First American Financial Corp., a global provider of title insurance, settlement services and risk solutions for real estate transactions, released First American’s proprietary Potential Home Sales model for January 2016, which provides a gauge on whether existing-home sales are under or over their long-run potential level based on current market fundamentals. For January, the model showed that the market potential for existing-home sales declined by 0.2 percent compared with December and decreased by 7.1 percent compared with a year ago.
According to the model, the seasonally adjusted, annualized rate (SAAR) of potential existing-home sales is up 76 percent from the low point reached in February 2009. The rate of potential home sales in the model decreased by 12,000 (SAAR) in January. The potential home sales rate is down 702,000 (SAAR) from the most recent peak in February 2014.
“The significant drop in existing-home sales to 4.76 million (SAAR) in November was largely reversed in December with a reported level of 5.46 million existing-home sales in December,” First American Chief Economist Mark Fleming said in a news release. “The October to November swoon was not unique to 2015. At the time, Pending Homes Sales indicated that there would be a strong rebound in December, as delayed closings due to the Know-Before-You-Owe rule eventually closed. Last month, we argued that the month-over-month volatility was not an indication of any fundamental changes in market conditions. The rebound in December existing-home sales is much more in line with our expectations for market sale activity.
“This month, potential home sales remained at the 5.7 million (SAAR) level, reducing the gap between our forecasted January actual existing-home sales level and potential existing-home sales in January to a meager 168,000 sales. The market is aligning with its potential.”
The model’s current underperformance gap is an estimated 168,000 (SAAR), which is significantly less than the sales potential gap of 1.8 million existing-home sales in February 2014. Fleming said the current signs led him to be “bullish” on the market in 2016.
“Mortgage rates actually declined in January due to the high degree of market volatility and the ‘flight to safety’ that drove down long-term treasury yields. As usual, mortgage rate trends will heavily influence housing prices.
“House price appreciation cooled modestly late last year, but could strengthen again based on the leverage assistance that low rates provide to consumers’ purchasing power. All else equal, lower rates mean borrowers can bid more for housing. In a market of limited supply, leverage-assisted demand drives prices higher. Actual price appreciation is currently stronger than what is fundamentally supported by market conditions. This leverage-assisted housing inflation could persist if rates remain low.
“With the initial delay in closings triggered by Know-Before-You-Owe seemingly behind us, and global economic uncertainty driving down mortgage rates, 2016 remains a year to be bullish on housing. First-time homebuyers will be able to benefit from strong purchasing power in a low-rate environment. This year, the housing market may indeed achieve its potential.”