Housing Market Nears Potential, but Supply Shortage Continues, 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 December 2017.

December 2017 Potential Home Sales

• Potential existing-home sales decreased to a 5.99 million seasonally adjusted annualized rate (SAAR), a 0.2 percent month-over-month decrease.
• This represents a 99.2 percent increase from the market potential low point reached in December 2008.
• The market potential for existing-home sales increased by 1.4 percent compared with a year ago, a gain of 82,000 (SAAR) sales.
• Currently, potential existing-home sales is 375,000 (SAAR), or 6.3 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 2.0 percent or an estimated 122,000 (SAAR) sales.
• Market potential decreased by an estimated 1,000 (SAAR) sales between November 2017 and December 2017.

Chief Economist Analysis: Supply Shortage Still Sapping Market Potential

“Faster economic growth, a healthy stock market, low unemployment and low mortgage rates are fueling substantial home-buying demand. The pace of actual existing-home sales has surged in recent months and significantly narrowed the gap between actual market performance and market potential. Nonetheless, the market is still underperforming its potential. Existing-home sales have been restrained by an increasingly concerning shortage of properties for sale, which puts upward pressure on house prices,” said Mark Fleming, chief economist at First American. “The shortage of homes for sale will likely continue in 2018 and continue to push prices higher.”

Additional Quotes from Chief Economist Mark Fleming

• “The housing market’s potential for existing-home sales remained essentially unchanged between November 2017 and December 2017. The two main reasons for the lack of movement in market potential are the expectation for future supply also remained flat compared with November, as indicated by the rate of authorized building permits in the Census Bureau’s latest report, and mortgage rates remained below 4 percent for the seventh consecutive month. In other words, the housing supply shortage is unlikely to change, while home-buying demand, aided by low interest rates, remains strong.”
• “As millennial demand continues to strengthen in 2018, new homebuilding and sales listings for existing homes will struggle to keep up. 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 supply of homes for sale nationally has fallen 9.0 percent from a year ago, and homes are selling 7.0 percent faster than a year ago, according to Realtor.com.”
• “The median number of days on market in December reached 83 days, and properties sold in six fewer days than this time last year – even as prices continued to climb year over year, according to Realtor.com.”
• “As a result, according to the First American Real House Price Index, affordability is down 8.6 percent in November, compared with a year ago and declining in all markets tracked by First American.”

What Insight Does the Potential Home Sales Model Reveal?