Low Mortgage Rates Fuel Rebound in Housing Market Potential, 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 May 2020.

May 2020 Potential Home Sales

• Potential existing-home sales increased to a 4.92 million seasonally adjusted annualized rate (SAAR), a 6.2 percent month-over-month increase.
• This represents a 46.5 percent increase from the market potential low point reached in February 1993.
• The market potential for existing-home sales decreased 7.0 percent compared with a year ago, a loss of nearly 368,120 (SAAR) sales.
• Currently, potential existing-home sales is 1.81 million (SAAR), or 26.9 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 11.5 percent or an estimated 565,580 (SAAR) sales.
• The market performance gap decreased by an estimated 312,204 (SAAR) sales between April 2020 and May 2020.

Chief Economist Analysis: Housing Market Potential Rebounds from April Low

“The early signs of a housing market comeback that appeared in mid-April, rising weekly purchase loan applications, continued to surge through May and into June. In fact, weekly purchase loan applications have now exceeded pre-pandemic levels,” said Mark Fleming, chief economist at First American.

“While the coronavirus pandemic continued to negatively impact the domestic and global economy in May, the market potential for existing-home sales rebounded from the April low point, according to our Potential Home Sales Model. In May, housing market potential increased to 4.92 million SAAR, a 6 percent improvement compared with April, but remained 7 percent lower than one year ago,” said Fleming. “The two biggest drivers of the increase in May are slightly loosening credit standards, which allow more potential home buyers to qualify for financing, and the increase in house-buying power due to historically low mortgage rates.

“The increase in house-buying power is also a major reason why market potential is not even lower compared with one year ago,” said Fleming. “During economic downturns, the housing market benefits in one specific way – monetary policy is usually eased to boost the economy, often leading to falling mortgage rates, which increases consumer house-buying power and makes homes more affordable. Relative to one year ago, the potential for existing-home sales declined by 368,120 (SAAR), but it could’ve been worse were it not for the house-buying power boost from low mortgage rates.”