—Build it and the homebodies just might buy it and provide welcome supply to the housing market, says Chief Economist Mark Fleming—
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 2020.
January 2020 Potential Home Sales
- Potential existing-home sales increased to a 5.36 million seasonally adjusted annualized rate (SAAR), a 1.4 percent month-over-month increase.
- This represents a 59.7 percent increase from the market potential low point reached in February 1993.
- The market potential for existing-home sales increased by 4.7 percent compared with a year ago, a gain of 240,050 (SAAR) sales.
- Currently, potential existing-home sales is 1.37 million (SAAR), or 20.3 percent below the pre-recession peak of market potential, which occurred in March 2004.
Market Performance Gap
- The market for existing-home sales outperformed its potential by 1.0 percent or an estimated 53,900 (SAAR) sales.
- The market performance gap decreased by an estimated 14,400 (SAAR) sales between December 2019 and January 2020.
Chief Economist Analysis: Demand Soars, Supply Sinks
"The housing market started the year off strong, with the market potential for existing-home sales reaching its highest level since January 2018, according to our Potential Home Sales Model," said Mark Fleming, chief economist at First American. "Housing market potential increased 1.4 percent in January 2020 relative to the previous month, and grew 4.7 percent year over year, an increase of 240,050 potential existing-home sales and the highest rate of yearly growth since December 2017. Actual existing-home sales exceeded housing market potential by 1.0 percent, or an estimated 53,900 seasonally adjusted annualized sales.
"The growth in market potential for existing-home sales was primarily fueled by positive market demand dynamics. In 2020, 4.8 million millennials will turn 30 – the peak age for home-buying. They’re fortunate to be entering the housing market at a time of historically low mortgage rates and a strong economy. However, there are challenges," said Fleming. "Millennials face a very limited supply of existing homes available for sale, especially homes in the entry-level price range. In January, the positive impact from market demand outweighed the negative impact of limited supply, boosting housing market potential relative to one year ago."
Lower Rates and Wage Growth Boost Affordability
"The primary reason for increased housing market potential compared with one year ago was increased house-buying power, how much home one can afford to buy given household income and the prevailing mortgage rate. In January, after three months of slightly increasing mortgage rates, the 30-year, fixed-rate mortgage declined to 3.6 percent, 0.8 percentage points lower than one year ago," said Fleming. "At the same time, the healthy labor market continued to boost wage growth, contributing to a 2.6 percent increase in household income. Low mortgage rates and income growth triggered a 13.5 percent increase in house-buying power compared with a year ago. This increase in house-buying power had the greatest impact on housing market potential in January, boosting market potential by 343,250 potential home sales."
New Household Growth Boosts Demand for Homes
"According to recent estimates, 1.65 million new households were formed between December 2018 and December 2019. As more new households are formed, demand for housing rises," said Fleming. "The increase in household formation enhanced market potential by 103,380 potential home sales in January compared with last year."
End of Year Housing Supply Relief
"While the construction of new homes, specifically much needed single-family homes, remains below what is needed to satisfy demand, homebuilding took a sharp turn higher at the end of 2019," said Fleming. "As new housing supply enters the market, the risk of not being able to find something to buy lessens, so homeowners may become more confident in the decision to sell their existing home. Compared with last year, the addition of new supply increased housing market potential by a modest 248 potential home sales."
Homebodies Holding Back Market Potential
"The lack of existing homes available for sale is the most significant hindrance to housing market potential. Interestingly, the same dynamic that’s making homes more affordable is preventing more supply from entering the market. Persistently low mortgage rates can discourage existing homeowners from selling," said Fleming. "The majority of homeowners already have a low mortgage rate because there has been ample opportunity to refinance to lower rates over the last decade. So, for a homeowner with a low mortgage rate, the only house-buying power advantage comes from household income growth. Many homeowners decide to ‘stay put,’ as observed by rising average tenure length, and the inventory of homes for sale dwindles further.
"The aging of the U.S. population has also contributed to rising tenure length as many aging silent generation, baby boomer and Generation X homeowners decide to remain in their existing homes," said Fleming. "More than half of all existing homes are owned by baby boomers and the silent generation, and they are choosing not to sell and consequently not buy either.
"While the year-over-year growth of tenure length slowed in January 2020, it is still 8.0 percent higher than one year ago," said Fleming. "The increase in tenure length had the only negative impact on housing market potential this month, reducing it by 376,110 potential home sales compared with one year ago."
Should We Expect More Good News for Housing in 2020?
"Housing demand is expected to grow in 2020, as millennials continue to form new households and mortgage rates remain below 4 percent. Additionally, wage growth driven by a strong labor market will continue to support house-buying power growth," said Fleming. "While it’s unlikely that tenure length will decline significantly in a low and unchanging mortgage rate environment, additional new housing supply can incentivize existing homeowners to move. Build it and the homebodies just might buy it and provide welcome supply to the housing market."
The next Potential Home Sales Model will be released on March 19, 2020 with February 2020 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. © 2020 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 $6.2 billion in 2019, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2020, First American was named to the Fortune 100 Best Companies to Work For® list for the fifth consecutive year. More information about the company can be found at www.firstam.com.
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