The Struggle is Real for First-Time Homebuyers

First American’s proprietary Potential Home Sales model examines July 2017 data and includes analysis from First American Chief Economist Mark Fleming on how the real estate market is performing versus its potential.


July 2017 Potential Home Sales

For the month of July, First American updated its proprietary Potential Home Sales model to show that:

  • Potential existing-home sales increased to a 5.82 million seasonally adjusted, annualized rate (SAAR), a 0.2 percent month-over-month increase.
  • This represents a 93.7 percent increase from the market potential low point reached in December 2008.
  • In July, the market potential for existing-home sales increased by 0.1 percent compared with a year ago, a gain of 6,000 (SAAR) sales.
  • Currently, potential existing-home sales is 541,000 (SAAR), or 9.3 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 4.7 percent or an estimated 273,000 (SAAR) sales.
  • Market potential grew by an estimated 10,000 (SAAR) sales between June 2017 and July 2017.


Will the Lack of Inventory Stymie Millennial First-Time Buyers?

“Lack of supply continues to be the main story of the 2017 housing market. Just a few months ago, the difference between the actual level of existing-home sales and the market’s potential was negligible, but supply issues have become a significant impediment and are preventing the market from reaching its potential,” said Mark Fleming, chief economist at First American. “The number of existing homes listed for sale has been declining for over two years and the number of new homes added to the market has been insufficient to meet demand. Millennials are entering the housing market, but are confronted with very few entry-level homes to buy.”


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Chief Economist Analysis Highlights

  • The housing market’s potential for existing-home sales improved slightly, growing 0.2 percent between June 2017 and July 2017, as the rate for a 30-year, fixed-rate mortgage remained little changed at 4.0 percent.
  • The lack of homes for sale in most markets has contributed to the recently growing underperformance gap between actual and potential existing-home sales. According to the National Association of Realtors (NAR), the number of homes listed for sale has declined for 25 consecutive months, dropping 7.1 percent between June 2017 and July 2017.
  • New residential construction, a critical source of new housing supply, is not keeping up with increasing demand. Last week, the S. Census Bureau reported that housing starts fell 5.1 percent in July compared to a year ago. The pace of housing starts needs to increase significantly to meet demand and alleviate inventory challenges.
  • Since 2009, the number of new households has increased by 5.9 million, while the net new number of housing units has only increased by 3.5 million, meaning there is a shortage of 2.4 million housing units in the United States.
  • The lack of inventory relative to demand is driving the fast pace of price appreciation. The increases in nominal house prices, combined with mortgage rates higher than a year ago, are having a material impact on affordability. According to the First American Real House Price Index, affordability is down 10.2 percent in June compared to a year ago.


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. 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.


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, income and labor market conditions 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 in order 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.