Historic Housing Market Rebound Sets Stage for 2021, According to First American Potential Home Sales Model

SANTA ANA, Calif.– 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 October 2020.

October 2020 Potential Home Sales

  • Potential existing-home sales decreased to a 5.98 million seasonally adjusted annualized rate (SAAR), a .06 percent month-over-month decrease.
  • This represents a 71.5 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 nearly 493,720 (SAAR) sales.
  • Currently, potential existing-home sales is 810,750 million (SAAR), or 11.9 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 0.7 percent or an estimated 40,495 (SAAR) sales.
  • The market performance gap decreased by an estimated 139,751 (SAAR) sales between September 2020 and October 2020.

Chief Economist Analysis: Housing Market’s Pandemic Rebound Fueled by Strong Fundamentals

“The housing market’s historic rebound since bottoming in the spring has been nothing short of amazing. After falling to a near-decade low in May, existing-home sales hit a 14-year high in September. In October, our measure of market potential for existing-home sales increased 9.0 percent compared with one year ago to a 5.98 million seasonally adjusted annualized rate (SAAR) of sales, nearly 21 percent higher than its low point in April of this year,” said Mark Fleming, chief economist at First American. “This is an unprecedented swing in housing market potential in just a few short months. Analyzing the individual economic forces that have driven the recovery of market potential for existing home sales can provide insight into how the housing market may fare in 2021.”

Understanding the Historic Rebound in Housing Market Potential

  • Credit Standards Loosened: “When lending standards are tight, fewer people can qualify for a mortgage to buy a home, and when homeowners are less likely to qualify for a mortgage for a new home or qualify for a low mortgage rate, they are more likely to stay in their current home. When the pandemic hit, lenders tightened their lending criteria to account for the greater likelihood of forbearance and delinquency,” said Fleming. “In October, credit loosened compared with April, when the index indicated the tightest conditions in over a decade, as the economy has partially recovered, increasing housing market potential by approximately 871,300 potential home sales.”
  • House-Buying Power Increased Nearly 8.0 Percent: “House-buying power, how much home one can afford to buy given household income and the prevailing mortgage rate, jumped 7.8 percent since April 2020. The dramatic increase in house-buying power had the second greatest impact on housing market potential, boosting market potential by nearly 154,000 potential home sales,” said Fleming. “The house-buying power surge was driven by the combined impact of lower mortgage rates, which were 0.48 percentage points lower in October than they were in April, and a 1.5 percent increase in annual household income for those still employed.”
  • Rapid House Price Appreciation: “As homeowners gain equity in their homes, they are more likely to consider using the equity to purchase a larger or more attractive home,” said Fleming. “The historic imbalance in housing supply relative to demand intensified in the summer and fall, fueling faster house price appreciation, which increased housing market potential by nearly 91,000 potential home sales in October compared with April.”
  • Household Formation Growth Continued: “Household formation continued to grow during the pandemic, largely driven by millennials, accelerating demand for housing,” said Fleming. “The increase in household formation enhanced market potential by nearly 7,000 potential home sales in October compared with April.”

The Only Economic Force that Reduced Housing Market Potential

  • Tenure Length Sets Records: “Tenure length, the average length of time someone lives in their home, continues to reach historic levels, exceeding 10 years in October, according to DataTree by First American. The increase in tenure length had the only negative impact on housing market potential compared with April, reducing it by 102,700 potential home sales,” said Fleming. “Rising tenure length means fewer and fewer people are listing their homes for sale, keeping housing supply tight. The dearth of supply is the primary constraint to housing market potential, because you can’t buy what’s not for sale.”

What Does This Mean for Market Potential in 2021?

“After hitting a low point in the spring, the housing market staged a dramatic comeback. The boost from loosening credit, along with rising house-buying power, equity and household formation, was strong enough to overcome the negative impact on housing market potential from the increase in tenure length so far in 2020,” said Fleming. “In 2021, tenure length appears poised to continue to rise, which will prolong the housing supply shortage and dampen housing market potential. Mortgage rates are anticipated to remain low and millennials are widely expected to continue to form households, boosting demand for homes.

“The trend in housing market potential will likely depend on the labor market’s recovery and how lenders adjust credit standards,” said Fleming. “Will the labor market continue to recover or weaken in the coming months as we battle the pandemic, and will any labor market weakness impact potential home buyers? If there is more uncertainty, will lenders tighten credit once more? The historic rebound in housing market potential will slow down if lenders won’t lend and consumers can’t spend.”

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