Rising Rates May Not Slow Home Sales, Says First U.S. Model of Potential Home Sales


SANTA ANA, Calif .– (COMMERCIAL THREAD) –America’s leading financial company (NYSE: FAF), a leading global provider of title insurance, settlement services and risk management solutions for real estate transactions, today released First American’s exclusive home sales potential sales model for the month of November 2021 The potential home sales model measures what the healthy level of the home sales market should be. based on economic, demographic and housing market fundamentals.

Potential home sales in November 2021

For the month of November, First American has updated its exclusive model of potential home sales to show that:

  • Potential sales of existing homes fell to 6.26 million seasonally adjusted annualized rate (SAAR), down 0.3% month over month.

  • This represents an increase of 79.5% from the low point of market potential reached in February 1993.

  • The market potential for existing home sales increased 7.2 percent from a year ago, a gain of 422,000 sales (SAAR).

  • Currently, potential sales of existing homes are 533,000 (SAAR), 7.9% below the peak of pre-recession market potential, which occurred in April 2006.

Market performance gap

  • The existing home sales market exceeded its potential by 9.4%, or about 586,000 sales (SAAR).

  • The market performance gap increased by approximately 87,000 sales (SAAR) between October 2021 and November 2021.

Chief Economist’s Analysis: Real Estate Market Potential Declines Month Over Month

“In November 2021, the housing market potential declined slightly month over month to reach a seasonally adjusted annualized rate (SAAR) of 6.26 million, according to our Potential Home Sales (PHS) model. The housing market potential in November increased 7.2% from a year ago and remains well above pre-pandemic levels, ”said Mark Fleming, chief economist at First American. “The demand for housing was strong before the pandemic, then the demand for housing accelerated in the midst of the pandemic as buyers wanted more space, had greater geographic flexibility in where they could. living and enjoyed increased purchasing power thanks to record mortgage rates. While many of these factors will hold constant in 2022, mortgage rates are expected to rise, so what impact will this have on home sales? ”

What can we learn from previous eras of rising rates?

“Sales of existing homes don’t always slow down when mortgage rates rise and are often more influenced by Why mortgage rates go up. Looking back almost 30 years, there have been six periods of significant rise in mortgage rates, ”Fleming said. “Rising mortgage rates have resulted in lower sales of existing homes in two of the six periods of rate hikes.

“The era of the 2005-2006 rate hike that preceded the 2008 housing crisis is characterized by the dramatic drop in sales. The rise in mortgage rates during this period was due to the Federal Reserve’s efforts to control inflation above target. The Fed’s measures worked, as sales of existing homes fell more than 12% in about a year, ”Fleming said. “Sales of existing homes also declined during the 1994 rate hike, with the Fed raising the federal funds rate to prevent strong economic growth from fueling inflation.

“However, other than these two examples, existing home sales have been resilient in the face of rising rate environments. For example, mortgage rates skyrocketed in the summer of 2013 when the Fed signaled it would scale back its quantitative easing policy of buying Treasury bonds and mortgage-backed securities, ”said Fleming. “But this tantrum had no negative impact on sales of existing homes.

“More recently, in 2017, it took almost a year of rate hikes, before the pace of existing home sales fell below the pace of sales seen before rates started to rise,” said Fleming. “Context matters and each period of rate hikes is different. The housing market’s response to rising rates depends on why the rates are rising.

Growing economy and millennial demand soften impact of rising mortgage rates

“Our pattern of potential home sales indicates that household formation, higher home purchasing power and looser credit conditions have continued to boost housing market potential compared to a year ago. However, limited inventories continued to dampen the potential of the housing market, a dynamic that is expected to persist into 2022, ”said Fleming. “While rising mortgage rates may reduce affordability in 2022, it is important to note that each rising rate environment is different and influenced by a variety of economic trends, and that the rise in rates we see today” hui is due to an economy in recovery. Rising mortgage rates do not change the other fundamental element of the housing market: strong demand from millennial homebuyers, which will continue to support the housing market in 2022. ”

Next version

The next potential home sales model will be released on January 19, 2022 with data for December 2021.

About the Potential Home Sales Model

Potential home sales measures existing home sales, which include single-family homes, townhouses, condominiums, and co-ops on a seasonally adjusted annualized rate based on the historical relationship between existing home sales and population demographics. US population, purchasing power in the US economy, price trends in the US real estate market, and financial market conditions. When the actual level of existing home sales is significantly higher than potential home sales, the pace of sales is not supported by market fundamentals and there is an increased likelihood of a market correction. Conversely, annualized and seasonally adjusted rates of actual sales of existing homes below the level of potential sales of existing homes indicate that market turnover is below the rate fundamentally supported by current conditions. Seasonally adjusted, annualized existing home sales may exceed or fall below the potential sale rate for a variety of reasons, including non-traditional market conditions, political constraints, and the behavior of market participants. Recent estimates of potential home sales are subject to revision to reflect the most recent information available on the economy, housing market and financial conditions. The potential home sales model is released each month before the National Association of Realtors Existing Home Sales Report.

Warning

The opinions, estimates, forecasts and other views contained on this page are those of the Chief Economist of First American, 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 and useful information, they do not guarantee that the information is accurate, up to date, or fit for a particular purpose. © 2021 by First American. The information on this page can be used with appropriate attribution.

About First American

First American Financial Corporation (NYSE: FAF) is a leading provider of title insurance, settlement services and risk management solutions for real estate transactions with a heritage dating back to 1889. First American also provides title factory management services; title and other records and images of real estate; assessment products and services; home warranty products; banking, trust and wealth management services; and other related products and services. With total sales of $ 7.1 billion in 2020, the company offers its products and services directly and through its agents in the United States and abroad. In 2021, First American was appointed to Fortune 100 best companies to work for® list for the sixth consecutive year. You can find more information about the company at www.firstam.com.