This Is Why Millennials Have Yet To Flood Housing Market

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SANTA ANA, Calif.--(BUSINESS WIRE)--Apr 20, 2018--(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 March 2018.

March 2018 Potential Home Sales

Potential existing-home sales increased to a 6.04 million seasonally adjusted annualized rate (SAAR), a 0.3 percent month-over-month increase.This represents a 61.8 percent increase from the market potential low point reached in February 2011.The market potential for existing-home sales increased by 3.4 percent compared with a year ago, a gain of 201,190 (SAAR) sales.Currently, potential existing-home sales is 1.25 million (SAAR), or 17.1 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 4.5 percent or an estimated 273,000 (SAAR) sales.The market performance gap increased by an estimated 22,700 (SAAR) sales between February 2018 and March 2018.

Chief Economist Analysis: The Market Dynamics Fueling the Great Housing Shortage

“In March, the housing market continued to underperform its potential. Actual existing home sales are 4.5 percent below the market potential for home sales, according to our Potential Home Sales model,” said Mark Fleming, chief economist at First American.

“The lack of supply is the primary culprit. The inventory of homes for sale in most markets remains historically tight, yet demand continues to rise as millennials further age into homeownership. Limited supply and rising demand means house prices are surging, so why aren’t more existing homeowners selling their homes? Two market dynamics are at play,” said Fleming.

Market Dynamic 1: Locked to Your Mortgage Rate

“Many existing homeowners are ‘rate-locked.’ The majority of existing homeowners have mortgages with historically low rates and, now that rates are rising, they are hesitant to sell their homes. They recognize that once they sell and purchase a new home, they will have a higher mortgage rate,” said Fleming. “There is limited incentive to sell when, due to higher mortgage rates, it will cost you more each month just to borrow the same amount from the bank. As mortgage rates rise further, more existing homeowners may become rate locked into their existing homes.”

Market Dynamic 2: Prisoner to the Market

“The root of the second dynamic at play is that the housing market is not like most markets. Typically, the seller, or supplier, makes their decision about adding supply to the market independent of the buyer, or source of demand, and their decision to buy. Yet, in the housing market, the seller and the buyer are, in many cases, actually the same person – the existing homeowner,” said Fleming. “In order to buy a new home, you have to sell the home you already own, and then find a home you like better. Every home is different, an almost perfectly heterogeneous product so, when supply is constrained like it is in today’s market, it becomes difficult to find a home better than what you already own.

“Potential sellers face a prisoner’s dilemma, a situation in which individuals don’t cooperate with each other, even though it seems in their best interest to do so. If sellers all choose to sell, they would all benefit as buyers because they would increase the inventory of homes available and alleviate the supply shortage,” said Fleming. “However, the risk of selling if others don’t in a market with a shortage of inventory prevents many existing homeowners from selling. The result is prices are further bid up by competition for the increasingly short supply.

“Our Potential Home Sales Model estimates the expected level of existing-home sales based on market fundamentals. The market potential for home sales based on current fundamentals is currently estimated to be 6 million at a seasonally adjusted annualized rate (SAAR). The market for existing-home sales is underperforming its potential by 4.5 percent and this market performance gap is growing.

“The housing market is facing a deluge of demographically-driven demand, and the greatest supply shortage in 60 years of record keeping, according to the Federal Reserve Bank of Kansas City,” said Fleming. “The increasing pace of new construction, particularly completions, will alleviate some of the supply shortage in the longer run, but in the meantime there are two reasons why existing homeowners have become prisoners in their own castles – the rate lock-in effect and the seller’s prisoner’s dilemma.”

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,” said Fleming. “Historical context is critically important. Our potential home sales model measures what home sales should be based on the economic, demographic, and housing market environments.”

Next Release

The next Potential Home Sales Model will be released on May 23, 2018 with April 2018 data.

About the Potential Home Sales Model

Background information on the First American Potential Home Sales Model is available here.

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. © 2018 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; and banking, trust and wealth management services. With total revenue of $5.8 billion in 2017, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2018, First American was named to the  Fortune  100 Best Companies to Work For ®  list for the third consecutive year. More information about the company can be found at .

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CONTACT: First American Financial Corporation

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KEYWORD: UNITED STATES NORTH AMERICA CALIFORNIA

INDUSTRY KEYWORD: PROFESSIONAL SERVICES REIT BANKING FINANCE INSURANCE COMMUNICATIONS PUBLIC RELATIONS/INVESTOR RELATIONS CONSTRUCTION & PROPERTY COMMERCIAL BUILDING & REAL ESTATE RESIDENTIAL BUILDING & REAL ESTATE

SOURCE: First American Financial Corporation

Copyright Business Wire 2018.

PUB: 04/20/2018 11:00 AM/DISC: 04/20/2018 11:00 AM

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Source : http://www.register-herald.com/region/two-market-dynamics-fueling-the-housing-shortage-according-to-first/article_3742f8ef-1ea9-5b4b-a496-c467efb92304.html

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