Housing Market Dynamics Mirror the Early 1980s, According to First American Data & Analytics’ Potential Home Sales Model

10/19/2023 Hanna

The current housing market is similar to the market of the 1980s. History doesn’t repeat itself, but it often rhymes, says First American Chief Economist Mark Fleming

SANTA ANA, Calif., – First American Data & Analytics, a leading national provider of property-centric information, risk management and valuation solutions and a division of First American Financial Corporation (NYSE: FAF), released First American Data & Analytics’ proprietary Potential Home Sales Model for the month of September 2023. The Potential Home Sales Model measures what the healthy market level of home sales should be based on economic, demographic and housing market fundamentals.

September 2023 Potential Home Sales

For the month of September, First American Data & Analytics updated its proprietary Potential Home Sales Model to show that:

Potential existing-home sales decreased to a 5.37 million seasonally adjusted annualized rate (SAAR), a 0.03 percent month-over-month decrease.
This represents a 53.9 percent increase from the market potential low point reached in February 1993.
The market potential for existing-home sales increased 0.3 percent compared with a year ago, a gain of 14,700 (SAAR) sales.
Currently, potential existing-home sales is 1,424,000 (SAAR), or 21.0 percent, below the peak of market potential, which occurred in April 2006.

Chief Economist Analysis: Existing-Home Sales May Dip Below 4 Million SAAR

“The average 30-year, fixed mortgage rate trended upward throughout September, approaching 8 percent in early October. Higher mortgage rates have a dual impact on the housing market – reducing affordability for buyers and strengthening the rate lock-in effect for potential sellers,” said Mark Fleming, chief economist at First American. “The combination of reduced affordability and an even stronger rate lock-in effect is likely to continue to suppress home sales because you can’t buy what’s not for sale, even if you can afford it.

“Existing-home sales in August were just above a 4 million seasonally adjusted annualized rate (SAAR), but leading indicators, such as purchase mortgage applications, signal that sales may dip below 4 million for the first time since the depths of the Great Financial Crisis, between July and October 2010,” said Fleming. “But the housing market today is very different from the housing market during the aftermath of the previous housing boom. Today’s housing market isn’t anything like the housing market of the mid-2000s – the housing market today is not overbuilt, nor is it driven by loose lending standards, sub-prime mortgages, or homeowners who are highly leveraged. However, the current housing market is similar to the market of the 1980s. History doesn’t repeat itself, but it often rhymes.”

Existing-home sales fell nearly 50 percent from the peak in 1978 to the trough in 1982, before rebounding alongside lower mortgage rates. Home prices surged by over 14 percent in 1978, then flatlined as year-over-year growth slowed to just 1 percent by 1982. Today’s market is similar – home sales face more downward pressure than prices.” – Mark Fleming, Chief Economist, First American

Demographics, Inflation, and Rates “Rhyme” with the 1980s

“In the late 1970s and early 1980s, baby boomers were aging into their prime home-buying years, providing a wave of demographic demand,” said Fleming. “Since millennials are ‘an echo’ of the baby boomers and are currently aging into their prime home-buying years, the demographic picture in the early ‘80s mirrors today’s housing market.

“The housing market today also faces a recession very similar to that of the late ‘70s and early ‘80s, according to our Housing Recession indicator. In the late ‘70s and early ‘80s, interest rates soared as the Federal Reserve fought to rein in the ‘Great Inflation.’ Sound familiar? As a result of tighter monetary policy and higher inflation, mortgage rates increased to a peak of 18 percent in 1981,” said Fleming. “As mortgage rates reached levels unseen before or since, homes became significantly less affordable and home sales fell. By October 1982, inflation had fallen to 5 percent. The Fed allowed the federal funds rate to fall back down to approximately 9 percent by the end of 1982 and the 30-year, fixed mortgage rate fell alongside lower inflation and a lower federal funds rate.

“Existing-home sales fell nearly 50 percent from the peak in 1978 to the trough in 1982, before rebounding alongside lower mortgage rates. Home prices surged by over 14 percent in 1978, then flatlined as year-over-year growth slowed to just 1 percent by 1982. Today’s market is similar – home sales face more downward pressure than prices,” said Fleming. “Home prices climbed nearly 17 percent on an annual basis in 2022, before slowing to a 5 percent yearly growth rate in the second quarter of this year. Meanwhile, existing-home sales plunged by nearly 40 percent from the recent peak in January of 2022 to the latest August figure. Demographic demand against a severely limited supply of homes for sale continues to put a floor on how low prices can go, but sales suffer as potential buyers are priced out and existing homeowners see no incentive to sell.”

The housing market did rebound from the 1980s, but it took some time. Inflation and mortgage rate stabilization were key. Because mortgage rates have increased further in October, we expect the housing recessionary conditions to linger in the near-term. However, industry forecasts predict that mortgage rates will moderate if the Federal Reserve stops further monetary tightening and provides investors with more certainty. Mortgage rate stability, even if the stabilization occurs with rates at a higher level, is the key to an eventual housing recovery.” – Mark Fleming

Where Does the Housing Market Go from Here?

“The housing market did rebound from the 1980s, but it took some time. Inflation and mortgage rate stabilization were key. Because mortgage rates have increased further in October, we expect the housing recessionary conditions to linger in the near-term,” said Fleming. “However, industry forecasts predict that mortgage rates will moderate if the Federal Reserve stops further monetary tightening and provides investors with more certainty. Mortgage rate stability, even if the stabilization occurs with rates at a higher level, is the key to an eventual housing recovery.”

Next Release

The next First American Data & Analytics Potential Home Sales Model will be released on November 20, 2023 with October 2023 data.

About the First American Data & Analytics 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. © 2023 by First American. Information from this page may be used with proper attribution.

About First American Data & Analytics

First American Data & Analytics, a division of First American Financial Corporation, is a national provider of property-centric information, risk management and valuation solutions. First American maintains and curates the industry’s largest property and ownership dataset that includes more than 8 billion document images. Its major platforms and products include: DataTree^®, FraudGuard^®, RegsData^®, First American TaxSource™ and ACI^®. Find out more about how First American Data & Analytics powers the real estate, mortgage and title settlement services industries with advanced decisioning solutions at www.FirstAmDNA.com.

About First American

First American Financial Corporation (NYSE: FAF) is a premier provider of title, settlement and risk solutions for real estate transactions. With its combination of financial strength and stability built over more than 130 years, innovative proprietary technologies, and unmatched data assets, the company is leading the digital transformation of its industry. First American also provides data products to the title industry and other third parties; valuation products and services; mortgage subservicing; home warranty products; banking, trust and wealth management services; and other related products and services. With total revenue of $7.6 billion in 2022, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2023, First American was named one of the 100 Best Companies to Work For by Great Place to Work^® and Fortune Magazine for the eighth consecutive year and was named one of the 100 Best Workplaces for Innovators by Fast Company. More information about the company can be found at www.firstam.com.