Housing Market Potential Poised for Growth, According to First American Potential Home Sales Model

—Market potential will likely increase in 2021, as mortgage rates are expected to remain near 3 percent, millennials continue to form households and more existing homeowners tap their equity for the purchase of a better home, says Deputy Chief Economist Odeta Kushi—

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 2021.

January 2021 Potential Home Sales

• Potential existing-home sales increased to a 6.17 million seasonally adjusted annualized rate (SAAR), a 0.4 percent month-over-month increase.
• This represents a 77.1 percent increase from the market potential low point reached in February 1993.
• The market potential for existing-home sales increased 9.0 percent compared with a year ago, a gain of 512,083 (SAAR) sales.
• Currently, potential existing-home sales is 712,052 million (SAAR), or 10.3 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 3.0 percent or an estimated 183,790 (SAAR) sales.
• The market performance gap increased by an estimated 136,731 (SAAR) sales between December 2020 and January 2021.

Chief Economist Analysis: Housing Demand Dynamics Offset Negative Impact of Limited Housing Supply

“At the onset of 2021, positive housing market dynamics powered growth in the market potential for existing-home sales, offsetting negative market supply dynamics. Millions more millennials will age into their prime home-buying age in 2021, and they will do so at a time of historically low mortgage rates,” said Odeta Kushi, deputy chief economist at First American. “Working against them is the extremely limited supply of existing homes available for sale, especially homes priced for first-time home buyers. In January, the positives of market demand overcame the negatives of supply, fueling a boost of approximately 512,000 potential home sales relative to one year ago.”

Historically Low Rates and Wage Growth Boost Affordability

“Soaring house-buying power, how much home one can afford to buy given household income and the prevailing mortgage rate, fueled the bulk of the increase in housing market potential compared with one year ago. In January, the 30-year, fixed-rate mortgage declined to 2.7 percent, 0.9 percentage points lower than one year ago,” said Kushi. “At the same time, for those still employed, wages continued to grow. The low mortgage rates and income growth spurred an 18.9 percent increase in house-buying power compared with a year ago, boosting market potential by 363,000 potential home sales.”

Household Growth Boosts Demand for Homes

“As millennials have continued to form new households, they have also boosted demand for housing. The increase in household formation compared with a year ago increased market potential by approximately 91,000 potential home sales in January,” said Kushi. “The multi-year demographic tailwind that the housing market has experienced for the last three years remains strong and will continue throughout 2021. Indeed, a recent survey shows that millennials are prioritizing saving for homeownership over marriage or children.”

Rapid House Price Appreciation Is a Temptation That Can’t Be Resisted

“Strong demand from home buyers armed with robust buying power confronted with limited supply heightens competition and that bids up prices, fueling equity growth. As homeowners gain equity in their homes, the temptation grows to list their current home for sale and use the equity to purchase a larger or more attractive home,” said Kushi. “This partially explains why home sales in the highest price tiers experienced the greatest year-over-year growth in December, according to the most recent NAR existing-home sales report. Rising equity levels due to faster house price appreciation generated a gain of approximately 238,000 potential home sales in January. The limited supply and strong demand dynamics are expected to continue in 2021, keeping upward pressure on house prices.”

Blame the Homebodies

“The lack of existing homes available for sale remains the only drag on housing market potential. Many homeowners may want to upgrade, but do not for fear that they will be unable to find a home to buy, preventing more supply from reaching the market and exacerbating the lack of inventory,” said Kushi. “As a result, everyone ‘stays put’ and the supply of homes for sale dwindles further. Year-over-year growth of tenure length was 4.0 percent higher in January than a year ago. The increase in tenure length had the largest negative impact on housing market potential this month, reducing it by 167,000 potential home sales compared with a year ago.”

Build it and The Homebodies Just Might Buy It

Homebuilding took a sharp turn upward at the end of 2020, but the pace of new home construction, specifically much needed single-family homes, remains below what is needed to satisfy demand. As new supply enters the market, the risk of not being able to find something to buy lessens and homeowners’ confidence in the decision to sell their existing home grows,” said Kushi. “Compared with last year, the additional new home supply increased housing market potential by a somewhat negligible 340 potential home sales. Much more is needed.

“Housing market potential will likely increase in 2021, as mortgage rates are expected to remain near 3 percent, millennials continue to form households and more existing homeowners tap their equity for the purchase of a better home,” said Kushi. “While the fear of not being able to find something to buy will not disappear in a limited supply environment, new housing supply can incentivize existing homeowners to move. Build it and the homebodies just might buy it.”

Next Release

The next Potential Home Sales Model will be released on March 18, 2021 with February 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 2020, First American was named to the Fortune 100 Best Companies to Work For^® list for the fifth consecutive year. More information about the company can be found at www.firstam.com.

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