Household Formation Key Component to Growth in Housing Market Potential, According to First American Potential Home Sales Model

—The pandemic has already influenced some long-term trends, like increasing tenure and limited supply, and may soon also influence other key housing market dynamics, such as household income growth and formation, 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 June 2020.

June 2020 Potential Home Sales

  • Potential existing-home sales increased to a 4.88 million seasonally adjusted annualized rate (SAAR), a 9.2 percent month-over-month increase.
  • This represents a 39.4 percent increase from the market potential low point reached in February 1993.
  • The market potential for existing-home sales decreased 2.3 percent compared with a year ago, a loss of nearly 114,000 (SAAR) sales.
  • Currently, potential existing-home sales is 2.11 million (SAAR), or 30.2 percent below the pre-recession peak of market potential, which occurred in February 2005.

Market Performance Gap

  • The market for existing-home sales outperformed its potential by 3.8 percent or an estimated 186,850 (SAAR) sales.
  • The market performance gap decreased by an estimated 442,960 (SAAR) sales between May 2020 and June 2020.

Chief Economist Analysis: Housing Market Potential Recovers Strongly in June, Down 2.3 Percent Year Over Year

"The domestic and global economy continue to feel the pain inflicted by the coronavirus pandemic. Yet the housing industry, at least for now, is bucking the trend," said Mark Fleming, chief economist at First American. "Weekly purchase applications have surpassed their levels from one year ago for eight straight weeks, as potential buyers respond to record low mortgage rates. The market potential for existing-home sales reflects the accelerated activity, according to our Potential Home Sales Model.

"After hitting a 2020 low point in April, the market potential for existing-home sales increased in May and again in June, reaching a 4.88 million seasonally adjusted annualized rate (SAAR), 9.2 percent better than the May and only 2.3 percent lower than one year ago," said Fleming. "While the rebound in the potential for existing-home sales is good news, the recent surge in COVID-19 cases has caused many parts of the country to reverse or pause plans to reopen, posing additional risks to the economy and the housing market. Examining the dynamics that influence housing market potential provide insight into health of the housing market."

Breaking Down Housing Market Potential

"Tenure length, the average length of time someone lives in their home, has been steadily increasing for years and is one of three dynamics reducing housing market potential in June. Amid the pandemic, tenure has continued to rise and had the biggest impact on housing market potential (354,200 SAAR potential home sales) in June," said Fleming. "Economic uncertainty has caused lenders to tighten credit standards, limiting the number of home buyers that can qualify for a mortgage and contributing to a year-over-year loss of 267,000 potential home sales. In June, the lack of new home construction further contributed to the limited supply of homes for sale and resulted in a small loss of 2,450 potential home sales relative to one year ago.

"Helping offset these negative impacts to market potential are three dynamics. Record low mortgage rates have helped fuel an increase in house-buying power, contributing nearly 305,000 potential home sales. Increasing household formation and rising house prices also contributed positively, with 164,400 and 40,360 respective potential home sale gains," said Fleming. "As mortgage rates continue to set new record lows and help fuel demand against a severely limited supply of homes, we anticipate house prices will continue to rise. Household formation, while a net positive for housing market potential in June, may suffer from pandemic-related impacts in the months ahead."

More Households, More Sales

"Household formation growth boosts demand for homes, and household formation has largely been on the rise over the last decade due to millennials continuing to form households. According to a 2019 study, household formation has rebounded to more than one million per year from the 2009 low point of 534,000 reached during the Great Recession," said Fleming. "Household formation has helped boost the potential for existing-home sales this year, but research on household formation during recessions suggests there may be cause for concern.

"A study from the Federal Reserve Bank of Cleveland shows that during the Great Recession, the rate at which Americans formed households fell sharply. The study showed that younger people are less willing and able to form their own households during recessions as employment prospects are reduced," said Fleming. "Another study showed that the likelihood that a young adult will form an independent household falls by up to 4 percentage points during times of recession. We may be seeing this playout now during the pandemic as a very recent study showed that more than 1.1 million people between the ages of 23 and 30 moved back in with their parents between February and May 2020.

"Given this recession’s likely similar impact on household formation, we simulated the possible impact on the market potential home sales for June, keeping all other fundamental drivers of the potential for existing-home sales the same," said Fleming. "If the number of households falls one percent relative to one year ago, the potential for existing-home sales would fall from its current level of 4.88 million SAAR sales to 4.71 million SAAR, a change of nearly 166,000 SAAR potential home sales. The pandemic and related economic impacts may turn household formation from a tailwind to a headwind for home sales later this year."

The Good, The Bad, and the Likely

"The housing market has proven resilient in the face of the pandemic thus far. Bolstered by record low mortgage rates and demand stemming from millennials aging into their household formation years, the potential for existing-home sales has rebounded, nearing its pre-pandemic level. Yet, risks remain. House-buying power is a function of both mortgage rates and income, and the longer the labor market decline continues, the higher the risk that household incomes could fall," said Fleming. "Similarly, the rate of household formation may slow if the labor market slowdown continues or worsens. The pandemic has already influenced some long-term trends, like increasing tenure and limited supply, and may soon also influence other key housing market dynamics, such as household income growth and formation."

Note: This month’s report includes a revision to the full history of the credit index, which may result in revised PHS values.

Next Release

The next Potential Home Sales Model will be released on August 20, 2020 with July 2020 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. © 2020 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; banking, trust and wealth management services; and other related products and services. With total revenue of $6.2 billion in 2019, 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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20200716005128/en/

Contacts

Media Contact:
Marcus Ginnaty
Corporate Communications
First American Financial Corporation
(714) 250-3298

Investor Contact:
Craig Barberio
Investor Relations
First American Financial Corporation
(714) 250-5214

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting.