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 for the month of January 2018.
Chief Economist Analysis: Housing Market Performance Gap Narrows, but Remains Below Potential
“In January, the market potential for existing-home sales increased to a 6.1 million seasonally adjusted annualized rate (SAAR), a 0.4 percent month-over-month increase, and a gain of 210,000 (SAAR) sales from January 2017,” said Mark Fleming, chief economist at First American. “The gap between actual market performance (existing-home sales) and market potential (potential home sales) has significantly narrowed as actual existing-home sales have surged in recent months. Nonetheless, the housing market is still underperforming its potential.
“According to our Potential Home Sales model, the increase in market potential this month is fueled by faster economic growth, low unemployment and continued low mortgage rates. The Federal Reserve (Fed) did not hike rates this month, however, the CME Group FedWatch views future rate hikes as nearly certain,” said Fleming. “In fact, just the expectation of future Fed rate hikes has actually pushed interest rates higher. The 30-year, fixed-rate mortgage rate increased to 4.32 percent last week, up 40 basis points from the beginning of the year. This is the fourth consecutive week of rising rates.”
Impact of Rising Rates on Housing Market Potential
“The consensus among economists is that 30-year, fixed-rate mortgages will approach 5 percent by the end of the year. Rising mortgage rates typically reduce the affordability of housing, as it means the cost of borrowing increases,” said Fleming. “So, the question is: how much will rising interest rates impact the amount of home sales?
“Our Potential Home Sales model forecasts what the market potential for home sales should be given current economic, demographic, and housing market environments. Potential home sales, while currently at a level of 6.1 million SAAR, are expected to reach an estimated 6.29 million SAAR by the end of 2019, despite a rising rate environment,” said Fleming. “However, while the yearly growth rate in potential sales is currently at 3.6 percent, it is expected to slow to just below 1 percent by the end of 2019.
“Historically, a 30-year, fixed-rate mortgage of 5 percent is still a very low rate. In fact, the mortgage rate has been greater than 5 percent in 38 of the last 46 years, so it is unlikely that large numbers of home buyers will be dissuaded by a modest increase in mortgage rates,” said Fleming. “There are a variety of reasons why people buy homes that are completely independent of mortgage rates. A gradual rise in mortgage rates won’t change that.”
What Insight Does the Potential Home Sales Model Reveal?
“When considering the right time to buy or sell a home, an important factor in the decision should be the market’s overall health, which is largely a function of supply and demand. Knowing how close the market is to a healthy level of activity can help consumers determine if it is a good time to buy or sell, and what might happen to the market in the future. That’s difficult to assess when looking at the number of homes sold at a particular point in time without understanding the health of the market at that time,” said Fleming. “Historical context is critically important. Our potential home sales model measures what home sales should be based on the economic, demographic, and housing market environments.”
The next Potential Home Sales Model will be released on March 20, 2018 with February 2018 data.
About the Potential Home Sales Model
Background information on the First American Potential Home Sales Model is available here.
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. © 2018 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 total revenue of $5.8 billion in 2017, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2016, 2017 and again in 2018, First American was named to the Fortune 100 Best Companies to Work For® list. More information about the company can be found at www.firstam.com.