—While the economy may be taking a ‘Delta dip,’ the unexpected burst of increased house-buying power has boosted housing market potential, 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 August 2021.

August 2021 Potential Home Sales

• Potential existing-home sales increased to a 6.40 million seasonally adjusted annualized rate (SAAR), a 0.05 percent month-over-month increase.
• This represents an 83.5 percent increase from the market potential low point reached in February 1993.
• The market potential for existing-home sales increased 9.9 percent compared with a year ago, a gain of 575,700 (SAAR) sales.
• Currently, potential existing-home sales is 392,200 (SAAR), or 5.8 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 6.4 percent or an estimated 407,600 (SAAR) sales.
• The market performance gap increased by an estimated 92,500 (SAAR) sales between July 2021 and August 2021.

Chief Economist Analysis: Housing Market Potential Up Nearly 10 Percent Year Over Year

“Housing market potential continued to strengthen in August, according to our Potential Home Sales Model, increasing 0.05 percent compared with July,” said Mark Fleming, chief economist at First American. “The market potential for existing-home sales is now nearly 10 percent higher than in August of 2020, when the housing market’s summer rebound was ramping up following the initial pandemic-driven decline in the spring.

“This past year has shown us that the economy follows the path of COVID-19, and that was evident in August’s labor market data. The labor market recovery stalled, as the resurgent pandemic discouraged workers from re-entering the labor force,” said Fleming. “Additionally, consumer confidence fell to a six-month low as worries about rising COVID-19 infection rates weighed on consumers’ outlook for the economy. But is increased economic uncertainty bad news for housing market potential? Not necessarily.”

Uncertainty Boosts House-Buying Power

“In August, house-buying power increased 0.9 percent compared with July due to a 0.03 percentage point decrease in the 30-year, fixed mortgage rate and a 0.5 percent increase in median household income. Lower than anticipated labor force participation, combined with increased demand for labor, is increasing the pace of wage growth,” said Fleming. “The month-over-month jump in household income contributed to a $2,800 increase in house-buying power. Additionally, the decline in mortgage rates contributed to a $1,700 increase in house-buying power in August. The total $4,500 increase in house-buying power boosted market potential by approximately 19,000 potential home sales.

There Are Still Forces Pushing Back

• Tightening Credit: “A downside of increased economic uncertainty that directly impacts housing is the potential for tightening credit conditions. When lending standards are tighter, fewer people can qualify for a mortgage, dampening first-time home buyer demand and increasing the likelihood that some homeowners stay in their current homes because they are ineligible for a new mortgage,” said Fleming. “In August, while credit conditions remained looser than average, they did tighten relative to July. Tighter credit conditions reduced potential home sales by approximately 54,000 compared with one month ago.”

• Lack of Supply: “The average length of time someone lives in their home increased in August relative to July, trimming housing market potential by over 7,000 potential home sales,” said Fleming. “While low mortgage rates can spur home-buying demand by reducing the monthly cost of a mortgage and increasing house-buying power, many existing owners who have refinanced into even lower mortgages are less incentivized to move. Approximately two-thirds of all home buyers are existing homeowners, so fewer homeowners listing their homes reduces housing supply.”

It’s Complicated

“The housing market’s relationship with this pandemic economy is complicated. While heightened economic uncertainty dims consumer confidence and may result in tighter credit, it also puts downward pressure on mortgage rates,” said Fleming. “The shortage of labor supply relative to the growing demand for labor has fueled household income growth. While the economy may be taking a ‘Delta dip,’ the unexpected burst of increased house-buying power has boosted housing market potential.”

Next Release

The next Potential Home Sales Model will be released on October 17, 2021 with September 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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