Rising Rates Shouldn’t Slow Down Spring Home-Buying Season, Says America’s First Potential Home Sales Model

SANTA ANA, Calif .– () –America’s leading financial company (NYSE: FAF), a leading global provider of title insurance, settlement services and risk management solutions for real estate transactions, today released First American’s proprietary model of potential home sales for the month of February 2021 .

Potential home sales in February 2021

  • Potential existing home sales increased at a seasonally adjusted annualized rate (SAAR) of 6.26 million, a 1.3% increase month over month.

  • This represents an increase of 79.6% from the potential market low reached in February 1993.

  • The market potential for existing home sales increased 12.2% from a year ago, a gain of 682,900 sales (SAAR).

  • Currently, potential sales of existing homes are 530,350 million (SAAR), 7.8% below the peak of pre-recession market potential, which occurred in April 2006.

Market performance gap

  • The existing home sales market exceeded its potential by 3.9%, or around 243,600 sales (SAAR).

  • The market performance gap increased by approximately 99,000 sales (SAAR) between January 2021 and February 2021.

Chief Economist’s Analysis: Housing Market Potential Reaches Highest Level Since 2007

“In February 2021, the potential of the housing market reached its highest level since 2007, despite the largest monthly increase in mortgage rates since October 2019. The potential of the housing market increased by 1.3% in February compared with in the previous month and 12.2% last year. – over the year, ”said Mark Fleming, chief economist at First American. “While the increase in the average tenure has been the main drag on the potential of the housing market this month, the increase in the purchasing power of housing still on the rise, more flexible credit standards and a strong formation of households exceeded the negative impact of a limited supply, both new and existing. As we enter the home buying season in the spring, this momentum is poised to support the continued strength of the housing market. ”

The good: millennials reach prime age for buying homes with record purchasing power

  • Demographics: “While mortgage rates rose a modest 0.08 percentage point in February, home purchasing power was slightly higher this month thanks to an increase in median household income. Yet larger gains in market potential have come from household formation. The month-over-month growth in household formation contributed to nearly 13,000 potential home sales, ”Fleming said. “Buying a home is not just a financial choice, but also a lifestyle choice. Millennials are reaching their peak of home buying in large numbers and have probably been considering buying a home for some time. A slight increase in rates may cause some millennials to adjust their prices, but that won’t necessarily deter them from buying a home. ”

The bad: you can’t buy what isn’t for sale

  • Lock rate: “Most existing homeowners have mortgages at historically low rates, and there is little incentive to sell if it costs them more each month to borrow the same amount of money,” Fleming said. “Although rates are only slightly higher today than the lowest rate of 2.68% in December of last year, this increase may still leave existing homeowners feeling ‘fixed by the rates,’ dissuading them from selling their house and preventing a bigger offer from reaching the market. ”
  • The current owner’s dilemma: “The other supply constraint is rooted in the uniqueness of the housing market. In most markets, the seller makes the decision to add supply to the market independently of the buyer. Yet in the housing market, the seller and the buyer are, in many cases, the same person – the current owner. To buy a new home, you also have to sell the home you already own and then find a home you prefer, ”Fleming said. “Every home is different, an almost perfectly heterogeneous product, so when the supply is limited like in the market today, it becomes difficult to find a better home than the one you already own. The current owner is faced with the dilemma of whether or not to sell when they are worried that they will not be able to find something to buy.
  • Lack of new construction: “One way to solve the supply problem is to build new houses, but headwinds of construction have limited the ability of home builders to build enough homes to meet housing demand, ”Fleming said.

The Maybe: The Positive Impacts of Equity Growth and Loosening Credit

  • Home equity: “The current owners are sitting on record equity amounts. As homeowners gain equity in their homes, the temptation grows to list their current home for sale and use the equity to buy a larger or more attractive home, if they can find one for sale. Fleming said. “The appreciation in home prices in January contributed to about 34,000 potential home sales in February, but remains uncertain in the days to come. While homeowners may want to use their equity to buy something bigger and better, they need to find something to buy first.
  • Credit: “The other ‘maybe’ is credit because the future of credit critically depends on the health of the economy. At the start of the pandemic, the credit crunch was the biggest contributor to the loss of potential home sales, as lenders tightened their credit criteria to account for a higher probability of forbearance and delinquency, ”Fleming said. “In February, credit standards eased on positive economic news and had the biggest positive impact on the potential of the housing market month over month, contributing to 41,000 potential home sales. The economic recovery is about to strengthen, but some uncertainties remain. ”

But the most likely scenario is …

“All factors considered, the market potential for existing home sales remains well positioned to continue to increase. The economy will likely continue to improve as vaccine roll-out accelerates. With higher vaccination rates, consumer and lender confidence will increase and the job market will be stronger, ”said Fleming. “Even if mortgage rates continue to rise, increased household formation, combined with more favorable market conditions, will maintain strong demand for home purchases. In addition, the recent increase in housing starts means home builders get new construction projects right, which will help alleviate some of the long-term supply shortage. But now? Expect continued strong demand and limited supply, which means the spring home buying season will unfold at a selling speed never seen before. ”

Next version

The next potential home sales model will be released on April 20, 2021 with data for March 2021.

About the Potential Home Sales Model

Potential home sales measures existing home sales, which include single-family homes, townhouses, condominiums, and co-ops on a seasonally adjusted annualized rate based on the historical relationship between existing home sales and population demographics. US population, purchasing power in the US economy, price trends in the US real estate market, and financial market conditions. When the actual level of existing home sales is significantly higher than potential home sales, the pace of sales is not supported by market fundamentals and there is an increased likelihood of a market correction. Conversely, annualized and seasonally adjusted rates of actual sales of existing homes below the level of potential sales of existing homes indicate that market turnover is below the rate fundamentally supported by current conditions. Seasonally adjusted, annualized existing home sales may exceed or be below the potential sale rate for a variety of reasons, including non-traditional market conditions, political constraints, and the behavior of market participants. Recent estimates of potential home sales are subject to revision to reflect the most recent information available on the economy, housing market and financial conditions. The potential home sales model is released each month before the National Association of Realtors Existing Home Sales Report.

Disclaimer

The opinions, estimates, forecasts and other views contained on this page are those of the Chief Economist of First American, 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 and useful information, they do not guarantee that the information is accurate, up to date, or fit for a particular purpose. © 2021 by First American. The information on this page can be used with appropriate attribution.

About First American

First American Financial Corporation (NYSE: FAF) is a leading provider of title insurance, settlement services and risk management solutions for real estate transactions with a heritage dating back to 1889. First American also provides title factory management services; title and other records and images of real estate; assessment products and services; home warranty products; banking, trust and wealth management services; and other related products and services. With total sales of $ 7.1 billion in 2020, the company offers its products and services directly and through its agents in the United States and abroad. In 2020, First American was appointed to Fortune 100 best companies to work for® list for the fifth consecutive year. You can find more information about the company at www.firstam.com.

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