First American Financial Corporation (NYSE: FAF), a Santa Ana-based provider of title insurance, settlement services and risk solutions for real estate transactions, was out Tuesday with its proprietary Potential Home Sales Model for the month of July 2018 that shows the housing market continues to underperform its potential.
According to the model:
- Potential existing-home sales increased to a 6.08 million seasonally adjusted annualized rate (SAAR), a 0.3% month-over-month increase.
- This represents a 62.8% increase from the market potential low point reached in February 2011.
- The market potential for existing-home sales increased by 3.5%compared with a year ago, a gain of 208,900 (SAAR) sales.
- Currently, potential existing-home sales is 1.21 million (SAAR), or 16.6% below the pre-recession peak of market potential, which occurred in July 2005.
- The market for existing-home sales is underperforming its potential by 5.8% or an estimated 352,000 (SAAR) sales.
- The market performance gap decreased by an estimated 75,000 (SAAR) sales between June 2018 and July 2018.
- “The U.S. economy remains on an impressive growth streak. Last month, the Commerce Department reported that the gross domestic product, the broadest measure of goods and services produced in the economy, grew at a 4.1% annualized rate in the second quarter, the strongest pace of growth since 2014,” said Mark Fleming, chief economist at First American. “The economy has added jobs every month for 94 consecutive months, producing the lowest unemployment rate since 2000.
“However, in spite of the macro-economic momentum, the housing market continued to underperform its potential in July. Actual existing-home sales are 5.8 percent below the market potential for existing-home sales, according to our Potential Home Sales model, which estimates the expected level of existing-home sales based on market fundamentals,” said Fleming. “The market for existing-home sales is underperforming its potential by an estimated 352,000 sales at a seasonally adjusted annualized rate (SAAR). Existing-home sales, which make up approximately 90 percent of U.S. home sales, continue to disappoint in 2018, despite what was likely the strongest period of economic growth since 2014.
“The housing market is moving at an exceptional rate these days. According to data from DataTree by First American, the median sale price of a home in the U.S. was approximately $230,000 in June – the highest since 2007,” said Fleming. “Additionally, the average home was sold in 54 days in June, a new record according to Realtor.com. Despite the terrific economic backdrop and a hot housing market, home sales remain below their market potential. Why could this be?
“Our research shows that rising rates, especially when they are still historically low, don’t significantly discourage home buyers, but evidence is growing that indicates rising rates do influence the home sellers. Rising rates reduce the incentive for current homeowners to sell their homes. There are limited reasons to sell when, due to higher mortgage rates, it will cost you more each month just to borrow the same amount from the bank,” said Fleming.
“Additionally, existing homeowners are hesitant to sell their homes as they are afraid that they will not be able to find a home to buy,” said Fleming. Home sales are being stifled by a shortage of homes on the market. The game of musical chairs that is the housing market today needs more chairs.”
“Home building, as a source of new supply, is crucial to solving the housing supply shortage. Home builders don’t have existing mortgages or the fear of not being able to find something to buy. Additional supply, particularly of new entry-level homes to meet the needs of the first-time buyers who remain interested in buying even as rates increase, is critical to satisfy the rising demand for housing,” said Fleming. “If existing homeowners remain hesitant to list their homes for sale, then increasing the pace of new home construction is necessary to alleviate the supply shortage that the housing market faces today.”
