Rising Rates Outweigh Impact of Strong Economy, 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 October 2018.

October 2018 Potential Home Sales

• Potential existing-home sales increased to a 6.04 million seasonally adjusted annualized rate (SAAR), a 0.5 percent month-over-month increase.
• This represents a 61.7 percent increase from the market potential low point reached in February 2011.
• The market potential for existing-home sales decreased by 0.4 percent compared with a year ago, a loss of 24,600 (SAAR) sales.
• Currently, potential existing-home sales is 1.25 million (SAAR), or 17.1 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 6.5 percent or an estimated 391,600 (SAAR) sales.
• The market performance gap decreased by an estimated 64,800 (SAAR) sales between September 2018 and October 2018.

Chief Economist Analysis: It’s Not the Economy, Stupid

“While the housing market continues to underperform its potential by 6.5 percent, the gap between actual existing home sales and the market potential for home sales narrowed by 1 percent in October compared with September, according to our Potential Homes Sales model,” said Mark Fleming, chief economist at First American. “The housing market has the potential to support more than 391,000 additional home sales at a seasonally adjusted annualized rate (SAAR).

“The primary culprit for the housing market’s performance gap remains severe supply shortages – home buyers can’t buy what’s not for sale,” said Fleming. “While the discussion of rising mortgage rates tends to focus on their impact on the buyer’s affordability, rising mortgage rates create a financial disincentive for existing homeowners with low mortgage rates from selling their homes. This phenomenon impacts both sides of the supply and demand dynamic – those who don’t sell, don’t buy either.

“The U.S. economy is experiencing its second longest economic expansion in history. Gross domestic product in the third quarter of 2018 increased by 3.5 percent, which exceeded economists’ predictions of 2 percent,” said Fleming. “Additionally, the economy has added jobs every month for 97 straight months, unemployment is at 49-year lows, and wages are growing at their fastest rate in nine years.