First American Financial Corporation (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 May 2016. The model provides a gauge on whether existing-home sales are under or over their long-run potential level based on current market fundamentals. For May, the model showed that the market for existing-home sales is underperforming its potential by 2.8 percent or by an estimated 156,000 seasonally adjusted, annualized rate (SAAR) of sales. While still underperforming, this is an improvement over last month’s underperformance gap of 4.1 percent or 232,000 (SAAR) sales.

In May, the market potential for existing-home sales grew by 0.9 percent compared to April, an increase of 51,000 (SAAR) sales, and decreased by 4.8 percent compared to a year ago. This month, potential existing-home sales reached 5.63 million (SAAR). This is an 86.6 percent increase from the market potential low point reached in December 2008*, but is down 567,000 (SAAR) or 10.1 percent from the pre-recession peak of market potential, which occurred in July 2005.

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According to the National Association of Realtors (NAR), existing-home sales rose for the second consecutive month in April, to 5.45 million (SAAR), from an upwardly revised 5.36 million (SAAR) sales in March.

“The 1.7 percent month-over-month increase and impressive 6.0 percent annual increase was driven by broad growth across the country, except in the west where buying activity, hampered by large price gains and tight supply caused sales to fall 3.4 percent year-over-year,” said Mark Fleming, chief economist at First American. “While nationally the inventory of homes for sale still remains at historically depressed levels, the supply continues to increase, rising to a 4.7-month supply in April, up from a downwardly revised 4.4-month supply in March.

“The tight supply continues to put upward pressure on house prices, which rose 5.8 percent year-over-year on a seasonally adjusted nominal basis according to the First American Real House Price Index. However, the current low-rate environment continues to provide relief to potential homebuyers in the form of increased leverage and home-buying power,” said Fleming.

“The average rate for a 30-year fixed rate mortgage fell to 3.6 percent in May, the lowest it has been since May 2013. The era of low rates seems likely to continue for some time, even in the face of potential rate hikes from the Federal Reserve later this year. This is due in part to pressure on the 10-year Treasury bond, as record levels of foreign demand continue to drive down yields,” said Fleming. “In fact, according to the Wall Street Journal, demand for 10-year government bonds from foreign buyers reached 73.6 percent on June 8.

“This 'flight-to-safety' drove yields down to 1.7 percent from 2.5 percent a year ago. This week, the yield on the 10-year Treasury-note tumbled further to 1.59 percent after the June meeting of the Federal Open Market Committee (FOMC) and the committee’s decision not to raise the Federal Funds Rate. This leaves fewer opportunities this year for a rate hike, although, as I wrote in my blog post last week, this will have little impact on the health of the housing market and housing affordability,” said Fleming. “In fact, FOMC decisions are currently non-event events for the housing market. In the coming months, global uncertainty due to events like ‘Brexit’ or other forms of geo-political unrest may have more influence on mortgage rates than any actions taken by the Fed.

“On the domestic front, credit availability continued to tighten as the Mortgage Bankers Association (MBA) reported a third consecutive monthly drop in its Mortgage Credit Availability Index (MCAI). In May, the overall index decreased by 0.8 percent, indicating further tightening of lending standards among mortgage originators. The declines were most apparent in the Jumbo and FHA/VA markets, which experienced a 1.3 percent and 1.0 percent decline respectively,” said Fleming.

“Relief may be in sight. The decline in credit availability in the FHA/VA market may not continue as United States Department of Housing and Urban Development Secretary Castro announced earlier this month the imminent implementation of rules meant to increase the availability of credit specifically targeting condo and co-op sales,” said Fleming. “This could be a boon to first-time homebuyers who often use both condos and FHA loans as a way to enter the housing market.”

*Previous Potential Home Sales releases referred to February 2009 as the low point of sales. The model used to generate existing-home sales potential has been updated with more recent data to more accurately reflect the dynamic relationships between sales, prices, interest rates and the user-cost of housing, resulting in a model that more accurately reflects past conditions.

Next Release

The next Potential Home Sales model will be released on July 19, 2016 with June 2016 data.

About the Potential Home Sales Model

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