— Lower rates boost housing market potential, but also discourage homeowners from selling and increase tenure length, says Chief Economist Mark Fleming—
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 December 2019.
December 2019 Potential Home Sales
- Potential existing-home sales increased to a 5.30 million seasonally adjusted annualized rate (SAAR), a 1.7 percent month-over-month increase.
- This represents a 57.8 percent increase from the market potential low point reached in February 1993.
- The market potential for existing-home sales increased by 2.6 percent compared with a year ago, a gain of 134,460 (SAAR) sales.
- Currently, potential existing-home sales is 1.43 million (SAAR), or 21.3 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 1.2 percent or an estimated 64,830 (SAAR) sales.
- The market performance gap decreased by an estimated 44,610 (SAAR) sales between November 2019 and December 2019.
Chief Economist Analysis: The Duality of Low Mortgage Rates
"The final month of 2019 saw actual existing-home sales exceed housing market potential by 1.2 percent, or an estimated 64,830 seasonally adjusted annualized sales," said Mark Fleming, chief economist at First American. "According to our Potential Home Sales Model, housing market potential increased 1.7 percent in December 2019 relative to the previous month, and grew 2.6 percent year over year, an increase of 134,460 potential existing-home sales.
"The growth in the market potential for existing-home sales is the net result of several forces that either boost or bash housing market potential," said Fleming. "However, one market driver is actually both a positive and a negative influence on housing market potential – persistently low mortgage rates."
Lower Rates Boost Affordability
"In December 2019, the primary driver of rising housing market potential compared with one year ago was increased house-buying power, how much home one can afford to buy given household income and the prevailing mortgage rate. House-buying power was 12.5 percent higher than a year ago," said Fleming. "This increase in house-buying power had the greatest impact on housing market potential in 2019, boosting market potential by 316,000 potential home sales.
"The house-buying power surge was driven by the combined impact of lower mortgage rates, which were 0.92 percent lower in December than they were a year ago, and a 2.4 percent increase in annual household income," said Fleming. "Clearly, lower mortgage rates result in considerable affordability gains for potential home buyers, which boost home-buying demand and, in turn, market potential."
Persistently Low Rates Increase Tenure Length, Reduce Supply
"Falling mortgage rates can help incentivize homeowners to sell their home and purchase a different home, but persistently low mortgage rates can have the opposite effect," said Fleming. "The decades-long decline in the 30-year, fixed mortgage rate, dropping from a high of 18 percent in 1981 to a low of nearly 3 percent in 2012, to just below 4 percent today, has helped prod the housing market. This long-run decline increased affordability and encouraged existing homeowners to move.
"However, the 30-year fixed-rate mortgage has hovered below 5 percent since the end of the Great Recession – nearly a decade ago! While historically low rates increase buying power and make it more affordable for potential buyers to purchase a home, they also discourage many existing homeowners from selling," said Fleming. "There is little to no house-buying power benefit for homeowners with an already low mortgage rate, so the only way existing homeowners can increase their house-buying power is through household income growth. This helps explain why more and more homeowners have decided to ‘stay put,’ reducing the inventory of homes for sale.
"As a result, tenure length (how long one stays in a home between moves) has increased dramatically. Prior to the recession, tenure length was less than six years on average. In December 2019, tenure length approached 12 years, up 8 percent compared with one year ago," said Fleming. "According to our analysis, lower rates boost housing market potential, but also discourage homeowners from selling and increase tenure length, thus reducing the supply of existing homes for sale – this is the duality of low mortgage rates."
What Does This Mean For 2020?
"Consensus among forecasters is that mortgage rates will remain below 4 percent for the next two years. Low mortgage rates and increased house-buying power will continue to boost demand, as will demographic tailwinds from millennials entering their prime home-buying years. On the other hand, those persistently low rates will discourage existing homeowners from selling, pushing up tenure length and limiting the inventory of homes available for sale," said Fleming. "However, that doesn’t necessarily mean we should expect housing market potential to decline. There are many considerations that go into one’s housing tenure decision, which could result in the desire to move. The lack of housing supply has been the norm for several years, yet the housing market has endured."
The next Potential Home Sales Model will be released on February 20, 2020 with January 2020 data.
About the Potential Home Sales Model
Potential home sales measures existing-homes sales, which include single-family homes, townhomes, condominiums and co-ops on a seasonally adjusted annualized rate based on the historical relationship between existing-home sales and U.S. population demographic data, homeowner tenure, house-buying power in the U.S. economy, price trends in the U.S. housing market, and conditions in the financial market. When the actual level of existing-home sales are significantly above potential home sales, the pace of turnover is not supported by market fundamentals and there is an increased likelihood of a market correction. Conversely, seasonally adjusted, annualized rates of actual existing-home sales below the level of potential existing-home sales indicate market turnover is underperforming the rate fundamentally supported by the current conditions. Actual seasonally adjusted annualized existing-home sales may exceed or fall short of the potential rate of sales for a variety of reasons, including non-traditional market conditions, policy constraints and market participant behavior. Recent potential home sale estimates are subject to revision to reflect the most up-to-date information available on the economy, housing market and financial conditions. The Potential Home Sales model is published prior to the National Association of Realtors’ Existing-Home Sales report each month.
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. © 2019 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; banking, trust and wealth management services; and other related products and services. With total revenue of $5.7 billion in 2018, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2019, First American was named to the Fortune 100 Best Companies to Work For® list for the fourth consecutive year. More information about the company can be found at www.firstam.com.
First American Financial Corporation
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