The 2022 Housing Market Is Very 2019, According to First American Potential Home Sales Model

—The recent pandemic years are anomalous, so comparing today’s housing market with the pre-pandemic era provides helpful insight, says Chief Economist Mark Fleming—

First American Financial Corporation (NYSE: FAF), the premier provider of title, settlement and risk solutions for real estate transactions and the leader in the digital transformation of its industry, today released First American’s proprietary Potential Home Sales Model for the month of March 2022. The Potential Home Sales Model measures what the healthy market level of home sales should be based on economic, demographic, and housing market fundamentals.

March 2022 Potential Home Sales

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

• Potential existing-home sales decreased to a 5.97 million seasonally adjusted annualized rate (SAAR), a 3.2 percent month-over-month decrease.
• This represents a 71.1 percent increase from the market potential low point reached in February 1993.
• The market potential for existing-home sales decreased 3.9 percent compared with a year ago, a loss of 240,100 (SAAR) sales.
• Currently, potential existing-home sales is 823,800 (SAAR), or 12.1 percent below the pre-recession peak of market potential, which occurred in April 2006.

Chief Economist Analysis: Market Potential for Existing-Home Sales Declines 3.9 percent Year Over Year

“Since the start of the global pandemic in March 2020, we have weathered unprecedented pandemic-induced changes and the housing market has been no exception. The typically hot spring home-buying season in 2020 was initially frozen by the pandemic’s impacts and shelter-in-place orders. As potential home buyers emerged from the stay-at-home orders, the housing market began to heat up,” said Mark Fleming, chief economist at First American. “This rising tide of pent-up demand aligned with historically low mortgage rates and hesitant sellers constraining the supply of homes for sale, creating a perfect storm for rapid house price growth.

“The ability to work-from-home further increased demand, as potential home buyers realized they had more geographic flexibility in their home searches. The result? The most competitive housing market in recent history,” said Fleming. “While housing market potential entering the 2022 spring home-buying season may be easing down from recent peaks, potential home sales remain strong and above pre-pandemic levels.

“In March, the market potential for existing-home sales based on fundamentals was estimated to be 5.97 million at a seasonally adjusted annualized rate (SAAR), down 3.2 percent compared with February, and 3.9 percent lower than one year ago,” said Fleming. “Yet, the market potential for home sales remains 8.6 percent above March 2019, the start of the last full spring home-buying season before the pandemic hit.”

Dare to Compare?

“Perhaps a more insightful point of comparison is not last year’s spring home-buying season, and certainly not 2020, but rather the 2019 housing market. In 2019, the economy was growing, demographic demand was strong, rates were sitting at approximately 4 percent, and housing supply was constrained,” said Fleming. “Examining what’s changed since the pre-pandemic spring housing market offers helpful perspective on the 2022 spring home-buying season.”

Homeowners Are Staying Put Longer, Constricting Housing Supply

“The majority of our for-sale housing supply comes from existing homes, and existing homeowners are staying put. The average length of time someone lives in their home continues to set new records, rising to approximately 10.5 years in March, up from 9.75 years in the spring of 2019,” said Fleming. “The longer people live in their homes, the fewer and fewer homes are listed for sale, compounding the housing supply shortage – you can’t buy what’s not for sale, and you won’t sell if you can’t find something better to buy. Homeowners staying put reduced housing market potential by 288,000 potential home sales compared with March 2019.”

Demand for Housing is Even Stronger

“While the lack of housing supply holds back sales activity, three forces have continued to propel the housing market forward,” said Fleming.

• “Household formation, a primary and long-term driver of home-buying demand, has continued to rise and contributed to a gain of nearly 273,000 potential home sales since March 2019,” said Fleming.
• “Strong house price appreciation typically encourages more existing homeowners to move. As homeowners gain equity in their homes, they may be more likely to consider using the equity to purchase a larger or more attractive home,” said Fleming. “Rapid house price appreciation has increased housing market potential by approximately 530,000 potential home sales in March compared with 2019.”
• “House-buying power, how much home one can afford to buy given household income and the prevailing mortgage rate, is 5.6 percent higher than it was in March 2019, thanks to modestly lower mortgage rates and higher household incomes,” said Fleming. “The increase in house-buying power boosted housing market potential by approximately 113,000 potential home sales in March compared with 2019.”

Another Strong Year Ahead?

“As mortgage rates continue to rise and dampen affordability and the historically low level of homes for sale limits purchase activity, it’s normal to see moderation in the market potential for existing-home sales. Yet, let’s keep the moderation in perspective,” said Fleming. “Housing market potential today remains above 2019 levels, which was the housing market’s strongest year in over a decade at the time thanks to the strengthening demographic tailwind and strong house-buying power. While comparisons to 2021 may not flatter the housing market entering the 2022 spring home-buying season, historical context matters. So far, the 2022 housing market is looking very 2019. The recent pandemic years are anomalous, so comparing today’s housing market with the pre-pandemic era provides helpful insight.”

Next Release

The next Potential Home Sales Model will be released on May 18, 2022 with April 2022 data.

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, homeowner tenure, house-buying power 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 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.

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. © 2022 by First American. Information from this page may be used with proper attribution.

About First American

First American Financial Corporation (NYSE: FAF) is the premier provider of title, settlement and risk solutions for real estate transactions. With its combination of financial strength and stability built over 130 years, innovative proprietary technologies, and unmatched data assets, the company is leading the digital transformation of its industry. First American also provides data products to the title industry and other third parties; valuation products and services; mortgage subservicing; home warranty products; banking, trust and wealth management services; and other related products and services. With total revenue of $9.2 billion in 2021, the company offers its products and services directly and through its agents throughout the United States and abroad. In 2022, First American was named one of the 100 Best Companies to Work For by Great Place to Work^® and Fortune magazine for the seventh consecutive year. More information about the company can be found at www.firstam.com.

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