SANTA ANA, Calif.--(BUSINESS WIRE)--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 (previously called the Existing-Home Sales Capacity model) for the month of December 2015, which provides a gauge on whether existing-home sales are under or over their long-run potential level based on current market fundamentals. For December, the model showed that the market potential for existing-home sales increased by 0.5 percent compared to November and decreased by 5.1 percent compared to a year ago.
According to the model, the seasonally adjusted, annualized rate (SAAR) of potential existing-home sales is up 78.1 percent from the low point reached in February 2009*. The rate of potential home sales in the model increased by 26,000 (SAAR) in December. The potential home sales rate is down 631,000 (SAAR) from the most recent peak in February 2014.
The model’s current underperformance gap is an estimated 902,000 (SAAR), which is significantly less than the sales potential gap of 1.8 million existing-home sales in February 2014.
Chief Economist Analysis: Winter Home Sales Woes
Last month, the National Association of Realtors (NAR) reported a significant drop in existing-home sales from 5.32 million (SAAR) in October to 4.76 million (SAAR) in November, a decline of 10.5 percent month over month. This month-over-month drop also implied a year-over-year decline of 3.8 percent.
“This is not the first time that we have seen a significant decline in existing-home sales between October and November. In fact, this is the third year in a row this has occurred. What’s unique about the decline this time is the increased magnitude of the month-over-month drop,” said Mark Fleming, chief economist, First American. “In addition to the winter home sales woes we have seen in the past two years, the additional decline is being attributed to delayed closings caused by the implementation of the Know-Before-You-Owe rule. Pending Home Sales, which measures contract signings and is a leading indicator of actual sales in the subsequent month, strongly indicates that existing-home sales will rebound in December as the delayed closing of signed contracts in November come to fruition in December.
“While actual existing-home sales adjust to regulatory requirements, our model of market potential remained very stable month-over-month and indicates that the market has the potential, given fundamental market conditions, for significantly more sales activity than is currently observed,” said Fleming. “After all the trepidation about the impact of an increase in the Federal Fund Rate announced last month by the Federal Reserve, long-term mortgage rates started the year below 4 percent. Rates are expected to remain below 5 percent through the end of this year, even as the Fed is likely to further increase their short-term Federal Fund rate. The modest forecasted mortgage rate increase over the course of the year will not significantly reduce the purchasing power of borrowers financing their home purchases.
“In addition, the slow expected increases in mortgage rates, steady modest growth in incomes, increasing household formation, and slowing price appreciation all indicate that market potential in 2016 is likely to remain in the 5.5 to 6 million (SAAR) existing-home sales range,” Fleming added. “In fact, price growth in particular is expected to slow from a rate of 6 percent year-over-year at the end of 2015 to a rate of approximately 3.5 percent year-over-year at the end of 2016. The decline in the pace of appreciation is a positive for first-time homebuyers, as it further reduces the gap between housing asset growth and income growth – a gap that cannot be indefinitely sustained as rates increase.
“Regulatory shock aside, the existing-home market should benefit in 2016 from an environment marked by continued low rates, strong purchasing power, slowing price appreciation and continued economic improvement. The winter home sales woes of late last year are not an indication of any structural change in market potential, but a temporary shock that will be quickly forgotten,” said Fleming.
*Previous Potential Home Sales releases referred to November 2011 as the low point of sales. The model used to generate existing-home sales potential has been enhanced to more accurately reflect the dynamic relationships between sales, prices, interest rates and the user-cost of housing, resulting in a model that more accurately reflects past conditions.
Next Release
The next Potential Home Sales model will be released on February 18, 2016 with January 2016 data.
About the Potential Home Sales Model
Background information on the First American Potential Home Sales model (previously called the Existing-Home Sales Capacity model) is available here.
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. © 2016 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; and banking, trust and investment advisory services. With revenues of $4.7 billion in 2014, the company offers its products and services directly and through its agents throughout the United States and abroad. More information about the company can be found at www.firstam.com.
