—Like the “taper-tantrum” in 2013, rising mortgage rates will cool market potential for home sales and dampen home price appreciation in 2017, although not as severely, says Chief Economist Mark Fleming—

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 November 2016.

November 2016 Potential Home Sales

• Potential existing-home sales increased to a 6.1 million seasonally adjusted, annualized rate (SAAR).
• This represents a 103.5 percent increase from the market potential low point reached in December 2008.
• In November, the market potential for existing-home sales grew by 4.0 percent compared with a year ago, an increase of 233,000 (SAAR) sales.
• Currently, potential existing-home sales is 98,000 (SAAR) or 1.6 percent below the pre-recession peak of market potential, which occurred in July 2005.

Market Performance Gap

• The market for existing-home sales is underperforming its potential by 8.4 percent or an estimated 515,000 (SAAR) of sales.
• Last month’s revised underperformance gap was -8.6 percent or 526,000 (SAAR) sales.

Chief Economist Analysis: Tight Inventories Keeping Market Under Potential, Rising Mortgage Rates are Expected to Cool Potential Home Sales into 2017

“The market potential for existing-home sales continues to grow based on the strength of the broader economy, particularly wage growth, as well as improving access to credit. But, the market continues to underperform its potential, primarily a result of persistently tight inventory,” said Mark Fleming, chief economist at First American. “The post-election ‘Trump Bump’ in long-term U.S. treasury yields that triggered mortgage rates to rise above 4 percent, as well as the increase in the Federal Funds rate last week, will likely have a modest cooling impact on potential home sales heading into 2017.

“While rising rates reduce affordability for potential first-time homebuyers, the expected moderation of price appreciation will align house price growth more closely with recently increasing income growth to help offset reduced affordability in the year ahead,” said Fleming.

Additional Quotes from Chief Economist Mark Fleming

• “According to the National Association of Realtors, existing-home sales grew 2.0 percent between September and October to 5.6 million (SAAR). Market gains remain broad-based, as the growth in sales was again seen across all four Census Regions.”
• “As we discussed in a post earlier this month, the post-election increase in mortgage rates, while not yet impacting sales activity, is expected to slow the pace of existing-home sales and house price appreciation in 2017.”
• “Home price appreciation is typically more sensitive to mortgage rate increases and I expect to see a decline in the house price growth rate of almost a full percentage point by the end of 2017.”
• “The ‘taper-tantrum’ in 2013, which was a larger increase in mortgage rates than we have seen in recent weeks, produced a similar result – a decline in sales activity, but a more pronounced decline in house price appreciation.”

What Insight Does the Potential Home Sales Model Reveal?

“When considering the right time to buy or sell a home, an important factor in the decision should be the market’s overall health, which is largely a function of supply and demand. Knowing how close the market is to a healthy level of activity can help consumers determine if it is a good time to buy or sell, and what might happen to the market in the future. That’s difficult to assess when looking at the number of homes sold at a particular point in time without understanding the health of the market at that time,” said Fleming. “Historical context is critically important. Our potential home sales model measures what we believe a healthy market level of home sales should be based on the economic, demographic, and housing market environments.”

Next Release

The next Potential Home Sales model will be released on January 23, 2017 with December 2016 data.

About the Potential Home Sales Model

Background information on the First American Potential Home Sales model is available here.

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. © 2016 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; and banking, trust and investment advisory services. With revenues of $5.2 billion in 2015, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2016, First American was recognized by Fortune^® magazine as one of the 100 best companies to work for in America. More information about the company can be found at www.firstam.com.

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Source: First American Financial Corporation