Rebounding Economy Strengthens Housing Market Potential Despite Unrelenting Supply Squeeze, According to First American Potential Home Sales Model

—You can’t buy what’s not for sale, even if you can afford it, 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 April 2021.

April 2021 Potential Home Sales

• Potential existing-home sales increased to a 6.31 million seasonally adjusted annualized rate (SAAR), a 1.3 percent month-over-month increase.
• This represents an 81 percent increase from the market potential low point reached in February 1993.
• The market potential for existing-home sales increased 30 percent compared with a year ago, a gain of 1,450,345 (SAAR) sales. The year-over-year comparison is very large this month as the housing market came to a halt last year at this time when the pandemic shut down the economy. Housing rebounded sharply in the summer.
• Currently, potential existing-home sales is 481,854 (SAAR), or 7.1 percent below the pre-recession peak of market potential, which occurred in April 2006.

Market Performance Gap

• The market for existing-home sales outperformed its potential by 4.4 percent or an estimated 277,400 (SAAR) sales.
• The market performance gap decreased by an estimated 16,800 (SAAR) sales between March 2021 and April 2021.

Chief Economist Analysis: House-Buying Power Drives Housing Market Potential

“Housing market potential regained strength in the month of April, according to our Potential Home Sales Model. In April, housing market potential increased 1.3 percent compared with March, and is now nearly 30 percent higher than the pandemic-driven collapse last April,” said Mark Fleming, chief economist at First American. “Relative to two years ago, housing market potential is 16.7 percent higher and will likely remain elevated as rates continue to hover near historic lows, the economy improves and puts upward pressure on wages, and millennials continue to choose home owning over renting.

“One of the primary drivers of housing market potential in April was the rise in house-buying power, which increased by $6,900 compared with the previous month, contributing to a gain of nearly 49,000 potential home sales. House-buying power is a function of changes in mortgage rates and household income, which both contributed positively this month,” said Fleming. “After increasing by 0.27 percentage points in March, mortgage rates settled back down in April, falling by 0.02 percentage points. While it may not seem like much, holding income constant at its March level, a 0.02 percentage point decline in mortgage rates increases house-buying more by $1,300.

“However, rising household income fueled the bulk of the increase in house-buying power this month. We estimate household income as a function of average hourly earnings and the average number of weekly hours worked. In April, average hourly earnings increased by 0.7 percent, considerably higher than the 2009-2020 average monthly growth rate of 0.2 percent. The number of average weekly hours worked also increased modestly in the month of April,” said Fleming. As more and more people are vaccinated and the economy strengthens further, demand for labor increases, and that puts upward pressure on wages as employers compete to attract employees, as was the case in April.”

But You Can’t Buy What’s Not for Sale

“Rising income, rates near historical lows, and higher than average savings rates bode well for home buying. Yet, you can’t buy what’s not for sale. The record low level of houses for sale makes it difficult to find the next house to buy, so sellers – who are often also prospective buyers – don’t sell for fear of not finding their next home to buy,” said Fleming. “If sellers all choose to sell, they would benefit as buyers because the inventory of homes for sale would increase and alleviate the supply shortage.

“However, the risk of selling in a market with a shortage of inventory prevents many existing homeowners from putting their homes on the market. The result is increasingly higher average tenure length, which reached a historical high of 10.56 years in April,” said Fleming. “Existing homeowners staying put accounted for more than 15,000 fewer potential home sales in April. The problem in the market today is supply. You can’t buy what’s not for sale, even if you can afford it.”

Will Summer Bring Supply Relief?

“A growing economy in the summer months has multiple implications for the housing market. Growing consumer confidence, a stronger labor market, and higher wages bode well for housing demand,” said Fleming. “While a growing economy and improving public health conditions may spur hesitant existing owners to list their homes for sale, it’s unlikely to significantly ease the super sellers’ market conditions.”

Next Release

The next Potential Home Sales Model will be released on June 21, 2021 with May 2021 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.

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. © 2021 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; banking, trust and wealth management services; and other related products and services. With total revenue of $7.1 billion in 2020, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2021, First American was named to the Fortune 100 Best Companies to Work For^® list for the sixth consecutive year. More information about the company can be found at www.firstam.com.

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