 (SAAR) sales.
• Currently, potential existing-home sales is 1.2 million (SAAR), or
  18.5 percent below the pre-recession peak of market potential, which
  occurred in February 2005.

Market Performance Gap

• The market for existing-home sales is underperforming its potential by
  5.3 percent or an estimated 293,000 (SAAR) sales.
• The market performance gap increased by an estimated 205,000 (SAAR)
  sales between December 2018 and January 2019.

Chief Economist Analysis: Rates Down, Sales Up

“In the first month of the new year, the housing market continued to
underperform its potential, but gave us signs of promise for the future.
Actual existing-home sales are 5.3 percent below the market’s potential,
according to our Potential Home Sales model,” said Mark Fleming, chief
economist at First American. “That means the market has the potential to
support 293,000 more home sales than the current amount at a seasonally
adjusted annualized rate (SAAR).

“Supply shortages have been the primary culprit for this performance gap
– you can’t buy what’s not for sale,” said Fleming. “However, mortgage
rates declined over the last two months, causing the market potential
for home sales to rise and prompting a brighter outlook for the spring
home-buying season.”

Breaking the Rate Lock

“In 2018, rising mortgage rates and low housing supply contributed to
homeowner tenure reaching its highest
level in 18 years and a slowdown in existing-home sales. Existing
homeowners, as well as first-time home buyers, have become increasingly
`mortgage-rate sensitive’ as the housing market adjusts to rising
rates,” said Fleming. “However, in the last two months, the 30-year,
fixed-rate mortgage declined by 0.4 percent and mortgage applications
increased by 23.5
percent in January.

“The drop in mortgage rates boosted home-buying power for buyers and may
have encouraged some homeowners, who were `rate
locked-in’ by rising mortgage rates, to re-enter the market,” said
Fleming. “As a result, the market potential for existing-home sales in
January increased by 0.4 percent (20,000 home sales) from December, and
2.9 percent (156,000) from November 2018.”

Punxsutawney Phil’s (Housing) Prediction

“We’ve all heard the folklore about the groundhog coming out of his home
to `predict’ the beginning of spring – if he can see his shadow, there
will be six more months of winter; if he cannot, spring is on the way,”
said Fleming. “A few weeks ago, Punxsutawney
Phil predicted an early spring. Can that same prediction be made for
an early spring home-buying season?

“This winter, lower mortgage rates have already benefited existing
homeowners, as well as first-time buyers. At the beginning of February,
mortgage rates declined to 4.4 percent, the same level as last spring,”
said Fleming. “If rates continue at this level for the remainder of the
month, we can expect the market potential for existing-home sales to
rise 2 percent in February, compared with January, to a 5.6 million
seasonally adjusted annualized rate. In fact, if mortgage rates remain
at 4.4 percent, we expect the market potential for existing-home sales
this spring to be 7 percent higher than it was entering the 2018 spring
home-buying season.

“The housing market in 2018 was largely characterized by rising mortgage
rates preventing homeowners who already had a low mortgage rate from
entering the market, which contributed to housing supply shortages in
practically every market across the country,” said Fleming. “However,
the recent dip in mortgage rates has boosted the market potential for
home sales. If today’s mortgage rate of 4.4 percent persists, we can
expect a prediction similar to Punxsutawney Phil’s – an early arrival to
spring (home-buying).”

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 March 21, 2019
with February 2019 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. © 2019 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; banking, trust and
wealth management services; and other related products and services.
With total revenue of $5.7 billion in 2018, the company offers its
products and services directly and through its agents throughout the
United States and abroad. In 2019, First American was named to the Fortune 100
Best Companies to Work For^® list for the fourth consecutive
year. More information about the company can be found at www.firstam.com.

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